EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

Introduction
In this modern era of globalisation and technological advancements, day in day out business practices are transforming and evolving. Whether it is in the field of Management, Marketing, Human Resource Management or Financial/Management Accounting, new techniques, tools, process and methods are coming to light which are making business activities less complex and easy to complete. In this report, the major focus will be revolved around Management Accounting practices and its successful usage in the growing Japanese nation. At the same time, the failure of the Western accountants to implement these new techniques will be dealt with as well. This report is going to be based the journal Management Accounting Practices in Japanese Manufacturing Firms: An Empirical Investigation taken from the Journal of Accounting and Finance written by Hema Wijewardena & Anura De Zoyasa. Many references throughout the journal article has indicated that it is the Japanese management accounting practices that have enabled Japan to be so successful in the global frontier and those references will be critically analysed to show how they have helped Japan in achieving a dominant position in the global competitiveness. The major problem of this study, as in the limitations, will be the extensive dependency on the article itself because the journal article on its own has a few limitations. The responses of the survey based on which the articles conclusion was deduced could have problems of question bias and misinterpretation. At the same time, the sample size may not be effective and not give the overall picture of the situation. And as for this particular report, other limitations include the lack of understanding on Japanese and American current business environment especially in terms of Management Accounting.

Main Issue
How effectively has modern management accounting practices enabled countries to prosper in the global business world?

Theme of Study
The major objective of this report is to analyse the effectiveness Japanese management accounting tools and critically assess how they have help Japan in transforming itself into a successful nation with a dominant position in global market. Several tools and techniques that Japanese companies use to carry out their management accounting needs will be looked into in

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

this report and the American management accounting practices will be compared to show how the former is more effective in achieving the required goals that are needed.

Analysis & Interpretation

From the case study, it could be deduced that most Japanese companies consider cost planning and cost reduction tools such as target costing and value engineering at the product planning and design stage as tools and techniques of extreme importance and significance. From the survey carried out, it was evident that the responses that were given by the 209 companies proved that heavy emphasis was given on target costing, cost-volume profit analysis and budgets in comparison to activity-based costing and standard costing. Placing such high significance and importance on target costing indicates that when it comes to the innovation of new products, Japanese companies place their complete attention to reduce cost in the planning and design stage which is the foundation stage of the product. In other words, they focus on making amendments and corrections in the very primary stage so costs can be controlled from the very beginning. In contrast to Japanese, America tends to focus less on reducing cost during the primary stages and instead puts their attention on reducing cost once the product has started all its major operations. As mentioned earlier, in Japan the target costing has been regarded as the most major management accounting tool that companies use to compete against international competitions because Japanese prefer simple methods. They tend to be interested in charging overhead costs directly to product lines rather than using the sophisticated overhead allocation criterion of ABC. Target costing is a system under which a company plans in advance for the product price points, product costs, and margins that it wants to achieve. If it cannot manufacture a product at these planned levels, then it cancels the product entirely. With target costing, a management team has a powerful tool for continually monitoring products from the moment they enter the design phase and onward throughout their product life cycles. It is considered one of the most important tools for achieving consistent profitability (Target Costings, n.d., para 1). By solely focusing on target costing, the Japanese companies are reaping a wide range of benefits. This includes increased overall profitability, reduced manufacturing costs, meets or exceeds customers expectation for the product, savings in raw materials costs due to Just-in-time inventory, results in product features and functions that customers value, reduction in design changes after production begins, short product life cycles.

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

However, the major question remains as to how the target price cost is set. A step-by-step approach has been established and it is detailed below (Managerial Accounting-Target Costing, 2012, para 12) 1. Ascertain the price which a customer is willing to pay. This calls for a short survey of the market and asking for prices of products which the company wants to produce. 2. Deduct a target profit margin from the market price to determine target costs. The profit margin would be set keeping in view cost of capital or desired rate or return or target profit based on ROI or opportunity costs. 3. Estimate the actual cost of the product with the help of a cross functional team. 4. If actual cost exceeds the target cost, investigate ways of driving down the actual cost to target cost.

Importance of Management Accounting Tools

Mean 4.23 4.05 4.13 3.82 4.03 3.82 CV 3.57 3.48 4.06 3.3 3.05

0.213 0.228 0.229 0.236 0.245 0.246 0.255 0.257 0.264 0.313 0.33

Fig .1

When it comes to cost accounting data, as per the survey carried out on 212 Japanese companies, it was seen that most Japanese companies believe that in gaining a competitive edge in the international market the best strategy to adopt is to use the cost accounting data for the cost management and product pricing strategy. The Japanese business refrain from using the cost accounting data from performance evaluation because they feel it is not the best way to interpret the performance of a company. Cost management is the process of planning and controlling the budget of a business. Cost management is a form of management accounting that allows a business to predict impending expenditures to help reduce the chance of going over budget. Many businesses employ cost management plans for specific projects, as well as for the over-all business model. When applying it to a project, expected costs are calculated while the project is
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EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

still in the planning period and are approved beforehand. During the project, all expenses are recorded and monitored to make sure they stay in line with the cost management plan. After the project is finished, the predicted costs and actual costs can be compared and analyzed, helping future cost management predictions and budgets. Margaret Rouse (2010, para 3) said implementing a cost management structure for projects can help a business keep their over-all budget under control.

Uses of Cost Accounting Data

Mean 4.46 4.26 4.4 CV 4 4.27 3.14 0.2 0.244 0.282

0.147

0.18

0.186

Fig. 2

Another significant aspect of the Japanese management accounting practices is how they focus more on controlling cost rather than the reduction of the cost. Based on the survey carried out on 193 companies in the article, its highlighted that business in Japan focus more on budgeting (a major aspect of cost management) and cost control instead of trying to reduce cost. The reason behind this is because their more extensive use of target costing than standard costing for cost reduction. Another reason that makes them focus more on cost control is because of extensive usage of target costing in cost reduction in the pre-production stage. In management accounting, investment appraisals play a very important role in capital budgeting since its an evaluation of the attractiveness of an investment proposal using various kinds of methods such as Accounting Rate of Return (ARR), Internal Rate of Return (IRR), Net Present Value and Payback Period (Investment Appraisal, n.d., para 1) Based on the article, in Japan most businesses focus on ARR and Payback Period. The reason behind this is maybe because of Japans more individualistic nature and conflicts with collectivism. And also because Japanese management accounting prefers more simpler practices.

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

Accounting rate of return (also known as simple rate of return) is the ratio of estimated accounting profit of a project to the average investment made in the project. Accounting Rate of Return is calculated using the following formula: Average Accounting Profit Average Investment

ARR =

Average accounting profit is the arithmetic mean of accounting income expected to be earned during each year of the project's life time. Average investment may be calculated as the sum of the beginning and ending book value of the project divided by 2. Another variation of ARR formula uses initial investment instead of average investment. The project will be accepted if its ARR is equal to or greater than the required accounting rate of return. In case of mutually exclusive projects, accept the one with highest ARR. (ARR, n.d., para 1-4) On the other hand, payback period is the time in which the initial cash outflow of an investment is expected to be recovered from the cash inflows generated by the investment. It is one of the simplest investment appraisal techniques. The formula to calculate payback period of a project depends on whether the cash flow per period from the project is even or uneven. In case they are even, the formula to calculate payback period is: Initial Investment Cash Inflow per Period

Payback Period =

When cash inflows are uneven, calculate the cumulative net cash flow for each period and then use the following formula for payback period: B C

Payback Period = A +

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

In the above formula, A is the last period with a negative cumulative cash flow; B is the absolute value of cumulative cash flow at the end of the period A; C is the total cash flow during the period after A In payback period method, the investment project will be accepted only if its payback period is LESS than the target payback period. (Payback Period, n.d., para 1-5)

Investment Appraisal Methods

Mean 3.97 3.93 CV 3.44 0.292 IRR 3.32 0.31 NPV

0.218 ARR

0.219 Payback

Fig. 3

Since the production environment has evolved, the usage of traditional cost accounting system has also changed drastically. Earlier, the traditional cost accounting systems were designed in such a way that they closely monitored direct labour cost for the mass production of a few standard items because direct labour cost was a significant portion of the total product costs. Manufacturing overheads, under those systems, were allocated to products primarily on the basis of direct labour costs. As a result of automation, however, direct labour content in the production cost structure has decreased dramatically in Japanese management accounting practices. However, Western countries still allocate overhead costs on basis of direct labour despite a decrease in its significance which indicates that they do not take automation into consideration. As a result of this misallocation of overheads, product cost may be misrepresented causing miscosting and mispricing of products. Although, it was mentioned earlier that Japan was leaning towards a non-traditional methods, from the research carried out it was indicated that direct labour still is used extensively as overhead allocation base. But its also being noted that this usage is a deliberate act of company policy as it provides a direct motivation to automate production.

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

Main Overhead Allocation Bases Direct Labour

hours/cost Direct Material Cost Units of Output Machine Hours

Fig. 4

From this research study, it was extracted that technological developments over the past few decades have brought about massive changes in the cost structure of manufacturing. In the graphs below which are classified by industry groups, the wider differences in the cost elements became clearer. It showed there was a decreasing tendency in direct labour and increasing factory overheads which proves that automation is seriously being considered in the Japanese management accounting system.

Manufacturing Cost Structure %

100 50 0

Direct Material

Direct Labour
Fig. 5

Factory Overhead

Total Manufacturing Cost Structure

Direct Material Direct Labour Factory Overhead
Fig. 6

One of major components that has help the Japanese business to flourish and prosper so much during this period is the Japanese invention of maintaining no inventories or very low levels of

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

inventories under their Just-in-Time system. This helped them in beating the most powerful competitors in the international market. According to authors Garrison, Noreen & Brewer (2013), Just-in-Time is an inventory strategy companies employ to increase efficiency and decrease waste by receiving goods only when they are needed in the product process, thus reducing inventory cost. The method requires that the producers are able to accurately forecast demand. According to the research done, the lower levels of inventory indicated that the Just-in-Time system of minimising inventories is extremely popular amongst the Japanese manufacturers. One of the major revelations from this research study was the basis under which performance of a business is evaluated. It has been established that in Japan, the usage of Return on Sales (ROS) is more effective in comparison to the usage of Return on Investment (ROI) by United States companies to evaluate performance. It is said that ROI leads managers to place excessive emphasis on short-term profits which causes a significant decreases in research and development investment and restricts innovation. In Japan, to overcome this limitation ROS is used as it separates the ROI into two parts ROS and turnover and by doing so they obtain separate measurements and avoid ROI weakness. ROS is more market-orientated and as a result they provide more detailed insights enabling business decisions to be made efficiently in Japan. ROS is also known as operating profit margin. It is a ratio widely used to evaluate a company's operational efficiency. It is calculated using this formula:

According to authors Garrison, Noreen & Brewer (2013), this measure is helpful to management, providing insight into how much profit is being produced per dollar of sales. As with many ratios, it is best to compare a company's ROS over time to look for trends, and compare it to other companies in the industry. An increasing ROS indicates the company is growing more efficient, while a decreasing ROS could signal looming financial troubles.

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

Performance Evaluation Measures of Firms (%)

100 80 60 40 20 0 ROS ROI Variances
Fig.7

Firms %

RI

ARR

On the other hand, ROI is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. To calculate ROI, the benefit (return) of an investment is divided by the cost of the investment; the result is expressed as a percentage or a ratio. The return on investment formula:

In the above formula "gains from investment", refers to the proceeds obtained from selling the investment of interest. Return on investment is a very popular metric because of its versatility and simplicity. That is, if an investment does not have a positive ROI, or if there are other opportunities with a higher ROI, then the investment should be not be undertaken. Technological developments in the recent decades the manufacturing environment has undergone fundamental changes, permitting manufacturers to move from the mass production of a few standardised items to the efficient products of small batches of customised products at short notice. These changes created a new for more refined methods of product costings. In Japanese manufacturing enterprises where target costing is widely used, the product designer plays a dominant role in the product costing estimating process than the cost accountant. This is completely the opposite in the Western companies especially in America where manufacturers typically design the product first and then calculate the cost. If the cost seems too high the product is either sent back to the designers for modification or the company settles for a small profit margin.

EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

Generation of Questions
The major question after analysing this research study that comes to mind is it that if the Japanese management practices were actually implemented in the USA, would they is as effective and successful as they were in Japan? Another major question that can arise after evaluating and studying this research to the core depth is whether the micro and macro environmental factors have been taken into consideration when carrying out this report. The reason behind bringing the micro and macro environmental factors into notice is because of there might be preset rules and regulations that do not enable USA to adopt some of the accounting practices that are being used in the management accounting system in Japan. If that is indeed the case, then there is no scope for American companies to take upon those same management practices. Therefore, the restrictions that exist needs to be looked into if there are any available. Moreover, only a few hundred companies were taken as a sample here when in reality the number of organisations in Japan surpasses tens and thousands of companies. So one who is studying this research study will question the credibility of this report mostly based on the poor sample size.

Summary and Conclusion

After a thorough analysis of this research study, it can be concluded that with the changing times in business whether in be in terms of globalisation or technology, Japan is heading towards the future strong and sturdy by making changes in their business practices as they progress. They are trying to keep their overall business operations, activities and functions all updated along with the technologies and strategies. Their major focus on redefining their management accounting practices clearly indicates that they are not treating the field of numbers any less than any other business function. The clear fact that they are recognising and taking into consideration the financial and management accounting aspects of the business with such seriousness is indeed praiseworthy because such areas of business play an important in the success of any venture. Another point to be noted in the conclusion is that, if possible, American and Western companies should try and implement these systems for their future benefit if they want to compete with the Japanese market with equal force and drive. As per the study, the Japanese management accounting practices emphasises heavily on cost planning and cost reduction tools at the product planning and design stage. They focus more on target costing and cost-volume-profit analysis. From the revelation that the Japanese markets rarely use ABC should be taken into consideration by American companies so they try and reduce its usage as well. The Just-in-Time system should
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EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

be effectively implemented throughout all the companies because that is one of the core aspects triggering the success of the business. Moreover, for performance evaluation ROS should be used because it gives a more clear understanding of performance evaluation than other measures.

Directions for Future Research

Increase sample size and get more responses Take into consideration micro-environmental and macro-environmental factors Try and avoid bias as much as possible to extract fair answers from respondents Avoid calculation errors and use more effective tools of representation like graphs and charts instead of tables because they are easily explainable and understandable More data on both the country and companies should be taken so that the results provide a more clear result which is not only understandable but is also relatable Assumptions should be avoided as much as possible because such articles are related to the core aspects of business which make or break a business/company Use latest references. Book, journals, websites citations should be not be taken from more than five years because these are contemporary studies

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EMBA 513: Management Accounting

Journal of Accounting & Finance- Vol. 13, No.2

References
Wijewardena, H. & Zoysa, A. (1999). Management Accounting Practices in Japanese Manufacturing Firms: An Empirical Investigation. Journal of Accounting & Finance, Vol. 13 (2), 20-38. Volume 13 No. 2, Garrison, R.H, Noreen, E.W & Brewer, P.C. (2013). Managerial Accounting (12th Edition). International: McGraw Hill Accounting Tools. (n.d). Target Costing, Retrieved July 13, 2013, from, http://www.accountingtools.com/target-costing HubPagesInc. (2012, May 1). Managerial Accounting- Target Costing, Retrieved July 13, 2013, from, http://hafeezrm.hubpages.com/hub/Managerial-Accounting-TargetCosting Margaret Rouse. (2010, November). What is Cost Management, Retrieved July 13, 2013, from, http://whatis.techtarget.com/definition/cost-management WebFinance. (n.d). Investment Appraisal, Retrieved July 15, 2013, from, http://www.businessdictionary.com/definition/investment-appraisal.html AccountingExplained. (n.d). Annual Rate of Return, Retrieved July 15, 2013, from, http://accountingexplained.com/managerial/capital-budgeting/arr AccountingExplained. (n.d). Payback Period, Retrieved July 15, 2013, from, http://accountingexplained.com/managerial/capital-budgeting/payback-period

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