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Australasian Accounting Business And Finance

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Australasian Accounting Business And Finance
The Case of a Newly Implemented Modern Management Accounting System in a Multinational Manufacturing Company Abstract Contemporary management accounting techniques (such as TQM, BSC, JIT) are widely lauded by academia but the proposed relevance to business has not necessarily the view held by industry (e.g. Burns & Vaivio, 2001; Chenhall & Langfield-Smith, 1998; Innes et al., 2000. The purpose of this article is to investigate the acquisition by a modern multi-national firm of a major IT-based management accounting program to assess the relevance and usefulness of its functionality by identifying the type(s) of systems that are utilised and the rationale for upgrading or modifying its system(s). This study relies on a single case based on two in-depth semi structured interviews with accounting and finance professionals in a multi-national manufacturing company that recently implemented a modern management accounting system. The findings indicate that despite demonstrating some relevance of the management accounting information, the manufacturer deactivated components of the system that were deemed irrelevant at particular levels of the organisation. This paper provides evidence about the non-reliance on management accounting information in a multinational company operating in Australia. The findings in the study imply that relevance is linked to implementation, planning and training will help managers to better prepare themselves in setting up contemporary management accounting systems. Keywords Change, IFRS, institutional, Portugal, principles, rules This article is available in Australasian Accounting, Business and Finance Journal: http://ro.uow.edu.au/aabfj/vol8/iss2/9 Technical Note The Case of a Newly Implemented Modern Management Accounting System in a Multinational Manufacturing Company Daniel Watts1, P.W. Senarath Yapa2 & Steven Dellaportas3 Abstract Purpose Contemporary management accounting techniques (such as TQM, BSC, JIT) are widely lauded by academia but the proposed relevance to business has not necessarily the view held by industry (e.g. Burns & Vaivio, 2001; Chenhall & Langfield-Smith, 1998; Innes et al., 2000. The purpose of this article is to investigate the acquisition by a modern multi -national firm of a major IT-based management accounting program to assess the relevance and usefulness of its functionality by identifying the type(s) of systems that are utilised and the rationale for upgrading or modifying its system(s). Design/methodology/approach – This study relies on a single case based on two in-depth semi structured interviews with accounting and finance professionals in a multi-national manufacturing company that recently implemented a modern management accounting system. Findings – The findings indicate that despite demonstrating some relevance of the management accounting information, the manufacturer deactivated components of the system that were deemed irrelevant at particular levels of the organisation. Originality/value – This paper provides evidence about the non-reliance on management accounting information in a multinational company operating in Australia. The findings in the study imply that relevance is linked to implementation, planning and training will help managers to better prepare themselves in setting up contemporary management accounting systems. Keywords: Change, IFRS, institutional, Portugal, principles, rules JEL Code(s): M40 1 McGrathNicol, Australia 2 RMIT University 3 RMIT University, steven.dellaportas@rmit.edu.au Introduction Contemporary management accounting techniques such as Activity Based Costing (ABC), the Balanced Scorecard (BSC), Just in Time (JIT), Value Chain Analysis (VCA), Total Quality Management (TQM) are practices that have gained widespread attention in accounting, particularly since the latter decades of the 20th century (Argyris & Kaplan, 1994; Bromwich, 1999/2000; Bromwich & Bhimani, 1994; Horngren, 1995; Kaplan, 1994; Kaplan & Norton, 1992; Otley, 1983; Scapens et al., 1996). Where management accounting information has not kept pace with uncertain environments, the relevance of management accounting has been increasingly questioned by business unit managers (Murphy et al., 1995; Kaplan, 1986). The determination of academic research to maintain the relevance of management accounting is a noble pursuit but it is undermined by the choices made in industry and the lack of a pure definition for its achievement and worth (Bromwich & Bhimani, 1994). With a myriad of conventional management accounting systems and the ability to modify or specify alterations, the type and provision of contemporary management accounting systems is an important decision for many firms. The selection of an inappropriate system may result in a detrimental effect on the strategic or operational functioning and positioning of the firm (Burns & Vaivio, 2001; Coad, 1999; Langfield-Smith et al., 2000; Mintzberg, 1990; Mintzberg et al., 1998; MacDonald & Richardson, 2002). Whilst the benefits of contemporary management accounting techniques are evident, successful implementation remains an important and unresolved issue that constrains the benefits derived from new management accounting technologies. This occurs in part because of the contention that management accounting has not developed its own persona and remains merely a tool, rather than an essential component of the decision making process (Loft, 1995; Granlund & Lukka, 1998). Industry challenges of the ilk of globalised competition and fluctuating macro-economic conditions may be the saviour of management accounting as industry seeks to find any advantage, no matter how insignificant (Langfield-Smith et al., 2000). Until the worth of management accounting can be categorically demonstrated, its value may not live up to its potential. The onset of globalised competition and ready access to high technology has forced companies to change the way they operate (Langfield-Smith et al., 2000). Increasing IT investment is touted as the advantage that provides the leverage for achieving a stronger more flexible production process to deal with persistent change and improve organisational performance (Chenhall, 2003; Grandeet al., 2010). Dechow et al., (2007) claim that IT automates many control functions with use friendly systems capable of adaption to low level or line management. With the rapid development of high-end technology, efficient and instantaneous communication, and increased competition, many firms have been forced to seek comparative advantage to remain viable (Langfield-Smith et al., 2000). Management accounting systems and the resulting information used to assist management in its decision making process is argued to provide a comparative advantage in a dynamic and competitive environment (Chenhall & Langfield -Smith, 1998). Designing and maintaining effective cost management systems has become a fundamental task for corporations and their management accountants. IT now plays an important role in areas that are typically the domain of management accounting. A central and emerging theme arising from this discussion is the focus on how organisations utilise innovative technology-based management accounting systems across the value chain to support corporate strategy. The aim of this study is to investigate the acquisition and implementation of a major IT-based management accounting program with management accounting functionality by a modern multi-national firm and to assess its relevance by seeking to identify the type(s) of systems that Watts, Senarath Yapa & Dellaportas | Newly Implemented Modern Management Accounting System are utilised at different organisational levels and the rationale behind upgrading or improving its system(s). The identification and analysis of how well a management accounting system has been implemented and subsequently utilised in a multi-national firm provides a practical perspective on how industry perceives the relevance of management accounting. The installation of management accounting systems and the degree to which they are utilised is left up to individual firms (Bromwich & Bhimani, 1994). This study, based on a single case with semi-structured interviews, provides deep and personal insight on the issues facing an organisation in implementing a contemporary management accounting system, at a time where delays may mean loss in market share or an ill-needed drop in profitability. Dechow et al., (2007) contend that the role of information technology as a provider of information and facilitator for management accounting is an important area for further investigation. This study examines the relevance of a recently implemented technology-based management accounting system. Data is sought on the relevance of management accounting information by management in their strategic and operational decision making processes as well as the systems utilised (or discarded) and modified by the company. Identification of the type, level of detail and format that this information takes, in addition to external information will assist in forming the conclusions to this study. The remainder of this paper is organised as follows: a review of relevant literature is presented in the next section. This literature review outlines the arguments that call for management accounting change and the impediments to effective implementation. This section also highlights the research objectives of this study. Section three outlines the methodology adopted in this study that is based on a single case with interviews as the primary method of data collection. This section is followed by a discussion and analysis of the findings in section four and a conclusion in section five. Management Accounting Change The prominence of modern management accounting emerged in the latter part of the 20th century with the promise of radical changes in management accounting techniques (Burns & Vaivio, 2001; Foster & Young, 1997). No longer was management accounting seemingly conjoined to cost accounting, as techniques such as TQM, JIT and ABC became popular adoption in industry (Bromwich & Bhimani, 1994). The motivations for the adoption of management accounting change generally fall into two broad categories, strategic or long- term change (Hubbard, 2000; Morgan, 1993) and operational or short-term change (Morgan, 1993). A firm may seek to address change by utilising both or either of these approaches but the implementation of a contemporary management accounting technique is generally considered strategic (Morgan, 1993; Bromwich, 1999/2000; Simons, 1990; Chenhall & Langfield -Smith, 1998, 1999; Langfield-Smith, 1997). Chenhall and Langfield-Smith (1999) outline four key steps for strategic management accounting system change that begins with “triggers for adoption” (p. 39) . This step pertains to the key factors that management determine as paramount for the decision to move to a new management accounting system. The second part of the process relates to the “System Characteristics”. This step outlines the type of management accounting characteristics management decides are paramount to the transition. “Implementation Issues”, the third part of the change process, follows with a focus on specific issues that will hinder or assist the implementation of a new management accounting system. The final part refers to “outcomes” that relates directly to the results of the implementation. The outcomes highlight what features and benefits the firm will be faced with post implementation. This study is focused on the latter two parts of the change process that are critical to assessing the relevance of a newly developed management accounting system. In spite of differences between firms, the triggers for the implementation and utilisation of management accounting systems are generally consistent across organisations and dominated by the need to respond to a crisis such as a loss of market share or a dramatic decrease in profitability (Chenhall & Langfield-Smith, 1998). Additional triggers for management accounting change include: increasing exposure to global competition; significant changes in manufacturing processes; significant technological changes to manufacturing processes; and benchmarking by parent companies against so that performance measures could be “…applied in consistent and reliable ways between entities in the group” (Chenhall & Langfield-Smith, 1999, p. 44). The triggers for a change in the management accounting systems may be prevalent in individual firms but the decisions concerning the type and success of such changes are not as easily recognisable. Indeed, even with triggers present for the adoption of new management accounting systems, the acceptance and uptake of a contemporary management accounting system is still not assured (Burns & Vaivio, 2001). All too easily recognisable from case studies are the differences in management accounting systems, but not necessarily why they are different (Simons, 1990). Consider the case of contemporary management accounting tools such as ABC. Such tools assist organisations to achieve effective cost management accounting practice for the allocation of resources to activities, and then activities to cost objects through imputed causal relations based upon volume and non-volume related drivers (Cooper and Kaplan 1987; Cooper and Kaplan 1988; Cooper 1990; Cooper 1990). It is generally acknowledged that ABC brings several benefits by removing distortions from traditional cost accounting system and providing accurate cost information for: better decision making (Cohen et al., 2005; Cooper & Kaplan, 1988); more efficient strategic planning and operating performance (Cagwin and Bouwman 2002; Kennedy and Affleck-Graves 2001; O’Guin, 1991). Despite the theoretical superiority of ABC over traditional volume based costing models, the implementation of ABC in business organisations has yielded mixed results. Whilst 51% of Fortune 500 companies implemented ABC and ABM models, only 18% sustained such implementations for more than four years (Kiani and Sangeladji, 2003). It appears that a number of firms which sought to implement these cost accounting techniques subsequently abandoned them. Cobb et al. (1992) found that the implementation of ABC is costly and troublesome, particularly the selection of drivers and defining accurately relevant activities. Employees find it difficult to understand ABC categories, allocating resources to them and interpret the results. On a broader level, contemporary management accounting techniques (e.g. ABC, BSC, TQM) are considered widely utilised by industry but the level of acceptance remains lower than expected (Burns & Vaivio, 2001; Chenhall & Langfield -Smith, 1998; Innes et al., 2000). Like cost accounting, contemporary management accounting will gain relevance and popularity as firms pursue development of internal accounting practices which don’t easy fit into existing systems (Bromwich & Bhimani, 1994). Research evidence acknowledges that the successful implementation of ABC cannot rely on technical factors alone (Cooper 1990; Cooper, Kaplan et al. 1992), contextual, behavioural and organisational factors also influence effective


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