Note on a New Zealand replication of the Innes et al. UK activity-based costing survey

Activity-based costing (ABC) is a well known technique for costing products and providing management information. This note reports the results of a faithful replication in New Zealand (NZ) of Innes et al.’s 1999 UK survey of ABC usage and a comparison of the results of the two surveys.Adoption rates were found to be similar, with NZ companies showing slightly lower rates of implementation of ABC than UK companies. However, once they had implemented the method, NZ companies demonstrated greater commitment to ABC across more areas of the firm than UK companies. ABC systems in NZ tended to display less complexity than their UK counterparts. Strong correlations were found in the different uses of ABC by industry sector, but there were contrasting perceptions on the success and importance of some ABC applications.This study provides an insight into ABC in NZ, data on trends in ABC experiences between two countries of widely differing size and geographic location, and suggestions for further research.     

Market forces meet behavioral biases: cost misallocation and irrational pricing

Psychological and experimental evidence, as well as a wealth of anecdotal examples, suggests that firms may confound fixed, sunk, and variable costs, leading to distorted pricing decisions. This article investigates the extent to which market forces and learning eventually eliminate these distortions. We envision firms that experiment with cost methodologies that are consistent with real‐world accounting practices, including ones that confuse the relevance of variable, fixed, and sunk costs to pricing decisions. Firms follow “naive” adaptive learning to adjust prices and reinforcement learning to modify their costing methodologies. Costing and pricing practices that increase profits are reinforced. In some market structures, but not in others, this process of reinforcement causes pricing practices of all firms to systematically depart from standard equilibrium predictions.     

Accounting research and researchers of the nineteenth century and the beginning of the twentieth century: an international survey of authors, ideas and publications

At the beginning of the nineteenth century the former glory of Italian accounting was overshadowed by its decline during the eighteenth century, and literature from France, England, Germany, America and other countries took centre-stage. 'Theories of accounts' (rather than 'accounting theories') dominated not merely the early but also the later part of this century when Italian accounting had regained a prominent position beside other countries. The relation of those theories to the 'charts of accounts'-which later became so prominent in Continental Europe is historically important. The controversies over personalistic versus materialistic accounts and that between entity versus proprietary theories, as well as the emergence of other theories are discussed with reference to individual authors. Diverse topics from railroad accounting and auditing to various aspects of cost accounting are investigated. Particularly important are the pioneering efforts of this period that anticipated further developments. These manifested themselves in the following ideas: entity theory, flow of funds statement, matrix accounting, different aspects of valuation, allocation and depreciation, price-level adjustments and indexation, current values, exit values, residual income valuation, managerial control, the emergence of competing accounting (and Bilanz) theories, the separation of fixed from variable costs, fixed and flexible budgeting, zero-based budgeting, PERT, transfer prices, break-even charts, variance analysis, job-order costing, labour and machine hour rates, standard costing, price determination, integrating financial and cost accounting, clean surplus theory, agricultural accounting, holding gains, and other topics. Appendix A offers an overview of Nineteenth century scholars concerned with accounting history (together with one representative work of each), and Appendix B lists the nationally (and often internationally) prominent names of accounting authors born in the nineteenth century but also or exclusively active during the twentieth century. The paper integrates approximately 400 publications of which less than half are of the English tongue.     

Responsibility cost control system in China: a case of management accounting application

This paper introduces the responsibility cost control system installed at Han Dan Iron and Steel Company in the People’s Republic of China. The Company has adopted a series of management accounting techniques or procedures in its cost control system, including target costing, responsibility accounting, standard costing, flexible budgeting, internal transfer pricing, behavior motivation, performance evaluation, variance analysis, and so on. In particular, the system has integrated responsibility accounting and cost control by introducing market mechanisms to substantially reduce production costs and raise profitability. The successful experiment reveals that the responsibility cost control system is an effective tool for cost control under the changing Chinese business environment. The Han Dan experience demonstrates that management accounting can play a positive role in improving business management and profitability in China or other developing countries. In addition, this study casts light on effective diffusion of management accounting practices under different social and economic systems.     

Examination of U.S.-based Japanese subsidiaries: Evidence of the transfer of the Japanese strategic cost management

As a result of global competition, many Japanese companies are now operating in the United States. This article presents a survey of the management accounting methods employed by U.S.-based Japanese manufacturers and documents evidence about the current direction of accounting practices that are being transferred from Japan to the U.S. work environment. The results of the study show that most of the U.S.-based Japanese firms are similar to Japanese domestic firms in their use of management accounting methods of target costing and value engineering, variable costing, and strategic adaptation of traditional methods such as standard costing and budgeting. It is also evident that U.S.-based Japanese affiliates may be influenced by U.S. practices, as shown by significant usage of activity-based costing and internal rate of return for evaluating capital investment projects. This article is an important part of a continuing effort to study the development of management accounting among foreign-owned subsidiaries in the U.S., helping them to meet the challenges of global competition. Additionally, expanding this line of research on foreign subsidiaries that apply world class management accounting practices in other countries may assist U.S. multinational firms in their overseas subsidiaries' operations. Two limitations of this study and, thus, suggestions for future research are identified. First, the data on U.S.-based Japanese affiliates were collected for one point in time. Second, this study did not match each U.S.-based Japanese affiliate with its parent in Japan.     

An Empirical Study of the Adoption of Sophisticated Capital Budgeting Practices and Decision-Making Effectiveness

This paper examines the trend towards greater sophistication in investment selection techniques and control processes, and their impact on capital budgeting decision effectiveness. Based on a sample of 100 large UK firms, the study examines the capital budgeting practices employed over an 11-year period. Very significant increases in the uptake of sophisticated investment methods are reported, particularly in the analysis of project risk. These developments are partly explained by the rapid developments in computing within capital budgeting. Clear evidence is found to suggest that senior finance executives believe that the adoption of sophisticated investment practices gives rise to improved effectiveness in the evaluation and control of large capital projects.     

Harmonisation of Accounting Measurement Practices in the European Community

This study attempts to determine the level of accounting harmonisation in the European Community by examining selected measurement practices from the 1992/93 annual reports of companies from Belgium, Denmark. France, Germany, Ireland, the Netherlands. Portugal and the UK. Harmonisation is tested using the chi-square statistic and measured using the / index. The chi-square statistic tests for the equality of the proportions of accounting measurement methods across countries. The / index measures the extent of concentration around a particular accounting measurement method. The results reveal that accounting for foreign currency translation of assets and liabilities, treatment of translation differences, and inventory valuation are harmonised, while accounting for fixed asset valuation, depreciation, goodwill, research and development costs, inventory costing, and foreign currency translation of revenues and expenses are not harmonised. The results also demonstrate that the extent of harmonisation is greater among fairness oriented countries than among legalistic countries.     

An analysis of the adoption, perceived benefits, and expected future emphasis of western management accounting practices in Chinese SOEs and JVs

This paper considers the adoption, perceived benefits, and expected future emphasis of western management accounting practices in the Chinese emerging market economy based on a sample of 64 joint ventures (JVs) and 115 State Owned Enterprises (SOE) gathered from a questionnaire survey. The study finds that the level of adoption of management accounting practices is most influenced by ownership type of the enterprise (JV or SOE) and to a lesser extent by the nature of the management accounting techniques to be adopted. A further significant finding is that management accounting practices such as budgeting for controlling costs, profit and sales budgeting, and target costing are perceived to be more beneficial for SOEs compared to JVs. However, responsibility accounting which is traditionally associated with SOEs and accounting for decision making is perceived to be less beneficial to SOEs compared with JVs.     

The Search for Standard Costing in the United States and Britain

This article describes the relationship between the understanding and practice of standard costing in both the U.S. and the U.K. and discusses the development of specific practices in the immediate post‐World War II period. Based on a detailed review of the post‐war literature, the authors conclude that the quantity and quality of standard costing and related scientific management practices (time study, variance analysis, etc.) reached a level in practice that many accounting historians have felt should have been achieved at an earlier point in time. Another principal finding is that standard costing, initially promulgated in the late 1910s, continued to develop in both the U.S. and the U.K. in evolutionary fashion into the late 1940s and 1950s, a finding which demonstrates that Britain was not as far behind America in terms of its standard costing practices as has been commonly believed. The article also explicates the relatively minor impact of the Anglo‐American Council on Productivity, sponsor of sixty‐six post‐war visitations over a four‐year period by British groups of employers, trade unionists and professionals, to study American industrial methods, including standard costing.     

A guide to the historical controversies and organizational contexts of standard costs

Undergraduate accounting students in the US receive little or no exposure to the history of their discipline. In an effort to remedy this deprivation, the authors suggest a series of historical vignettes to serve as collateral reading in accounting courses. This essay, designed to supplement the standard costing and variance analysis chapters of a cost or managerial textbook, is offered as an example of the historical background pieces envisioned.Students and educators alike may not realize that standard costing has served far different roles in the premodern, modern, and postmodern eras. We trace the history of cost accounting from the UK and US industrial revolutions to the current era in order to identify several divergent interpretations attributed to standard costing. We emphasize how the purposes of standard costing have changed over time and why target costing is the proper focal point in the postmodern era.     

The ‘ladder of success’ in healthcare: the UK national reference costing index

Relative performance evaluation (RPE) is a form of benchmarking that operates through ranking institutions in comparative league tables. This paper explores issues raised by the introduction of RPE to benchmark UK hospital costs (termed ‘reference’ costs for this purpose). These reference costs are aggregated into a comparative cost index—thereby creating a ‘ladder of success’.The ‘ladder of success’ has the potentiality both to enhance the purchasing role and to provide a comparative database for hospitals to improve their performances. Yet this research found that several problems confound its use for benchmarking: the absence of a referent (or standard) against which ‘reference’ costs can be compared; the non-comparability of many hospitals featuring in the index; and the lack of standardisation in costing practices.In terms of refining and developing the index to enhance its usefulness, there are several possibilities: distinguishing between direct and indirect costs; introducing benchmarking ‘cluster groups’; pinpointing an acceptable range of target costs; and reducing the scope of clinical activities included. However, if any of these alternatives were adopted, the power of a single comprehensive measure that attaches one—and only one—number to each trust would be lost. The issue is that in making the index more meaningful, political leverage over the UK trusts would be reduced. Hence, despite all its associated problems, this research concludes that the ‘ladder of success’ looks likely to continue in its present form.     

Adoption and Benefits of Management Accounting Systems: Evidence from Finland and Australia

This study provides empirical evidence on management accounting practices in Finnish manufacturing companies. It identifies the adoption of the management accounting practices, received benefits from the adoption and intentions to emphasize the practices in the future. The results indicate that financial measures like product profitability analysis and budgeting for controlling costs is likely to be important in the future, but it is also clear that greater emphasis will be placed on newer practices like customer satisfaction surveys and employee attitudes. The results of the management accounting practices are compared to the findings of a similar study based on Australian data.     

Product Pricing Behaviour Under Different Costing Systems

Product pricing under ex ante imperfect marginal cost information is examined. The major findings indicate that under conditions of increasing (decreasing) average total (variable) cost, absorption (variable) costing results in outcomes closer to economic optimum. In addition, cost accounting systems interact with price elasticity of demand, resulting in greater (lesser) decision deviations from economic optimum under absorption costing when costs are decreasing (increasing).     

Full costing versus variable costing: Does the choice still matter? An empirical exploration of UK manufacturing companies 1988–2002

This paper explores the impact of the choice of full costing, as a basis for stock valuation (SSAP 9), on the reported profitability of UK manufacturing companies from 1988–2002. It does so by assessing the sensitivity of these companies' profits to the adoption of the variable costing alternative and so explores the potential for this accounting method choice to influence this important performance measure. Tests are undertaken to identify the accounting significance of the stock asset and the stock adjustment, the longer term effects of the choice on the time series of companies' profits and the shorter term effects as reflected in variation in the annual profit signal (particularly, profit vs loss and profit growth vs profit decline). The results indicate that stock remains a substantial variable in profit measurement and that there are likely to be a minority of companies whose reported profitability during the period changes significantly depending upon the basis of stock valuation used. Given the absence of any definitive case for full costing over variable costing, these findings suggest that further research and some consideration of the modification of the existing standard to permit financial statement users to ascertain variable costing based profits are merited.     

The Evolution of Standard Costing in the U.K. and U.S.: From Decision Making to Control

Decision making and control are two fundamental components of industrial management that are aided by accounting information. This article traces the evolution of standard costing in the U.K. and U.S. and describes how it has served these two purposes over time. At the start of the industrial revolution, standard costing, in the form of past actual costs, aided managers in make-or-buy, pricing, outsourcing and other routine and special decisions. In the late nineteenth century, as the mass production of homogeneous products became more common, predetermined, norm-based standard costs were promoted as the means to control operations and reduce waste. The use of predetermined costs was recommended by both academic and professional branches well into the twentieth century. Since the mid-1980s, norm-based standards have come under fire for not providing appropriate strategic signals in an era of global competition, continuous improvement and perpetual cost reduction.
This article compares the nature of standard costing practices in the British Industrial Revolution with those that evolved in the U.S. under scientific management. The enquiry is not limited to double-entry systems and, like Miller and Napier (1993), the domain is broadened to include other forms of cost-keeping practices. We utilize primary and secondary sources to argue that the environment and rationales for standard costs have changed fundamentally over time. It is speculated that in the future standard costing will be used far less for individual accountability or operational control, but will return to its decision-making roots in the form of long-run cost targets that benchmark the success of continuous cost-reduction efforts.     

Relating Context Variables to Participative Budgeting and Evaluative Use of Performance Measures: A Meta‐analysis

Extant findings regarding how context variables relate to participative budgeting and the evaluative use of accounting performance measures (APM) are contradictory. Unlike previous reviews of such findings, this empirical article uses a meta‐analysis to examine the relations of context variables with participative budgeting or evaluative use of APM to determine (i) how the variables relate and (ii) which factors might cause between‐correlation variance, such as statistical artefacts or moderating influences of variable measures, sample selection, or industry differences. All meta‐analyses are based on rather small samples. Three groups of context variables emerge. First, some relate significantly and homogeneously to participative budgeting or evaluative use of APM; these direct relations should be considered explicitly in further studies. Second, for some variables, the relations are homogeneous but not significant, such that they are neither simple nor direct. Third, substantial variance exists in the correlations for some context variables; these relations are contingent on other influences. Industry differences and sample selection explain some inconsistencies in exploratory moderator analyses and should receive additional research attention.     

Using technology to reveal true costs

Healthcare leaders should address three important questions as they prepare to implement new costing systems: Do all providers in their organizations' systems, networks, or partnerships share the same definitions of unit of care and of fixed, variable, incremental, direct, and indirect costs? What are the maintenance processes and protocols for cost center and period matching of revenues and costs? If some providers within a network or partnership are not using costing systems, can an enterprise derive surrogate cost per unit of care?     

Compass Point University: how many spring/summer classes should be offered?

This case poses the issue of marginal costing for a service that occurs regularly, but is not the primary function of the organization. The setting is a university and the service is courses offered during spring/summer semesters, a situation familiar to many students. In this case, students must decide whether spring/summer courses are analogous to a special order or whether such costs should be considered integral to the institution’s programming. Students are asked to identify relevant costs and revenues and to devise a decision rule which takes into consideration the implications of various cost assumptions.After completing the case students should be able to apply the concepts of incremental revenues and costs in decision-making. They should also be able to justify using incremental costing in a recurring setting. Students will be able to explain how managerial incentives, in the form of fixed budgets, can interfere with the application of incremental cost and revenue concepts. During class discussion, the broader implications of changing institutional responsibility reporting and budgeting policies may be raised. This case is suitable for introductory courses at both graduate and undergraduate levels and in the first upper-division undergraduate course in managerial accounting.     

The evolution of the application of capital budgeting techniques in enterprises

This study examines the evolution of the application of capital budgeting techniques. Previous studies mostly used cross-sectional inquiries to understand the capital budgeting practices of firms. Only a few researchers have undertaken longitudinal studies to generalise the findings of the individual cross-sectional studies to the wider population and to identify the emerging trends in the use of capital budgeting techniques (CBTs). This longitudinal study surveys 83 studies of capital budgeting practices across firms in India, South Africa, the United Kingdom (UK) and the United States of America (USA) for the period from 1966 to 2016. The findings show that six capital budgeting techniques, namely, the net present value (NPV), the internal rate of return (IRR), the payback period (PBP), the accounting rate of return (ARR), the return on investment (ROI) and the real option valuation (ROV), are the most popular methods for evaluating capital investments. Of these techniques, the ROV is the least used, and a general lack of familiarity with this technique and its complexity are the most commonly cited reasons for not using it. Another method that is used less than the first four techniques is the ROI. However, this technique is of growing significance and is mainly used in the UK, followed by the USA, South Africa, and India. Firms in the USA and UK have increased their use of the IRR as a primary method for evaluating capital projects and have retained the PBP as an ancillary technique to strengthen the available information when evaluating capital projects. Firms in India and South Africa are increasingly excluding both the PBP and ARR methods and are increasingly using the NPV when evaluating capital investments. Although this development is in line with the theory, it limits the scope of the available information when evaluating capital projects.     

Risk Analysis in Capital Budgeting Contexts Simple or Sophisticated?

The aim of this paper is to report findings from a comprehensive UK survey which covered a wide range of risk handling issues in capital budgeting. The results provide a clear and up-to-date picture of the current practices of risk analysis within 146 large companies. In addition, the relationships between some risk analysis practices and other firm characteristics were explored. Their implications for theory and management, and some possible suggestions to bridge the gap between theory and practice, are discussed.