The Bookkeeping Can Be Traced Back Accounting Essay

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The bookkeeping can be traced back to the thirteenth century. But reserchers beleive that the beginning of cost and management accounting took place around 1812. This is the time, textile mills began to perform many processes inside the organization that had previously been performed outside the company by independent craftsmen.

The different activities created a need for determining the cost of performing these activities inside the company. From this modest beginning, accounting has evolved into a dynamic and extremely important, although controversial part of business and economics.

The growth of the service industry and the rapid growth of financial institutions further changed the environment in which accounting existed in the beginning of the 1960s and managerial accounting began to mean more than just cost accounting hence began the development of modern techniques of accounting. (James R.Martin, MAAW online)

Prior to 1950, cost accounting emphasized generating information for tax and financial accounting purposes. These had a fairly narrow orientation towards inventory valuation for external reporting.

From 1960-1990s changes in accounting techniques shifted to volume expansion, this is the time where first oil crisis happened chracterizec by high ecnomic growth. During the time Japanese firms developed new markets through mass production. At that time variable costing was the most popular tool primarily in process-oriented companies.

From 1973 - 1980s further changes took, characterized by stable or low economic growth. During this time Japanese learned that volume expansion alone may not be appropriate for the future.They moved away from mass production and into low volume production of varied products. There by firms began to introduce more relevent methouds. (Oregon State University,Online)

In recent years there has been considerable debate wether the extent to which management accounting is taking a development. According to Johnson and Kaplan (1987), that management accounting had not changed since the early part of the twentieth century and, as such, had lost its relevance.

But it has also been argued that the environment in which management accounting techniques are practiced has changed considerably - with advances in information technology, more competitive markets, different organisational structures and new management practices and those change lead the development of various new accounting techniques and hence has re-gained its relvenece back. (John B, Robert S, 2000)

Application of many of such new techniques are prooven sucessful in different organizations and are practicing in different ecnomies.

However the following report is specifically focused on the following techniques among them.

  1. Activity Based costing (ABC/M)
  2. Lifecycle Costing
  3. Target Costing and
  4. Kaizan Costing
  5. Througput accounting


Activity based cost management (ABC/M) is one of the technique used to developed management costing. Activity based data has been used for cost management. Cost management and resources allocation is the major use of activity based techniques. This technique was diversity with many firms citing cost management and cost reduction.


In the early 1980s many companies were feel that the limitation of the traditional costing system. That is inappropriate overhead allocations and indirect costs were relatively small. Due to this, a traditional system seems more sophisticated methods of assigning indirect costs to cost objectives. This is so-called "revolution" of ABC has began to developed in the late 1980s.

By the 1990s, companies were trying to grasp the element of ABC/M. Because it seems that the implementation of activity based techniques had brought about a distinct change in the image of management accountants. That is activity based accounting data was perceived as relevant by accountant and managers, as a result it was used more widely than before. This applied to data for decision making and cost management. Consequently ABC/M began to use more widely over the years.


ABC is a methodology that measures the cost and performance of the activities, resources, and cost objectives. Resources are assigned to activities, then activities are assigned to cost objects based on their use. ABC recognized the casual relationships of cost drivers to activities. This result the cost of these activities is assigned directly to products through cost driver rates. Therefore, ABC looked production environment with the manufacturing support facilities. Moreover, "ABC" typically is used to determine product costs; it is equally applicable to determining customer costs, channel costs and so on.

Some of the other benefits the companies enter tiled by implementing ABC include:

  • More accurate product cost
  • Supporting measurement of economic value analysis
  • Serving as a fundamental input to target costing
  • Identifying market etc.

These analyses permit the price (future price, opportunity cost price) which will help mangers to make right decision about the resources consumption model and also reduce the possibility of managers making poor decision based on available accurate product cost report. Therefore ABC is more powerful tool measuring performance and also identifies opportunities to improve business processes effectiveness and efficiency by determining the "true cost" of a product or services.

ABM is the broad discipline that focuses on achieving customer value chain and company profit via the management activities (Lyne & Friedman, 1996). It draws on ABC as major source of information. ABM focuses more on "how to change and improve cost". That is ABM provides information on the cost of activities, why the activities are undertaken and how well they are performed. In addition ABM highlights unaware of activities that makes up the organization. So that they can be prioritized for detailed studies to ascertain whether they can be eliminated or performed more efficiently. Hence, the cost reduction can be achieved by eliminating the activities, performing them more efficiently with fewer organizational resources or redesigning them so that they are performed in an entirely different and more cost efficient way (Drury, 2005). Some of the benefits typically derived from ABM such as identification of redundant costs, tracking the impact of reengineering efforts, better understanding the cost drivers and so on. Together with ABC and ABM which helps to the companies in achieving most possible profit out of their productivity by reducing the cost of the product.


More recently different companies have become rapidly adopting ABC/M in order to reduce costs and to manage the cost effectively in their organization. Specifically, businesses like Coca-Cola Company and Honeywell have been performing ABC/M for many years. That is because they establish the ABC/M output data to serve as an enabler to their ongoing improvement programs, like six sigma, lean production, change management, cycle time compression, business process reengineering, target costing and channel/customer profitability.


Although ABC/M technique is promising, there are also drawbacks associated with them. Skinner (1998) viewed that another common criticism of ABC implementation is the time involved to collect data that is more time is required as ABC requires a larger amount of data which is necessary to trace and identify the activities and cost drivers. Apart from these criticisms ABC conflicts with TQM so customer satisfaction efforts

Furthermore ABC/M techniques might also fail in large companies especially in manufacturing industries. The reason is that large manufacturing industries contain a vast majority if overhead costs; therefore it is complex in identifying activities to the appropriate cost drivers. (Pierce, 2004)

In addition, the success or failure of the ABC/M project leads on the top management of the organization. Without the commitment of the top management, it is very hard to implement ABC/M in a company. For example, some organization they attempt to develop an ABC/M technique in their project. However, the top management and many people in the organization misunderstand the ABC terms such as cost objects, even the word "activity". In such a situation they are completely lost the purpose of implementing ABC/M technique in the first place. Therefore, it is essential for the upper management to possess the relevant knowledge to run the ABC/M system in order to prevent failing the project in the organization.


For years, ABC/M was considered an expensive technique that only large organization with extensive resources could undertake. But today with the help of computers (IT) the cost of collection and time taken to gather information has decreased. Hence, all organization in the today's world would be able to adopt ABC/M techniques to their organization. Most research shows that, twenty years from now, managerial accountants will accept ABC/M being as common as standard costing systems is accepted today. Only few applications will ABC/M be optional (Cokins.2002).


In the recent past Management Accounting has undergone various developments. Among those is the product life cycle management and it serves as a tool for various information needed by an organization. Even though the Life Cycle Costing (LCC) concept was introduced by Dean in 1950 it was not applied to most of the industries until 1980 when there were criticisms of the traditional Management accounting practices. As the traditional management accounting control procedures have focused primarily on the manufacturing stage of a product's life cycle.

LCC is the process of estimating and accumulating cost over a product's entire life. LCC can apply to product, services, customers, projects or assets and, as its name implies, it costs the cost object over its projected life. The product life cycle progresses through a sequence of stages from introduction to growth, maturity, and decline. The growth phase is considered to be the most profitable phase as this is the cheapest phase. The planning and design stage incur the most cost so cost management has to be done in this stage. The manufacturing stage only applies what was planed that is all the planes are incurred at this stage. The stage where cost managing difficulties are faced is the decline stage. Product life cycle reporting involves tracing costs and revenues on a product by product basis thorough out their life cycle.

The aim is to adopt a policy which will maximize the return over the cost objects total life by focusing on the operational and terminal cash flows. LCC helps management to understand the cost consequences of developing and making a product and to identify areas in which cost reduction efforts are likely to be most effective.


LCC is particularly important in environments in which there is large planning and development cost for example: developing a new jetliner, or a large product abandonment costs, example: decommissioning a nuclear generating facility. The American NASA advanced air transportation technology project by California have achieved there strategic goals and have been able to manage there cost through LCC.

Integrated Business Machines (IBM) applies LCC and estimates and accumulates costs over a products entire life cycle in order to determine whether the profits earned during the manufacturing phase will cover the cost incurred in the pre- and post- manufacturing stages.

Most of the Japanese Electronics and electrical industrial product like Sony, Philips have proven there success by applying the concepts of LCC as this system that came with value chain analysis and each stage of it encourages the value chain. That is from the time the product is born to the time it declines.

LCC forms an input to evaluation processes such as Value Management, Economic Appraisal and Financial Appraisal and is a methodology to evaluate the economic performance of investments in building and building systems.

Many of the USA construction firms have adopted the approach of LCC in order to reduce costs in their organizational project, as projects that undergo, LCC analysis gives the total cost of the Present value system - including all expenses incurred over the life of the system. This analysis enables to compare different options, and to determine the most cost-effective system designs.

BMW has proven so successful by the usage of components from the recycled plastic. As LCC analysis helps the management for comparing costs of different designs and/or determining whether a hybrid system would be a cost-effective option also allows the designer to study the effect of using different components with different reliabilities and lifetimes.


LCC estimates too early in the life of a project when the degree of accuracy has a broad range, and assuming that the alternative has a finite life cycle. The cost of performing a LCC analysis may not be appropriate for all projects and a high sensitivity to changing the requirements. The product life cycle is influenced by many factors of which some can be controlled while others simply cannot as they arise without warning. For example like the entry of a competitor into a common market.


But the main criticism of LCC is that in the short term - not all products/services die. Jeans may die, but clothes probably won't. Legal services, medical services, may die, but depending on a social political climate, probably won't. Even though the validity of the product or service is questionable, it can offer a useful 'model' for managers to keep record which can be referred to.

One of the most respected criticism of the product life cycle, was made by Dhalla & Yuspeh that is "clearly, the PLC is a dependent variable which is determined by market actions; it is not an independent variable to which companies should adapt their marketing programs.

Marketing management itself can alter the shape and duration of a brand's life cycle."

So this means the life cycle may be useful as a description, but not as a predictor; and usually should be firmly under the control of the marketer and the product brand life cycle is significantly longer than the planning cycle of the product.

It is claimed that every product has a life cycle. It is launched; it grows, and may, at some point, die. In general LCC provides a comprehensive accounting of product cost both manufacturing and environmental, from cradle to the grave to help decision makers understand the cost consequences of making that product and to identify arrears in which cost reduction efforts are both desirable and effective .


"Target costing is an activity which is aimed at reducing the life cycle of costs of new products, while ensuring quality, reliability and other consumer requirements, by examining all possible ideas for cost reduction at the product planning, research and development, and the prototyping phases of production. But it's not just a cost reduction technique; it is part of a comprehensive strategic profit management system" (CIMA 2005)

This technique involves identifying the price customers are willing to pay for products of a specified quality and function. After deducting the required profit margin from the target selling price, the target (or allowable) cost is derived. When the target cost has been established, the company begins the tasks of cost attainment. This involve using the managerial techniques such as value engineering to examine the factors effecting the cost of a product in order to achieve the required standard, quality at the target cost and the use of tear down cost analysis to examine the competitors product to identify the ways for product improvement and cost reduction. These techniques will aid in redesigning the product, its manufacturing process, and its distribution services in order to remove any gap between the target cost and the current cost of production.


In the competitive business environment with product life cycle getting shorter and shorter and consumers demanding for new and diversified products and the automation and computer control manufacturing systems, the traditional manufacturing systems became outdated and ineffective. As a cost management concept, target costing was originated in Japan. Toyota invented target costing during the 1960's (Tanaka, 1993). Since then the use of target costing has spread widely among Japanese companies. US companies more linked to traditional cost management have deployed target costing systems comparatively slowly and less widely.

Target costing was mainly applied to the manufacturing industry in Japan, but with its successfulness, more and more companies in the other countries such as US, Germany, France are adopting the concept. Its application has also expanded to other industries such as processing, transportations, construction, consulting and many other types of services industries.

In his study Helms, M. et al stated that the successful companies and industries adopting target costing includes Toyota, Nissan, Sony, Daihatsu, Canon, Olympus Optical, Komatsu and the non Japanese companies includes Mercedes, Goodyear, Rockwell, Texas Instrument, Daimler Chrystal and the North Sea Oil Industry.


Target costing drives a product development strategy that focuses the design team on the ultimate customer and on the real opportunity in the market. This has allowed the companies using this technique to win considerable market shares and compete with its rivals. Based on the price-down, cost-down strategy, target costing places emphasis on the firm's relative position in the market and product leadership. Because it is closely linked with the firm's long-term profit and product planning process.

According to Cooper, R and Chew, B.W (1996), target costing technique helps to prevent the senior managers from launching low margin products that do not generate appropriate returns to the company. It ensures that development team will bring profitable products to market not only with the right level of the quality and functionality but also with appropriate process for the targeted customer segment.

One of the main benefits of target costing includes that it allows companies to successfully motivate employees and enforce cost management action plan. It is a very disciplined approach to managing cost and improving processes and products. Target costing is aloes very compatible with other cost management techniques such as TQM, Kaizan and ABC/M


Target costing has proven successful in most of the manufacturing industries but it also has a number of implementation challenges. The implementation of target costing becomes more difficult if the culture has previously been embraced by cost plus approach. The need for a team work, closer linkage between the supply chain is vital in the implementation process. In Japan this technique has proven successful because of their work ethics and the commitment towards the job. While in western countries the implementation of this technique faces many problems as a result of the unhealthy work ethics and culture.

According to Helms, M. et al (2005), in order to implement the target costing and to achieve the success the understanding of the costs and communication through out the supply chain is important. Due to lack of this understanding and communication and poor linkage in the supply chain creates barriers in implementation of target costing technique and number of industries continues to use prevailing cost-plus approach.

Reaching the target cost is a joint effort of the entire supply chain; the pressures of reaching the target cost must be understood and communicated through out the chain. The amount of coordination needed to set a target cost is very time consuming and demands information sharing and team work.

Another barrier or limitation includes that the target costing needs a comprehensive information system and cross-functional involvements as the cost reduction of the product is concentrated at the product planning, research and development and product designing stage. The cost reduction objectives should be set at an achievable level.

Davila, A and Wouters, (2004) stated that target costing has significant advantage in stable industries such as camera industry characterized by short product life cycles, clearly establish price points, well understood technology and where product costs are key profitability. However the advantages of target costing become liabilities in high technology industries. In his study he is also pointed out the reasons for this are, target costing focuses attention on cost drivers and away from revenue drivers. This technique is too time consuming and it is too linear and bureaucratic.


'Kaizen' is a Japanese term for making improvements to process through small incremental amounts, rather than through large innovations' (Drury 2004, P. 950). The focal point of Kaizen costing is continuous improvements, and it is more focused on achieving small incremental cost reduction by monitoring the manufacturing process. Some of the key objectives of the Kaizen philosophy include the elimination of waste, quality control, just-in-time delivery, standardized work and the use of efficient equipment.


After World War II, the industrial forces brought in American experts who were familiar with statistical control methods to restore a war-torn nation. The main task of this group include conducting programs included Job Instruction (standard work) and Job Methods (process improvement). In conjunction with the Shewhart cycle (also referred to as the Deming Cycle) taught by W. Edwards Deming, and other statistics-based methods taught by Joseph M. Juran, these became the basis of the kaizen revolution in Japan that took place in the 1950s.


Toyota Production System (TPS) has successfully implemented these activities in their production line. In a study from Okayama University, Koichi Shimizu point out that cost reduction activities of TPS start from the product design stage. After that, the management sets a reference cost of each of the parts and a standard time for their production. Then the shop floor that produces these parts and vehicles firstly targeted to attain these costs and standard time, and then reduces them by carrying on kaizen activities. Group leaders and engineers whose responsibility it is to execute these activities. These activities and the kaizen gains are supervised and controlled by management. Thus they call these kaizen activities "organized kaizen activities". In this regard kaizen for increasing production efficiency and for lowering labour cost never ends but it is the matter of worker's voluntary activities.

Here it can be questioned why Japanese firms especially Toyota has achieved a remarkable performance in their production line using Kaizen activities. Koichi Shimizu in his study highlighted that at Toyota, Kaizen activities are undertaken as a group work. This of course contributes to contracting real working hours by reducing line stops caused by machine breakdown. And also some workers suggest an important and remarkable idea about quality improvements or working process improvements. It serves as a training of their kaizen mind and ability, that is, looking for problems in their work place, searching measures to take and solving problems. In the case of quality circles, a worker becomes its leader in rotation and discusses with the other members about the problem he/she or they set. It forms leadership as well as their cooperation. The importance is given here to forming their "kaizen mind" and "teamwork" (in Toyota's sense, it means cooperation among company's members). These voluntary activities also allow workers to give attention in their operations to product quality, productivity, costs and which leads to efficiency. Obviously Kaizen imposed brings up the worker's unfriendly or negative reaction against improvement of their own working process.

Kaizen costing takes place after the production has started and addresses the problems that may not have been apparent earlier. And also companies in a more mature market with longer product lifecycle emphasize more on Kaizen costing. For instance, Kaizen costing system was initiated in Olympus Optical Company, when one of the Olympus Opticals' new products failed to meet its target. As mentioned by Cooper (1995), Companies would quickly redesigned such products during the early stage of the manufacturing phase by using Kaizen costing to bring their cost in line with their target cost

The kaizen (continuous improvement) activities have been considered in the Western industrial world as a prime factor in Japanese firms' high product quality and productivity. Kaizen activities have also been emphasized by Japanese firms themselves when they were promoting these activities in their transplants in USA and in Europe


Consequently, it is clear that European and American automobile producers have tried to set in place kaizen activities in order to assure high product quality, and if possible, to increase their productivity, by involving workers in these activities. Those who characterize the Japanese style factory management as "management by stress", can criticise that kaizen is focused upon increase in productivity and imposed as such to workers. If the workers were continuously compelled to increase their productivity by kaizen, they would always be under a stress. And also Kaizen costing has been criticised for the same reasons as target costing. Further more it has been argued that Kaizen costing leads to incremental rather than radical process improvements

At this point, it is necessary to note that for kaizen costing to be effective, involvement from all levels of the organisation is important. This can be done by explaining the significance of kaizen costing to the organization and the benefits which will affect all of them. In implementing kaizen costing, the organizational culture is another factor that has to be considered. Therefore the issue of having strong leadership and continuous support from the management is very essential.

Kaizen activities take place in a series of few steps over time. So, kaizen costing may not be suitable for industry that is highly risky and unpredictable. Kaizen costing may not be as applicable to industries where big investments and big changes are required. And kaizen is most suited to manufacturing industry where there are line workers and managers.

Although Kaizen is criticised to some extent, it is widely used in Japanese motor industry and in the electronic industry, where there is huge competition in the market. It costing is a simple and yet powerful concept. As for kaizen costing, continuous commitment from the management and strong involvement from the employees are two very essential factors. And still there is place to do more research.


Throughput Accounting is defined as the rate which raw materials are turneed in to sales. Throughput approach treats all costs, other than direct materials, as operating expenses, or period costs. It reveals a new management tool for managerial accounting and shows an alternative path for other management practices. It also enables managers to quickly see if their decisions increase profitability. (Thomas Corbett)

The throughput views companies as systems. Every organization has at least one factor that limits its throughput; otherwise, performance would continually improve. According to TA approach, removing the constraints and pushing forward the performance of the organization should be the real goal of management rather then emphasis on cost reduction at the first instance.

The Goldratt Institute (goldratt dot com) has illustrated TOC Analysis in the form of five steps used as a foundation upon which solutions are built:

  1. Identify the constraint
  2. Decide how to exploit the constraint
  3. Subordinate and synchronize everything else to the above decisions
  4. Elevate the performance of the constraint
  5. If, in any of the above steps the constraint has shifted, go back to Step 1


Gallowoway and Waldrom (1988-89) developed throughput accounting (TA) based on the Theroy of constraints (TOC) which was developed by Goldratt and Cox in 1986 in the USA.(CIMA,2005)

According to CIMA, throughput accounting (TA) is one of the most widely recognized management accounting system developed when the new management accounting system was needed once the new manufacturing philosophy was put into practice. This has been developed as an alternative system of cost and management accounting in JIT environment.


The TA philosophy is applicable to any type of organization, while the practice elements apply mainly to companies that produce products to customer specifications.Examples include the manufacturers of machines, locomotives and aircraft engines (James R,Martin).

Throughput accounting improves profit performance with better management decisions by using measurements that more closely reflect the effect of decisions on three critical monetary variables (throughput, inventory, and operating expense) (Wikipedia).

Throughput is quite widely used in the USA by companies such as Ford Electonics,General Motors and Avery Dennsions. Some of them claim that it has revelutionised their business by using this approach. TA is also used by number firms of UK companies as well(CIMA Official Study System,P2,p369).

As per the case-throughput accounting at Garrett Automotive Ltd UK (a manufacturer of turbo chargers for the automaotive industry) has recognised TA technique in 1988. It has reported that its acconting system before the introduction of TA approach was very detailed and cumbersome. They had to produce 48 page lengthy monthly reports which managers found difficult to understand properly.

But as sales and materials were the largest influencial factors on profitability, it made sense to make its decsion to introduce TA, which primarily concern those two elements.

According to the case study, Garret has got plenty of benefits from the adjustment they made under TA apprach and resulted doubling its profit. They were also managed to alter the lengthy monthly reports just 5 pages.

Another case study in support of TA, 'Implementing TOC in a traditional Japanese manufacturing environment', Hitachi Tool Engineering (Japan), the implementation of TA appraoch were very sucessful and to got significant improvements in its operation and profitability (Elisabeth Umble, Satoru Murakami)

TA is the only philosophy of its type which is based on the importance of throughput therefore its proven sucessful strategy is to increase throughput by simultaneously decreasing inventory and operating expenses and boost profits.

According to Mac Arthur, J. B ( 1996 ) the Bertch Cabinet Manufacturing, Inc.USA (an integrated medium sized manufacturer of wood cabinets and accessories) has prooven sucessful from changing ABC to TA in the companys overall business process.

Bertch experimented with ABC between 1991 and 1993 in two of their eight divisions. However, for Bertch, the costs of developing and running a complex ABC system were greater than the benefit that would be derived from implementing such a system.

In February 1993 Bertch implemented TA in its synchronous manufacturing environmnet.Sixty days after implementation managers saw improvements and helped to increase sales revenue and profits. Because under throughput accounting the products to be emphasized are those with the highest throughput per unit of the scarce resource and they managed to do that.

As the primary purpose of a management accounting system is to satisfy the needs of managers within the organization. Bertch did just that. They have given management a resource that will provide value-added information allowing them to make informed business decisions.


As no system is usually free from all the problems, TA also may face soem practicle difficulties. Such problems include:

Finding the constraint & product mix needed to maximize throughput

Determining the optimum product mix with overlapping constraints

Determining the optimum product mix with overlapping constraints

However, with the help of modern computing by using such as linear programing techniques, the opitimal solution can be found easily.

Another problem is TA method does not provide proper matching (as defined by GAAP) because all manufacturing cost, other than direct material are expensed when incurred rather than capitalized in the inventory. Therefore, the throughput method is not acceptable for external reporting although advocates argue that it provides many advantages for internal reporting.


'TA is seen by some as too short term, as all cost other than direct materials are regarded as fixed. But people in favour of this argue that this is not true. But it does concentrate on direct material costs and does nothing for the control of other costs. These characteristics make TA a comppliment for ABC.' (CIMA,paper 8,p263)

Thomas Corbett (2000) also points out that by considering the three questions mentioned above, throughput accounting can address long-term as well as short-term profitability.

Goldratt (1986) argues that, under current conditions, labor efficiencies lead to decisions that harm rather than help organizations. TA, therefore, removes standard cost accounting's reliance on efficiencies in general and labor efficiency in particular from management practice. Many cost and financial accountants agree with Goldratt's critique, but they have not agreed on a replacement of their own and there is enormous inertia in the installed base of people trained to work with existing practices.


TA attempts to maximize throughput where all traditional system atttempts to maximize profit. But according to TA approach, by attempting to maximize troughput firms could be producing in access of the profit maximizing output. Therefore a better technique of cost and managemnt accounting for both short term and long term decesion and performance evaluation.Thanks to the works of Gallowoway and Waldrom (1988-89) and Goldratt and Cox (1986)


The traditional costing techniques became obsolete as the manufacturing processes moved towards automation and technological advancements. Companies began adopting new techniques to obtain operational improvements, reduce costs and to gain sustainable advantages in creating shareholders and customer values.

Every cost management technique has its own benefits and drawbacks. Even with the limitations many of the cost and management accounting techniques, which are being practiced today, were proved successful, based on various philosophies, by different organizations in different parts of the world.


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