Comparative Analysis of Management Accounting Practices in the U.S. and Japan, Slides of Management Accounting

Download Comparative Analysis of Management Accounting Practices in the U.S. and Japan and more Slides Management Accounting in PDF only on Docsity! J-0138cL Nusret Chkici, Chris Hessel and Kishore Tanabn Brown. S. and J.B. Warner. ‘Usinx DaitY Stock Rettrms:The Caseof Event Sttsdir%.’ Jou~l of FinancioI ~CS-14 (March 1985), 3–31 . Caves, R. ‘Cotpomte Mergers in tntemsrtiod Economic Integration.’ Working Paper (1990), Center for Economic Policy Reseatrh,Harvard University. Dodd, P. ‘Merger Pmposafs, Management Dkcretion and Stockholder Wealth.’ Journal of Financial Ecomomia 8 (1980), 105–137. Dodd, P. and R. Ruback. ‘Tender Gffers and Shareholder Returns: An Empiricat Anatysis.’ Journal of Finonciul Economics 5 (1977), 351–373. Doukas, J. and N.G. Travlos. ‘The Effect of CorporateMuhinationahsrnon Shareholders’ weatth: Evidence from IntemationsdAcquisitions.’ Journal of lbunce 43 (December 1988), 1161–75. Echo, B. ‘HorizontalMergers, Collusion, and Shareholder Weatth.’ JournrJlof Financial &~”CS 11 (1983), 241-274. Grrsbel,H. G. ‘IntemafiortalfyDNersitied Portfolbs: Welfare Gains and CstpitatFfows.’ America Economic Review 58 (December 1968), 1299-1314. l%as, R. and J. Karls. ‘How Foreign Buyers Can Get Doubk Tax Deductions.’ Mergers & Acquisitions, Jrdy/August, 1989. Hite, J., J. Gwers and R. Rogers. ‘The Marketfor IstterfinnAsset sates: PnrtisdSell-Gftk and Totat Liquidations.’ Joumd of Finand Etonmrics 18 (1987), 229-52. Huang, Y. and R. Watlding. ‘Target Abttormat Returns Associtsted with Acquisition ASMOUncements.’Journaf of Finuncid Economics 19 (1987), 329–349. Jarrell, G. A. and A. B. Ibrdsen. ‘Shark Repeltenta and Stock Prices: The Effects of Antitakeover Amendments Since 1980.’ Joumd of Financial Ehmomics 19 (March 1987), 12748. Jarrell, G. A., J. A. Brictdey and J. M. Netter. ‘~ Market for CmpOrate Control: Empiricat Evidence Since 1980.’ Journal of Economic Pempecrs”ves2 f.Winter 1988), 49-68. Jensen, M. C. ‘Takeovers: Their Causes and Corwquemzs.’ Joumd of Economic Perspm+ves 2 (Winter 1988), 2148. Jensen, M. C. and R. S. Ruback. ‘Tfse Market for Corporate Control: The Scientific Evidence.’ Journal of Financial Jhnonu”cs 11 (March 1983), 5–50. Kogut, B. ‘Foreign Ditect Investmentas a Sequentisdprocess.’ In C. Kindfebcrgerand D. Andretsch (C&.), Mr&mriod CbIPOmts”oni tk I!Wk. Cambridge, MA: The MIT Press, 1983, 38–56. MergerStatReview, W. T. Grimm & Co. Various Issues. Gffice of the Chief Economist, Securr”fiesand Ewhange Cbmntission. ‘Stock Trading Before the Amwuncement of Tender Gffers: Insider Trading or Market Anticipation?’ (1987), Smith, C. W. ‘InvestmentBanking and CapitatAcquisition Process.’ Journaf of Financkd &WKldCS 15 (Janoary/Febmary 1986), 3–29. Stutz, R. ‘Gn the Effects of Barriersto Intemationat Investment.’ Jounrai of Firsurrce36 (September 1981), 923-34. ! Journalof InremosionalFhmciol Monagerneruand Accounting3:1 1991 Management Accounting Practices in the U.S. and Japan: Comparative Survey Findings and Research Implications* Michael D. Shields and Chee W. Chow !%SSDiegoStatCUniversity Yutaka Kao Kobehivsnity h Nakagtuvu MatsrsyasnsUniversity Abatraet In recent years, the success of Japanese tirrrssin the gtobat market hm prompted efforts to undmtand the sources of their competitive advantage. It has beur suggested that one such source is the Japanese firms’ management accmmtm‘ g systems, and a number of articles have claimed that importantdifferences do exist ketwecn U.S. and Japanese firms in this area. However, tke claims have temled to be supportedby amdotaf, ratherthan systematic, evidence. ‘tlte objective of this article is to contribute fisrther insights into sirnifarities and differences between U.S. and Japanese firms’ management accounting pracdcea. Exhaustive searchm of publishrd surveys in the U.S. and Japamxe literatures (much of which is in Japarme) provided the basis for U.S.–Japan comparisons on six aspects of management wmrmtmg“ practices. hr NM, tkse comparisons were used for deriving implications for fisturemaearch. Two major limitations of extant research and, thus, direcdmss for future raearch are identified. First, fistureresearch needs to go beyond the simpfe use or non-use of techniques to investigate more detaifed aspects of technique Use. Second, since ~ swoundng is onty one component of a firm’s total msmagement system, attmtmn afso needs to be devoted to the organizationrdcontext, process, and goats of a firm’s mamgement -nting practices. During the last deeadc, the success of Japanese manufacturing firms in the global eeonomy has stindatd substantial interest in the sources of their competitive advantage. The Japanese manufacturing firms’ management practices have been suggested to be one such source, and numerous books have described the nature of these practices and explained how they may be used by non-Japanese firms (e.g., Abegglen and Stalk [1985], Ouchi [1981], Pascale and Athos [1984], Pegels [1984]). More recently, increased attention has been directed at discovering differences between ● An artier versionof this paperwas pmented at USCsecond Asian-&If~ Conferenceon lnter- natiorsalAccountingIssues,Vsncouver,Canada,Cktobsrtt3-13, 195KI. 62 Michael Shield, C%ee Chow, H@zka Kato & Yu Nakagawa Japanese and non-Japanese manufachming firms’ management accounting systems. Focusing on the U. S., several prominent articles have claimed that important differences do exist between U.S. and Japanese firms. However, these claims tend to be supported by anecdotal, rather than systematic, evidence (e.g., Harirnan [1990], Hiromoto [1988], Morgan and Weerakoon [1989]). Thus, while these articles have contributed to understanding differences in management accounting practice between Japan and the U. S., they leave unanswered the question of how prevalent these differences are and, hence, bow much the latter may have con- tributed to the Japanese f-’ cmnpetitive advantage. This paper presents extant survey findings on similarities and differences between U.S. and Japanese firms’ management accounting practices. In turn, these ftings provide the basis for suggesting potentially fruitful dwections for future researeh. The surveys were obtained fi-om an exhaustive search of the academic and practitioner publications in both countries.’ A IIO@WOfiy feature of the Japanese surveys is that many of them were published in Japanese, and are unlikely to have been readily accessible to most Western accounting researchers. Comparative Survey Results This section presents the comparative survey results in six tables. Each table covers a distinct topic area: cost accounting system design, short- term decision making, capital budgeting decisions, operational budgeting, operational control and management control. Appendix A lists the sources of specific survey results in these tables. Each study is assigned an unique alphabet to facilitate identification in the tables. By and large, the survey samples were drawn from medium to large manufacturing companies from a variety of industries. However, because most of the surveys only sampled from one of the two countries, our comparisons are limited to descriptive, as opposed to inferential, analyses. Also, several important aspects of management accounting systems (identified later) were excluded because roughly comparable surveys between the two countries could not be found. Cost Accounting System Design Table 1 includes six aspects of the design of cost accounting systems. Several differences between the JapaneX and U.S. firms are apparent. As shown in Panel A, comparti to U.S. firms, Japanese ones use more Mmgement Accounting Practices in the U.S. ond Japan 63 (or more expensive) direct materials and less (or less expensive) manufacturing overhead resourees. There is about the same use of direct (variable) costing and full (absorption) costing in both countries, though the Japanese firms report more frequent use of process costing to accumulate product costs (Panel B). In allocating manufacturing overhead, proportionally more U.S. firms distinguish between its fixed and variable components (Panel C). Both sets off- have similar diversity of practice in the aggregation of overhead cost pools (Panel D). While firms in both countries report using a similar set of allocation bases for manufacturing overhead, Japanese firms tend to use a measure of direet labor cxmtent (hours or coat) slightly more frequently (Panel E). Despite this dMference, it is important to note that firms in both countries have used volume, as opposd to events/trans- actions, allocation bases almost exclusively. Short-term Decision Making The only item mrunon to the surveys of the twd countries is the use of cost-volume-profit (CVP) analysis. As shown in Table 2, a higher\ I percentage of U.S. firms do not use any form of CVP modeling. , However, among the users, proportionally more Japanese firms use the basic linear deterministic model as opposed to the more sophisticated probabtiistic or non-linear models. ~itd Budgeting Decisions ~ One of the biggest differences between Japanese and U.S. firms is in the use of capital budgeting decision models. Table 3 shows that discounted cash flow models such as net present value and internal rate of return are commonly used by U.S. firms. The typical approach among U.S. firms could be deseribed as one of maximizing expected net present value or internal rate of return subject to a pay back constraint. In contrast, Japanese fms more frequently use pay back as the primary model. Another difference is that U.S. firms more frequently provide for some explicit consideration of risk in their capital budgeting decision models. Operational Budgeting Only two aspects of operational budgeting were common to the surveys from the two countries. In Japanese firms, the person responsible for operational budgeting tends to be the budget director whereas for U.S. 68 Michael Shier!&, Chee Chow, Table 6. Management Control Yutaka Kato & Yu Nakagawa Panel A. Important Pm$omwnce Criteria Used for Ewluating Divisional Managers Panel B. Panel c. Panel D. Sources: sales sales Growth Market Share Asael Turnover Return on Sales ROI controllableprofit ResidualIncome profitMinusCorporateCoats ManufacturingCosts Other Japan A 69% 28% 12% 7% 30% 7% 28% 20% 44% 28% 8% Financial Criteria Used to Emluate Divisional Managers Japn Sources: P Return on Investment 12.5% Return on Sales 71.9% Residual Income NI Profit Before Interestand Taxes N] Profit 15.6% Cash Flow NI Budgeted Performance NI Other N1 Erteru of Allocation of Corporate Indirect Cbsts Japan Sources: x Full NI PaItial N1 Futi or l%tiai 85% Nom 15% u.s. A 19% 28% 19% 13% 26% 75% 49% 13% 38% 13% 17% Us. Q 51.7% M 28.8% 45.4% 21.5% 49.3% 20.5% u.s. E 57% 23% NI 20% Tmnsfir Prictkg Methoa!s Japm Us. Sources: w B Market 11% 17% Adjusted Markd 25% 26% ContributionMargin M 13% Negotiated 7% 13% coat PIUS 21% 13% Actual Full Coat 17% 4% StandardFutl Coat 16% 13% StandardVariable Coat 2% NI ~ Management Accounting Practices in the U.S. and Japan 69 Research Implications The extant survey results suggest that them are many similarities as well as differences between Japanese and U.S. management accounting practices. The latter deserve attention as areas where the Japanese fins’ practices may have contributed to their competitive advantage. However, to obtain further insights into the nature and effixta of U.S.–Japan differences in -gement accounting practice, effotta are needed to overcome two major limitations of the available comparative evidence. The first limitation of the extant evidence is its limited scope and depth of coverage as well as ita focus on techniques. For example, the area of short term decision making only has comparative evidence on the use of CVP models. Many other potentially important decisions, such as pricing and make-or-buy, are excluded. While the evidence on capital budgeting does cover the major discounting and non-discounting methods, it leaves unaddressed key elements of these methods, such as how the discount rate is determined. Similarly, many aspects of operational control (e.g., the types of variances computed) and management control (e.g., the levels of performance standards, the nature of reward structures) are unaddressed. One reason for this lack of coverage is limited overlap among Japanese and U.S. surveys (see Appendix B). The other reason is the limited scope of extant studies. There is need for future studies which not only cover more management accounting practices in greater detail, but ab sample simultaneously from both countries. The second limitation of extant survey research is its lack of attention to context, process and goals. Management accounting is only one com- ponent of a firm’s total management system, and its role cannot be fully understood without considming its organizadonal context, the process whereby it is applied ad h goals that management seeks to achieve. Anmdotal evidence has been repted of differences between Japanese and U.S. firma in these areas (e.g., Abegglen and Stalk, 1985; Hirornoto, 1988; Paseale and Athos, 1984). More systematic studies are needed to assess the degree to which such differences do exist because differences between U.S. and Japanese firms’ management amounting practices cannot be accounted for by unequal abilities to apply these techniques. Since the 1950s and 1960s, the Japanese fmns have had constant and significant exposure to U. S. management accounting methods [Hiramatsu, 1987; K.atcret al., 1989; Monden and Sakurai, 1989]. 70 Michael Shieti, Chee Chow, Yudra Kato & Yu Nakagawa Management Accounting Practices in the U.S. and Japan 71 For example, while survey evidence indicates that Japanese firms tend to use pay back and average rate of return in capital budgeting, this does not necessarily imply that they ignore the time value of money. Hodder [1986], based on interviews with managers in Japanese manufacturing firms, observes that typically an imputed interest charge is imposed on the investment. In addition, Sakurai [1989b] suggests three reasons why the Japanese firms’ greater use of pay back is consistent with their investment strategies. (1) Japanese firms tend to emphasize building competitive advantage based on investments in technology. Such strategies require large investments, and it is necessary to recoup cash as fast as possible to reinvest in new technologies. (2) Japanese firms are increasingly com- peting on the basis of short product life cycles; this requires flexibility which is increased with shoti pay backs. (3) With innovative products in the global market it is not feasible to predict distant cash flows with meaningful accuracy. Takatera and Yarnamoto [1989] provide another rationale for the Japanese firms’ preference of accrual accounting (e.g., pay back and average rate of return) over discounted cash flow (DCF) methods. Takatera and Yamamoto argue that Japanese business people have ex- perienced an ever-changing environment and as a result, have developed a belief that the !iture is never a simple extension of the past. Thus, they believe that it is difficult to develop meaningful scenarios or strategies for the future, and that plans will be modified to adapt to changing environ- ments. Since an important source of environmental change is competitors’ actions, they focus on comparing their performance to that of their competitors (’looking sideways’ rather than ‘looking ahead’). To the extent that the Japanese managers do not base their plans on future scenarios, DCF methods have limited appeal. This is especially so because DCF information is not publicly disclosed. In contrast, aecrurd accounting measures am generally available and can be used to support contempor- aneous cross-competitor analysis. Another survey finding on capital budgeting was that U.S. firms more frequently explicitly account for risk in their models. But Hodder’s [1986] interview study indicated that Japanese managers also attend to risk considerations. Hodder notes that Japanese managers often adjust the pay back criterion subjectively to incorporate the expected effects of risk. He also observes that Japanese firms commonly emphasize what he calls ‘verbal scenario analysis’ during bottom-up consensus decision making. The essence of this approach is to subject the assumptions on which an investment proposal is based to a constmctive and critical evaluation by a diverse set of managers who will have association with that investment. By limiting the incidence and magnitudes of erroneous assumptions, the risk of capital projeets are correspondingly reduced. It is also possible to attribute the different practices of U.S. and Japanese firms to different underlying goals. For example, the surveys summarized ( earlier have indicated that both U.S. and Japanese firms use direct labor ( almost exclusively for allocating manufacturing overhead. The U.S. firms have historically done this because it was considered to be ‘good’ accounting which provides accurate product cost estimates [Johnson and Kaplan, 1987]. In contrast, Japanese fm use this approach for motivational purposes. Hiromoto [1988] notes that many Japanese firms realize that in a high technology rnanufaeturing environment, using direct labor to allocate manufacturing overhead distorts product costs. Yet they t still employ this allocation base because of the incentives that it provides to increase labor efficiency and to implement technology that replaces 4 labor. Difference in goals also may account for differences between U.S. @ Japanese firms’ relative use of standard costs. It is suggested that U.S. firms emphasize the use of standmds to control mamfacturing costs after the fact, whereas Japanese fms stress the proactive use of management accounting to promote process and product innovation [Hirornoto, 1988; Makido, 1989; Sakurai, 1989a; Sakurai and Huang, 1989; Tanaka, 1989]. The latter’s management accounting proms begins by looking at the t market for products that may not yet exist. From this market analysis, they determine a target cost (usually much lower than the currently attainable level) and invest heavily in pre-manufacturing activities to reduce costs to this level [Berliner and Brirnson, 1988; Hirornoto, 1988; Makido, 1989]. Japanese fwrns believe that there are relatively small and slow oppor- tunities for cost reduetion in manufacturing vis-h-vis pre-manufacturing activities. Hence, instead of controlling manufacturing costs via cost \ variances, they focus on non-accounting methods, such as target costing, total quality control, value engineering and just in time inventory, to I prevent the occurrence of a variance [Inoue, 1989; Makido, 1989]. It has also been suggested that Japanese firms otlen design and operate their management accounting systems contingent on their competitive strategy, market competition and orgtitional culture [McMilhuI, 1984; Hiromoto, 1988; Harirnan, )990). While many U.S. tirrns design their management control systems contingent on organizational context, such as 72 Michael Shiefdr, Chee Chow, Yutaka ffito & Yu Nakagawa decentralizationand uncertainty(e.g., Merchant [1981 1), there may not be as much contingent design for their cost accounting systems [Karmarkar, Lederer and Zimmerman, 1990]. Another potential cause of the U.S. –Japan difference is the different roles ad career paths of management or cost accountants. Most accountants in U.S. firms are trained as accountants in universities, and their career paths typically have an accounting (as opposed to, e.g., general management) emphasis. The biggest variance among U.S. management or cost accountants may be the type (financial, cost, audit, tax), rather than amount, of accounting experience. In contrast, Japanese cost accountants— they generally do not use the term management accountants —tend to be non-accountants or generalists by university training and job experience [Hiramatsu, 1987; Yoshikawa, Innes and Mitchell, 1989]. The typical Japanese cost accountant is trained in a discipline other than accounting, then hired by a firm and put through a job rotation program that may last about ten to 15 years [Hirarnatsu, 1987; Yoshikawa, Innes and Mitchell, 1989]. One aspect of this job rotation system is that many employees who will never be accountants will have spent time working in the accounting department. After rotating through several fictional areas, some generalists are then targeted for additional in-house baiting in cost accounting to prepare them to spend the next several years in amounting. Subsequently, many of these cost accountants are transferred out of accounting and become general managers. As an example, at Matsushita, spending time as a cost accountant is considered part of the career path of a general manager [Pascde and Athos, 1981]. The difference between U.S. and Japanese cost accountants’ tmining and career paths has impottant implications for the vested Mew in, or ‘owner- ship’ of, the cost accounting system. In contrast to the U. S., cost accounting systems in Japanese firms tend to be owned by employees who have no proprietary interest in perpetuating either the accounting profession or accounting culture. Rather, these employees have a fro-wide perspective as generalists or non-accountants. Thus, they may be more inclined to design, operate, or accept changes in cost accounting systems targeted at promoting the interests of the fm rather than the accounting profession. summary Extant survey findings have indicated many areas where U.S. and Japanese firms’ management accounting practices differ, and many where they do not. The former deserve attention as potentird contributors to the Management Accounting Pradces in the U.S. and Japan 73 Japanese firms’ competitive advantage. To shed further light on the nature and effects of U .S.–Japan differences, fitture studks need to increase both the breadth and depth of practices examined. Equally important, they should consider the goals, process, and context of these practices. I Note 1. The search of U.S. surveys coved the following 12 piodicds tbr the period since 1980: Accounting and Bminess Research; CMX: lhe Management Acmunnn“ g Magazine (fornnxly Cbst and Management); CPA JaumaL FE: Ihe Magazine fir financial Executives (formuty Fimncial Exe@”ve); Fii Managm Harwd Buriness Rew”ewJournulof Accounting, Auditing & Finance;ManagementAccauming; Managerial Pkznn.ing;lhe Accounnn“g Review lk Engineering ~, and W Pmcn”all Accountant.‘Iheywere supplernmtcdby a selective examinwh of her peridicah The search of Jspanese surveys was sirnitarlyextensive. In both counmia, surveys WemfourKl which covered antuchwkie rrsngeoftopi athnnthosemportcd inthispaper. Appendix B \ lists the surveys thst were omitted front the comparison due to tack of correqadence between tlw U.S. and Japanese studii. Interested * may atso consutt a cottection of * papers edked by Monden and Sakurai [1989]. References Abcgglen, J. and G. Ststk, Kaisha: l% Japanese Copxntian (Ncw York Basii Books, 1985). Berliner,C. andJ. Brimson,Gm Managemenrjbr T-’s Adwmced Manujhcrwing: lhe CUM-f Cancepnd Design (Boston, Msss: HarvardBusiness Schoot press, 1988). Hsriman, J., ‘Influencing Rather than Informing: Japanese Mamgcmnt Accounting, ‘ MamrgementAccauuing (U.K.), March 1990. I Hiramatsu, K., ‘The Rote of Accoundng Edudon snd Rcsmtrch in Japanese Corporations,’ In K. Somcya (Ed.) Accounting E&m&m and Research To Promote Inteti”onal Undemanding (Quorum Books, 1987). Hiromoto, T., ‘Anotkr Hiddut JMge-Jspanese Msnsgcrncnt Accounting,’ Harwwd Business Review Jdy-August 1988. Hodder, J., ‘Evstustion of Mamfacturing Invcstmnmts:A Comparison of U.S. snd Jspnnese Practices,’ Financ@ Managewu SpMg 1986. Inoue, S. ‘Cost Management in Mutdkind, Low- or Medium-volume Production,’ In Y. Momien and M. Sakurai (E.&) Japanese Managernenf Accaunfr”ng(Catnbrid8e,, Mass.: Productivity Press, 1989). Johnson, T. snd R. Kaplsn, Relewmce Lost: ?’heRise and Fall of Marwgement Accounting I (Cambridge, Msss. : Harvard Business School Press, 1987). Karm@ar, U., P. Lederer snd J. Zinuncrmsn, ‘Choosii Msnufscturing Production Control ad Cost Accounting Systems,’ in R. Kaptsn(Ed) Measuresjbr Manu@turing ficellence (Boston, Mass: Harvard Business Sctrool Press, 1990). Kate, K., Y. Harssawa, Y. Toyoshirns, K. Kikuchi and T. Kuriyarna,‘The Organization of Msnsgernent Accounting Functions in Japanese Corponttions,’ tn Y. Monden and M. Sskurai (Ilk.) Japanese Managemetu Accti”ng (Csrnbridge,Msss.: Productivity plE?S, 1989).