Management And Accounting Web

Atkinson, A. A., R. D. Banker, R. S. Kaplan and S. M. Young. 2001. Management Accounting: 3rd edition. Upper Saddle River: NJ: Prentice Hall.

Chapter 9
Management Accounting and Control Systems for Strategic Purposes

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

ABKY Main Page

1. Introduction

AKBY indicate that the purpose of this chapter is to cover the technical aspects of management accounting control systems. The next chapter deals with the behavioral aspects. This chapter includes a discussion of several important concepts including: 1) the accounting concept of control, 2) management accounting control system design, 3) life cycle costing, 4) target costing, 5) kaizen costing, 6) environmental costing, and 7) benchmarking.

2. Accounting Control


There are many umbrella terms used for management accounting systems. The term Cost Management System (CMS) was used as the umbrella term for the CAM-I conceptual design. (See MAAW's CAM-I page.) This new conceptual accounting design includes all the concepts discussed in this chapter plus several others discussed in other chapters of this book, e.g., activity based costing and the just-in-time management philosophy and techniques. Today many accounting practitioners refer to the same group of concepts as Activity Based Management. ABKY use the term Management Accounting Control Systems as an umbrella term for all of these concepts and techniques.

Scope of the System

The authors make an important point on page 366, that the old accounting control systems concentrated on the production stage, or value added stage of the value chain, while the new accounting control systems emphasize the entire value chain.

Meaning of Control

The term control has different meanings. For example, the terms accounting control and statistical process control have very different meanings. In accounting, control is defined loosely in terms of the movement of a system in relation to the system's objectives. The system is in control when it is moving towards achieving the system's objectives and out of control when it is not moving in that direction (See page 367).

Accounting control involves:

1. Planning - objectives and measurements.
2. Executing the plan.
3. Monitoring performance.
4. Evaluating actual performance against the plan.
5. Correcting out of control situations.

ABKY list three types of control in Chapter 1, Exhibit 1-2. These include operational control, management control and strategic control. The concept of control referred to in chapter 9 is related mainly to management control (providing information related to the performance of managers and operating units) and strategic control (providing information related to long run financial and competitive performance). These are macro concepts where the emphasis is on the performance of the main segments of the company. A lot of aggregated data is involved.

In statistical process control (SPC), upper and lower limits are established statistically based on the concept of a normal curve. When performance is within the established limits, the system is said to be in control. Performance that falls outside the limits signals that the system may be out of control. (See MAAW's SPC topic.) SPC is a micro concept that is used by individual operators to monitor their own work. SPC is based on real time disaggregated data and is not part of the accounting control concept discussed in chapter 9.

3. Management Accounting Control System Design

Well designed accounting control systems include appropriate behavioral and technical elements.

Behavioral considerations include:

1. Ethics.
2. A balance between short term and long term measures.
3. A balance between qualitative and quantitative measures.
4. Employee empowerment.
5. Appropriate incentives.

Technical considerations include relevant information that is

1. Accurate.
2. Timely.
3. Consistent across segments.
4. Flexible to meet the needs of many users.

Well designed accounting control systems are also broad systems in terms of scope as indicated above. This means that the system's design should include the entire value chain.

4. Life Cycle Costing

A product's life cycle can be viewed from different perspectives including the producer's perspective, the consumer's perspective and society's perspective. The main emphasis in this chapter is on the producer's perspective. (See MAAW's PLC topic to view other perspectives.)

Life cycle costing includes all of the stages of the products life cycle across the entire value chain including:

Research, design and development - production - distribution - post sales service - consumption - and disposal of the product by the final consumer.

Most of a product's costs (80 to 90%) are locked in, or committed at the end of the design stage as indicated in the graphic illustration below (See also exhibit 9-2). A dollar spent on design and development can reduce costs in the later stages of the product's life cycle by $8 - $10 according to Shields and Young (Summary).

Product Life Cycle

5. Target Costing

As indicated in the table below, the traditional costing focus has been on an engineer driven cost plus approach to product costing and pricing starting from the supply side. The target costing approach determines a target cost starting from the market or demand side. A target price is set with close and continuous customer input. A target profit is subtracted from the target price to arrive at an estimate of the target cost. Then design engineers work to design the product so that it can be produced at the target cost considering both production costs and consumption costs. Target costing places cost reduction emphasis at the design stage recognizing that 80-90% of the product's costs are locked in, or committed by the time the product begins the production stage of it's life cycle.

Concept Traditional Costing Target Costing
Focus of the cost price relationship Engineer driven cost plus markup = price approach. Focus on the supply side first. Market driven price less profit = target cost approach. Focus on the demand side first.
Algebraic relationship between cost and price Profit = Price - Cost
Price = Cost + Profit
Target Cost = Target Price - Target Profit
Value chain and product life cycle emphasis Emphasis on production costs. Emphasis on the product life cycle costs over the entire value chain. Includes the customer's costs.
Cost reduction emphasis Production stage. Emphasis on budgeted costs. Design stage, e.g., emphasis on designing products with fewer parts and common parts.

As noted on page 376, the target costing approach emphasizes the entire value chain by involving cross functional teams in the design process including members from all the functional areas inside the organization, as well as suppliers and customers.

Some behavioral problems created by target costing are discussed on page 376 including conflicts with suppliers, pressure on employees and lack of full cooperation between functional areas within the organization.

(See MAAW's Target Costing topic for some additional material).

6. Kaizen Costing

Kaizen is a Japanese word meaning continuous improvement. Kaizen costing focuses on obtaining small incremental cost reductions in the production stage of the products life cycle. Emphasis is placed on target cost decreases and employee empowerment to make it happen. The Kaizen approach to costing views the system as dynamic in that the causes of waste, excess and variation can be continuously reduced. In the traditional costing approach, standard costs are set based on the idea that the constraints in the system are static. While actual costs are compared with standard costs in the traditional approach, actual costs are compared with target cost reductions in the kaizen approach. While employees are viewed as neutral, or perhaps the cause of problems in the traditional approach, employees are viewed as the source of the solution in the kaizen costing approach.

Concept Traditional Costing Kaizen Costing
Cost focus Standard costs based on static conditions. Engineers develop standards for direct material and direct labor time. Accountants develop standard cost based on these standards. Actual costs assuming dynamic conditions.
Cost management focus Cost control. Compare actual cost to standard costs to meet standards. Continuously reduce costs based on cost reduction targets. Compare actual cost to kaizen targets.
Employees roll in the process May be viewed as the cause of unfavorable variances. Viewed as the source of continuous improvement.

See MAAW's Continuous Improvement topic for more on kaizen costing.

7. Environmental Costing

Emphasis on environmental costs is part of the product life cycle concept. As noted above, the PLC concept includes society's perspective as well as the producer and customer perspectives. While the producer's goal is to maximize product life cycle profits, the consumer and society in general focus on the benefit-cost relationship. Environmental costs refers to the externalities associated with producing and consuming products. The following table provides a summary of these concepts.

Perspective Objective Methods
Producer Maximizing life cycle profits. Revenue enhancement and cost reduction.
Customer Maximize performance relative to price and after purchase costs. Perform life cycle trade-off studies, i.e., compare alternative product's prices and consumption costs.
Society - Government Minimize externalities - e.g., pollution, unsafe products. Laws, regulation, fines etc.

As ABKY indicate on page 380, environmental costs include both implicit and explicit costs. Explicit costs are more direct in that they can be identified with eliminating environmental problems such as changes in technology (e.g., to reduce exhausts emissions), fines and environmental cleanup. Implicit costs are more indirect and more difficult to identify as environmental costs. Examples include the costs of employee education, legal counsel, public relations and particularly the loss of goodwill associated with creating environmental problems. The authors recommend activity based costing as a way to identify and control environmental costs.

See the Boer, Curtin & Hoyt summary for a discussion of several environmental costs, e.g., A company that used a solvent-based paint incurred the following costs: license required to produce hazardous waste (paint sludge), superfund fee used for environmental cleanup, employee training required to handle waste, reports to the EPA, related insurance, other fees, and waste water treatment.

8. Benchmarking

Benchmarking involves identifying the best practices and comparing an organization's performance to those practices with the goal of improvement. A five stage generic model was developed by Spendolini (1992) that includes the following. (See the Elnathan, Lin & Young summary).

1. Identify the internal areas or activities to benchmark.

2. Obtain a long term commitment from senior management and develop a benchmarking team.

3. Identify benchmarking partners.

4. Collect and share information. Types of information can include information related to products, functions or processes, and strategy.

Benchmarking Methods can be:
        a. unilateral (i.e., not reciprocal, covert), or
        b. cooperative (sharing).

Cooperative benchmarking can include:
        a. database comparisons,
        b. indirect benchmarking using a consultant, or
        c. group benchmarking where participants share and discuss methods.

5. Take action to meet or exceed the best practices.

(See MAAW's Benchmarking topic for a number of web links to benchmarking sites).


Introductory question. Discuss the meaning and relationship between the umbrella terms CMS, ABM, MACS. (See item 2 above).

1. What does "control" refer to in the context of a management accounting and control system? (See item 2 above).

2. What are the five steps involved in keeping an organization in control? (See item 2 above).

3. What two broad technical considerations must designers of management and control systems address? (See scope in section 2 and relevance in section 3 above).

4. What four components should management accounting and control systems designers consider when addressing the relevancy of system's information? (See section 3 above).

5. What is the total-life-cycle costing approach? Why is it important? (See section 4 above and benefits in the PLC summary).

6. What are the three major cycles of the total-life-cycle approach in a manufacturing situation. (See section 4 above and the PLC graphic).

7. What is the difference between committed costs and incurred costs? (See the PLC graphic above and the Cokins 2002 graphic for what this means).

8. What are the three stages of the research development and engineering cycle? (See section 4 above).

9. What is the post-sale service and disposal cycle?

10. What is target costing? (See section 5 above).

11. What are the two essential elements needed to arrive at a target cost? (See section 5 above and the Cokins 2002 summary for a graphic view).

12. What is value engineering?

13. In which stage of the total life cycle of a product is target costing most relevant? (See the Cokins 2002 graphic).

14. What roles do cross-functional teams and supply chain management play in target costing? (See section 5 above).

15. What is Kaizen costing? (See section 6 above and the Monden & Lee summary).

16. When is a cost-variance investigation undertaken under Kaizen costing? (See the table in section 6 and the Monden & Lee graphic illustration).

17. Why is it said that a Kaizen costing system operates "outside of the standard costing system"? (See the table in section 6).

18. What are some examples of explicit and implicit environmental costs? (See section 7 above and the Boer, Curtin & Holt summary).

19. What is benchmarking and why is it used? (See section 8 above).

20. What are five stages of the benchmarking process? (See section 8 above).

21. What are three broad classes of information on which firms interested in benchmarking can focus? (See stage 4 of the benchmarking process above).

22. What stage of the benchmarking process is the most important for benchmarking the management accounting methods? Why? (See stage 4 of the benchmarking process above).

23. What are two general methods of information gathering and sharing when undertaking a benchmarking exercise? (See stage 4 methods above).

24. What are three types of sharing and gathering information under the cooperative form of benchmarking? (See stage 4 methods above).

25. What is the benchmarking (performance) gap?

ABKY Main Page