Management Accounting-Performance Evaluation: Ian Herbert Considers the Effects of Increased Investments in Capital Equipment and Lower Direct Labour Content on Standard Costing

By Herbert, Ian | Financial Management (UK), March 2008 | Go to article overview

Management Accounting-Performance Evaluation: Ian Herbert Considers the Effects of Increased Investments in Capital Equipment and Lower Direct Labour Content on Standard Costing


Herbert, Ian, Financial Management (UK)


May 2006's P1 exam had the question: "Briefly discuss three reasons why standard costing may not be appropriate in a modern business environment." But what is meant by "modern" and what should we be comparing it with? And what are the implications for management accounting? To answer these questions, first it helps to look back in history.

Manufacturing was a modest affair before the 18th century, with activity centred on cottage industries. (Of course, you'd be justified in saying: "Hang on: what about the great cathedrals?" Such projects employed vast numbers of labourers and artisans on one site for years, which shows that in real life things are complex and progress isn't always linear-often we can talk only of general trends.) Then the British industrial revolution heralded key technological advances--for example, the harnessing of water by Richard Arkwright to power machines in cotton mills. The nature of the technology necessitated the concentration of activity on single sites and a specialisation of skills. Arkwright's mills were a complete departure from the traditional, craft approach and would have been described as "modern" in his day. Now we might think of a factory full of robots as "modern" and a typical eighties car factory would be seen as traditional--even old-fashioned. So "modern" is a relative term.

[ILLUSTRATION OMITTED]

In time, factory work processes became more formal and intensive. The most striking example was Ford's production lines at Baton Rouge in the early 20th century. The emphasis was on producing standardised, affordable consumer goods. Product specialisation and the division of labour meant that factories became more dehumanised and there was antagonism between workers and managers, although Ford paid quite good wages. This discontent manifested itself in strikes and poor-quality goods. The School of Scientific Management reinforced the scrutiny of activity at a micro level, resulting in further standardisation and measurement. This facilitated the widespread use of standard costing, which also required a stable environment with long batch runs and relatively few model changes. Setting standards for the future, typically up to a year ahead, was now possible and, even in large factories, costs could be controlled on a "management by exception" basis.

While these developments were radical, management accounting evolved slowly. Initially it was restricted to product costing for the purposes of controlling costs and valuing stock for profit-reporting purposes rather than setting selling prices. When CIMA was formed in 1919 it was called the Institute of Cost and Works Accountants; supporting management decision-making is a more recent role.

From 1945 to about 1980, consumer demand often outstripped capacity, so manufacturers prospered with a level of inefficiency that would be unthinkable today. Then Japanese factories started making high-quality goods at incredibly low cost. At first, western firms assumed Japan's labour costs were far lower. When it became clear that Japan's edge came from new approaches to production, it was too late for many to adapt. Academics Thomas Johnson and Robert Kaplan argued that "remote control" management and the supporting accounting techniques had contributed to western firms' inefficiency-eg, an overreliance on simplistic plant-wide overhead absorption rates, especially when these were based on direct labour. Their 1987 book Relevance Lost (Harvard Business School Press) outlines the evolution of management accounting within the wider context of industrial development. It provides a valuable background against which to appreciate later advances in accounting.

Before we fast-forward to the present, let's review what we now refer to as traditional manufacturing. In the eighties most industries were mechanised, although the equipment required constant maintenance. Machines broke down, forcing firms to hold large stocks of work in progress at each stage of manufacture to keep production flowing.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Management Accounting-Performance Evaluation: Ian Herbert Considers the Effects of Increased Investments in Capital Equipment and Lower Direct Labour Content on Standard Costing
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.