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.     

The foundations of modern cost management: the life and work of Albert Fink

After the Civil War, American railroads struggled with profitability problems because they lacked an understanding of the nature of short-range profits as they related to long-term investments, especially an investment that had to be upgraded and expanded almost continually. In the early 1870s, Albert Fink, superintendent of the Louisville and Nashville Railroad, experimented with a cost-analysis system. In general the purpose of the system devised by Fink was to measure the profitability and efficiency of the railroad's operations in terms of then-revolutionary concepts of fixed and variable costs and costs allocated to multiple accounting periods. Fink's operating statistics, such as revenue and expenses per ton-mile and passenger-mile, became standards in the industry and earned Fink the designation of 'Father of Railroad Economics'. Fink used his cost management techniques to argue against the regulation of the entire rail industry by impending legislation that would create the Interstate Commerce Commission which would subsequently embrace his costing methodology. His statistical analysis also helped to create the basic managerial concept of 'control through statistics', wherein business decisions are made based on sound information.     

University Tees: Introducing fundamentals of management accounting in a small business

This case introduces sophomore-level managerial accounting students to pricing decisions. The case also offers an opportunity to discuss the concepts of business strategy, business risk, and cost drivers. Students draw on concepts such as relevant costing, breakeven analysis, and contribution format income statements to recommend price quotes for a small business.¹     

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.     

ACCOUNTING FOR RESEARCH AND DEVELOPMENT EXPENDITURE: AN ANALYSIS OF THE ROLLS ROYCE RB.211 PROJECT

There is evidence that standard setting bodies see the promotion of uniformity of accounting practice as a major objective in setting accounting standards. However, recently issued standards in respect of the accounting treatment of research and development costs allow corporate managers considerable choice in accounting for these costs. An examination of the circumstances surrounding the development of the RB.211 engine by Rolls Royce Limited during the years 1967-70 is undertaken to determine the extent to which different practices may be employed in accounting for research and development costs under the U.K. and International accounting standards. Evidence adduced from this examination suggests that the management of Rolls Royce Limited could have complied with the requirements of these accounting standards and still have been free to expense or capitalise the costs incurred on the RB.211 project.     

Allocations and Common Costs in Long-Run Investing and Pricing Decisions: An Historical Analysis

The extent to which allocated common costs should influence business decisions remains controversial in management accounting. In the finance and investment literature this issue is generally ignored or dismissed by appeals to the'incremental' principle. This article presents an historical analysis of allocations in long-run investing and pricing decisions. It is demonstrated that seminal figures in the development of both investment and price theory were conscious of the need for firms to cover common costs and generally favoured some form of allocation. The anti-allocationist position is shown to be of relatively recent origin and to have caused an inconsistency in the management accounting literature in the treatment of common costs. European costing theory is shown to have been consistently allocationist. Evidence of a return in the recent U.S. literature to the older Anglo-American, and continuing European, allocations tradition is presented.     

Condominium Townhouse Investment

This accounting case involves the evaluation of various alternatives based on a real‐life personal property investment. The Condominium Townhouse Investment (CTI) case uses introductory management accounting concepts and analyses to introduce students to the case method of learning. The main concepts reinforced are relevant costs and revenues, including differentiating between opportunity and sunk costs. Students are not only asked to define and identify these items, but to consider choices centered on the decision alternatives in their role as accountants in public practice. This case is especially valuable because it offers students the chance to become engaged in an analysis and decision‐making situation that they can relate to both personally and professionally because, one day, they themselves are likely to become involved in a home ownership decision. The case focuses on real estate as a personal business investment, and requires both qualitative and quantitative analysis, with more emphasis on the qualitative aspect. In addition, the teaching notes include methods and strategies for students to use in an introductory managerial accounting class or level‐1 MBA class.     

Capitalized customer acquisition costs and earnings quality: A case study of PhotoWorks,Inc

This case examines issues related to accounting method choice, earnings management, and earnings quality. Specifically, the case examines a company (PhotoWorks, Inc.) that chose the less conservative approach of capitalizing and then amortizing a certain type of advertising expenditure rather than expensing the costs as incurred. The primary purpose of this case is to illustrate the role of judgment in accounting method choice and how it provides potential opportunities for earnings management. The case also allows students to explore the multi-dimensional nature of financial reporting decisions and to develop a greater appreciation for how their accounting coursework relates to important “real-world” issues. After completing this case, students should be able to do the following: (1) describe factors that are involved in accounting method choice and support the appropriateness of an accounting method choice based on a search of the accounting standards; (2) understand and evaluate the effects of accounting method choice on the financial statements; (3) describe the conflicting motivations managers face when deciding on financial accounting methods versus tax accounting methods; (4) explain what is meant by earnings management, factors that motivate managers to manage earnings, methods they can use to manage earnings, and how earnings management affects earnings quality; and (5) describe the role of auditors in analyzing a company’s accounting method choices and in assessing the quality of a company’s earnings.     

Managerial Accounting Early in the British Industrial Revolution: The Carron Company,a Case Study

Traditional accounting histories date the advent of sophisticated cost accounting to the mid-1880s. Research in recent years, however, has provided evidence of purposeful cost management during the British Industrial Revolution. Given the advances in capital accumulation techniques, market structure development, and technology, it might have been expected that British entrepreneurs would have appreciated the advantages that effective costing could provide. This article is a case study of the Carron Company, the huge Scottish ironworks, whose cost accounting methods were notably innovative during the period for which plentiful archival records exist: 1759–1786. Carron's utilisation and practice of cost management is examined in the areas of expenditure control; responsibility and departmental cost management; overhead allocation; cost comparisons and transfers; costs for decision-making; budgets, forecasts, and standards; and inventory control. The positive findings in all these activity areas contribute to the growing rehabilitation of British Industrial Revolution cost accounting as a precursor of ‘the costing renaissance’ a century later.     

Financial accounting choice and earnings management

This paper presents a case that exposes students in graduate accounting or MBA financial accounting classes to the concepts of accounting choice and earnings management. In the case, students role-play as a manager who, facing conflicting incentives, must make and defend three expense estimates for a hypothetical company. Students also read selected business press articles that introduce earnings management and that highlight the importance of the issue to the business community. The articles give students some background from which to approach the choices they will make with respect to the financial statements.     

Financial accounting choice and earnings management

This paper presents a case that exposes students in graduate accounting or MBA financial accounting classes to the concepts of accounting choice and earnings management. In the case, students role-play as a manager who, facing conflicting incentives, must make and defend three expense estimates for a hypothetical company. Students also read selected business press articles that introduce earnings management and that highlight the importance of the issue to the business community. The articles give students some background from which to approach the choices they will make with respect to the financial statements.     

The meaning of a defined accounting concept: regulatory changes and the effect on auditor decision making

Accounting standards exist in an attempt to “standardize” accounting practice. These standards contain definitions of accounting concepts whose function is to guide judgments made in practice. However, such judgments can have a major impact on a firm's externally reported accounting numbers, as their inherent subjectivity and discretion may be lent to the manipulation of earnings. This study provides empirical evidence of the effect of measured meaning on an accounting judgment, in the context of regulated changes to the definition of one key accounting concept used in measuring operating income. The extraordinary items classification decisions made by auditors were found to be systematically associated with differences in measured meaning of the extraordinary items definition. The study has important policy implications for accounting standard-setting.     

Costs of Accounting to Lenders: Canadian Evidence

Do new accounting pronouncements impose costs on firms with accounting-based restrictions in their public lending agreements? Previous studies have not found significant, adverse share price reactions to such pronouncements. This paper posits that management is concerned with the total costs of the monitoring policies used for reporting to lenders, and that share price reactions are likely to comprise only a small portion of those costs. The episode of mandatory lease capitalisation in Canada is used to test some predictions that are consistent with this expanded view of the costs of accounting to lenders. Lessees ‘public lending agreements were examined to see if they stipulated restrictions based on accounting numbers; and, if they did, whether the constraints were based on GAAP (generally accepted accounting principles) or TAP (tailored accounting principles). The evidence strongly supports the hypothesis that there are costs of accounting to lenders; but these costs are unlikely to be observed by researchers who look only for adverse share price reactions to mandated accounting changes. It also indicates that Canadian standards setters were sensitive to lessees’ accounting costs.     

Collective Bargaining and Cost Accounting: The Case of the US Men's Clothing Industry

The attributes and rationales of modern cost accounting procedures are not unequivocal. Some scholars underscore the adversarial relationship between accounting and labour (Bougen, 1989; Owen and Lloyd, 1985; Ogden and Bougen, 1985) while others contend that accounting data were used as much for social, political and ideological purposes as for efficiency concerns (Hopper and Armstrong, 1991; Ezzamel et al., 1990; Hoskin and Macve, 1988a and 1988b; Stewart, 1992). Alternatively, several researchers have re-examined the origins of cost accounting and more recent costing developments (Fleischman and Parker, 1991; Fleischman and Tyson, 1993; and Tyson, 1990 and 1992). The present paper further explores the development of modern cost accounting practice. It presents a detailed analysis of the US men's clothing industry between 1919 and 1926 and assesses over 1,200 arbitration decisions to determine how piece rates, production standards and standard costs were developed, implemented and carried out in practice. It finds that collective bargaining and compulsory arbitration significantly moderated these procedures such that workers and owner/managers received tangible economic benefits.     

Hicksian Income in the Conceptual Framework

In seeking to replace accounting conventions by concepts in the pursuit of principles‐based standards, the FASB/IASB joint project on the conceptual framework has grounded its approach on a well‐known definition of income by Hicks. We welcome the use of theories by accounting standard setters and practitioners, if theories are considered in their entirety. Cherry‐picking parts of a theory to serve the immediate aims of standard setters risks distortion. Misunderstanding and misinterpretation of the selected elements of a theory increase the distortion even more. We argue that the Boards have selectively picked from, misquoted, misunderstood and misapplied Hicksian concepts of income. We explore some alternative approaches to income suggested by Hicks and by other writers, and their relevance to current debates over the Boards' conceptual framework and standards. Our conclusions about how accounting concepts and conventions should be related differ from those of the Boards. Executive stock options (ESOs) provide an illustrative case study.     

The role of criticism in the dynamics of performance evaluation systems

Drawing on the concept of “trial,” developed by French sociologists, this article analyzes the dynamics of employees’ performance evaluation systems, particularly those involving accounting performance measures. A case study is presented as an illustration of our proposal to consider these systems as one of the major trials in the business world, that is, social arrangements organizing the testing of people and resulting in ordering them, and further in consistent social goods allocation. This analysis emphasizes the role of criticism in the dynamics and evolution of performance evaluation systems and enables us to revisit concepts like controllability or objectivity which have been presented for decades as cornerstones of performance evaluation systems either in management control or in human resource management fields.     

Commentary: IFRS and the Domestic Standard Setter – The Challenge of the Public Sector

In his interesting reflections on accounting standard setting, Kevin Stevenson raises the issue again – applying business accounting standards to the public sector. This matter has been the subject of debate for the past decade. I argue that because the nature and roles of governments differ fundamentally from those of business, governments require a set of accounting standards tailored to suit their special needs. Their accounting systems must report the appropriate information required for the efficient management of the nation's financial affairs.     

Further evidence of earnings management and opportunistic behavior with principles-based accounting standards: The case of conditional asset retirement obligations

FASB Interpretation No. 47 (FIN 47) clarifies the diverse accounting practices for conditional asset retirement obligations (CAROs) that arose under SFAS No. 143, which is classified as a principles-based standard by the SEC. Prior research suggests that the subjectivity in SFAS No. 143 provides management with the opportunity to manage earnings and avoid the recognition of CAROs. This study examines firms that recorded adjustments for CAROs upon FIN 47 adoption. We demonstrate that effective monitoring is essential to promote adherence with principles-based standards, and that gatekeepers may not be effective when standards are ambiguous. Univariate tests and logistic regressions reveal that FIN 47 adopters have audit committees with a greater number of financial experts and are audited by BIG 4 firms. Particular firm-specific factors are also found to be associated with the adoption decision. The results also indicate that newly-reported obligations related to asbestos in firm-owned property and restoration costs for leased premises were subject to prior management discretion. This study extends existing literature on SFAS No. 143 and FIN 47 and studies examining earnings management with principles-based standards. The case of FIN 47 provides further evidence that significant opportunities for earnings management and discretion exist within a principles-based accounting environment, particularly when standards lack clarity. It also confirms the critical role of monitoring by the audit committee and external auditors to promote adherence with the substance of such standards.