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Kaplan, R. S. 1984. The evolution of management accounting. The Accounting Review (July): 390-418.

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

History & Development Main Page | Research Methods Main Page

This paper, Kaplan's 1983 paper, and the publication of Relevance Lost provided a wakeup call for academic accountants and many others as well. Kaplan begins by saying that there has been little innovation in management accounting systems in the last sixty years. Kaplan's purpose in this article is to summarize the development of management accounting, including the new demands for management information, and to develop a research strategy to meet these demands. The paper includes five parts including:

1. A summary of historical developments in cost accounting,
2. Historical development of managerial control,
3. Developments since 1925 in cost accounting and managerial control,
4. New challenges for cost and managerial accounting research, and
5. New directions for management control research.

Since the first three sections are summaries, what follows are summaries of summaries. For more information on these developments see the Relevance Lost topic. A lot of this history appears in the first few chapters of that book.

A Summary of Historical Developments in Cost Accounting

Kaplan draws on Johnson's work in this section who built on the work of Chandler, Littleton, Solomons and Garner. It appears that information needed for planning and control arose during the first half of the 19th century in textile mills and railroads, and then somewhat later in tobacco companies and metal-making industries. These developments are described in Chapter 2 of Relevance Lost. It is interesting and important to note that depreciation and the matching concept had not been developed at this time, so fixed costs were not allocated to products or periods. In addition, capital budgeting (discounted cash flow methods) had not been developed. Frederick Taylor and Hamilton Church were influential during the early 1900s in developing standards and measuring and allocating overhead costs to products. Break-even analysis was used in 1903. Church seems to have understood the concept we now refer to as activity-based costing in 1908, warning that all overhead cost should not be loaded onto products using direct labor as the cost allocation basis. In 1923, J. Maurice Clark wrote about many concepts that we still find in management accounting books today such as avoidable cost, differential costs and sunk costs. He also emphasized different cost for different purposes, using statistical methods to estimate cost behavior and the idea of keeping financial accounting information separate from cost accounting information (p. 396). Cost information was used for strategic decisions related to pricing and operating efficiency.

Historical Development of Managerial Control

In this section Kaplan describes how DuPont developed and decomposed the return on investment (ROI) measurement and used it as the "true test" of profitability. For more on ROI see the Relevance Lost Summary and the ROI topic. The ROI development provides the origin of the investment center concept and perhaps the broader responsibility accounting concept. This section also includes a discussion of General Motors multidivisional organization and how GM used ROI for pricing. The GM system included incentives and profit sharing for senior managers and a "sophisticated market-based transfer pricing system". Cost information was also used for make-or-buy decisions during this period. These concepts and measurement techniques were developed by practicing engineers and managers, not academic accountants.

Developments since 1925 in Cost Accounting and Managerial Control

After 1925, little was developed that had an impact on practice. Joel Dean wrote about capital budgeting, GE developed the residual income measurement, transfer pricing remained an unsolved issue, and some techniques such as linear programming, nonlinear programming, regression analysis and probability theory were developed in operations research. Information economics and agency theory were academic topics, but these models excluded the role of knowledge, innovation, and other important areas such as marketing, training, motivation, quality and maintenance. Transaction cost economics also developed during this time period, but it was not adequately tested and had little impact on practice. Generally, this literature was devoid of references to actual organizations.

New Challenges for Cost and Managerial Accounting Research

The traditional cost accounting model developed for mass production of standardized products needs to be updated to support new operating concepts such as just-in-time, zero defects, zero inventory, a cooperative workforce, flexible manufacturing systems, computer aided design and manufacturing, and computer-integrated manufacturing. See the sections on CAM-I and JIT for more on these concepts and issues.

New Directions for Management Control Research

An excessive focus on short-term financial performance has created many problems. GAAP allows profits to be generated by many nonproductive, non-value-creating activities. Allocations of corporate expenses to profit centers confuses the underlying microeconomics and cost structure of the divisions involved. Executives have attempted to create earnings using financial transactions such as the sale of low book-value assets, off-balance sheet leasing, and reducing expenditures on discretionary and intangible investments such as product and process development, engineering, human resource development and customer relations. These problems reveal a basic flaw in the view that GAAP profit is an adequate indicator of the improvement in the economic wealth of the firm.

Why did these problems emerge now? Several reasons include the following:

1. There was less pressure on short-term profit in the 20s and 30s.
2. Management promotions occurred less often in the past.
3. The size of organizations has changed from small to relatively large. So sacrifices in long terms profits to achieve short terms goals are not at as noticeable.
4. Managers today are unfamiliar with the firm's products, processes and technology.
5. A wide spread use of executive bonus plans promotes a short-term focus.
6. Global competition and other changes in the competitive environment have changed so that the old control systems are no longer adequate.
7. Measures such as product leadership, employee skills and morale, customer loyalty are perhaps better measures of future profitability than financial performance. Multiple measures are needed.

Management accounting must serve the strategic objectives of the company. The definition of management accounting (see NAA's 1981 definition) emphasizes financial measurements, but needs to include an explicit recognition of the need for information and measurements in such soft areas as product quality, productivity, product innovation, employee morale, and customer satisfaction.

If management accounting research is to progress, information needs to be collected from corporations. See the summary of Kaplan's 1983 paper for more on his recommendations for a research strategy.


Related summaries:

Atkinson, A. A. and W. Shaffir. 1998. Standards for field research in management accounting. Journal of Management Accounting Research (10): 41-68. (Summary).

Ittner, C. D. and D. F. Larcker. 2001. Assessing empirical research in managerial accounting: A value-based management perspective. Journal of Accounting and Economics (December): 349-410. (Summary).

Ittner, C. D. and D. F. Larcker. 2002. Empirical managerial accounting research: Are we just describing management consulting practice? The European Accounting Review 11(4): 787-794. (Summary).

Johnson, H. T. 1987. The decline of cost management: A reinterpretation of 20th-century cost accounting. Journal of Cost Management (Spring): 5-12. (Summary).

Kaplan, R. S. 1983. Measuring manufacturing performance: A new challenge for managerial accounting research. The Accounting Review (October): 686-705. (Summary).

Kaplan, R. S. 1993. Research opportunities in management accounting. Journal of Management Accounting Research (5): 1-14. (Summary).

Kaplan, R. S. 1998. Innovation action research: Creating new management theory and practice. Journal of Management Accounting Research (10): 89-118. (Summary).

Martin, J. R. Not dated. 200 years of accounting history dates and events. Management And Accounting Web. AccountingHistoryDatesAndEvents.htm

Shields, M. D. 1997. Research in management accounting by North Americans in the 1990s. Journal of Management Accounting Research (9): 3-61. (Summary).