Ultimately, costing principles, such as the causality principle, must be converted into practical practices with supporting tools. This chapter describes how cost modeling has evolved over the last century. It describes the trends and obstacles that have helped or delayed developments. These evolving areas and trends include (1) the expansion from product costing to include channel and customer profitability reporting and analysis, (2) the integration of managerial accounting with other enterprise and corporate performance management (EPM/CPM) methods, (3) the shift from historical reporting to predictive accounting (e.g., marginal/incremental costing, (4) driver-based budgeting and rolling financial forecasts, (5) customer lifetime value (CLV), (6) imbedding analytics into managerial accounting (e.g., correlation and regression analysis), (7) acceptance of two or more co-existing managerial accounting methods, and (8) chargebacks to internal users and service-level agreements of information technology (IT) and shared services.
TopIntroduction
The field of management accounting is experiencing a punctuated shift toward more progressive methods and practices. The cause is reaction (1) to business marketing and sales techniques that are increasingly customer centric and require predictive planning and (2) to operational manager needs to improve productivity by removing waste, shortening cycle times, and increasing efficiency and effectiveness. What are the major trends involved?
Throughout my career I’ve observed numerous management fads appear and then fade away as a temporary craze. I’ve also watched managers excitedly jump onto these new bandwagons only to be disappointed when they haven’t lasted. In some cases, though, what begins as a good idea actually sticks and becomes a trend, which is what I’ll describe here for management accounting.
Before I share my observations, imagine if you reviewed the titles and content of The New York Times best-selling business books or of Harvard Business Review articles from the last 25 years. How many of them might cause you to react with a chuckle and say, “Oh, that one”? Do you remember any of the items in the following list? (Warning: Some advocates or book authors may be offended.)
Quality circles (for total quality management, or TQM), One minute manager, Business process reengineering (BPR), Management by objectives (MBOs), Six Sigma, Matrix management, Core competency, Intrapreneuring, Search for excellence, Best practices, Management by walking around (MBWA).
I’m not saying those practices served no purpose. They did introduce useful ideas, but they didn’t live up to their promises as they ascended. Many organizations jump from one improvement program to another, hoping that each new one will provide that big competitive edge, only to discover with hindsight that it was just a method du jour. Most managers would acknowledge that pulling one lever for improvement rarely results in a substantial change--particularly a long-term sustained change. And the business media haven’t helped. They hype what’s fashionable at the time, mostly because that’s their role.
Will the management accounting trends that I describe here take root or be just another fad or fashion?
TopManagement Accounting Eras
First let’s look at some history. Figure 1 illustrates a humorous but valid timeline of the shifts in accounting:
- 1.
Ancient Era--Rocks and stone piles.
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Medieval Era--Piles of precious metal and paper money. This situation ultimately led to the book published in 1494 by Luca Pacioli, an Italian mathematician and Franciscan friar, titled Summa de arithmetica, geometria, proportioni et proportionalità. It dealt with Hindu-Arabic arithmetic and its offshoot, algebra, and contained Pacioli’s 27-page treatise on Venetian accounting that described double-entry bookkeeping.
- 3.
Industrial Age Era--Standard cost accounting. In the 1860s, Albert Fink, a German-born civil engineer who worked in the United States, developed cost per ton/mile rates for the railroad industry using cost allocations. In the 1890s, to reflect Frederick Winslow Taylor’s manufacturing scientific methods, Alexander Hamilton Church developed standard costing methods.
- 4.
Regulatory Compliance Era--The Great Depression in the U.S. resulted in regulatory reforms to protect investors from shady financial reporting practices (1930s). In one sense, they were a setback to management accounting because the reforms established simplified rules that calculated inventory values and costs of goods sold (COGS), yet the overhead cost allocation methods were misleading because they were based on cost factors that violated costing’s causality principle (the need for cause-and-effect insights).
- 5.
Consumer Era--The emergence of activity-based costing (ABC). This next era arguably led to a transition from management accounting to managerial economics. ABC reflected “causal” cost tracing of increasingly diverse types of products, services, channels, and customers that resulted in an organization’s relatively greater indirect-to-direct expense structure to manage the increase in complexity. In 1987, the book Relevance Lost: The Rise and Fall of Management Accounting by H. Thomas Johnson and Robert S. Kaplan, documented the need for and benefits of upgrading costing practices from a highly aggregated “cost pool” with a single, noncausal cost allocation factor to using multiple disaggregated cost pools with causally related factors.
- 6.
Predictive Analytics Era--Predictive accounting. Today and moving forward, there’s a shift in emphasis from an historical to a predictive view of strategy and operations. With cost projections, organizations can translate their plans and actions into monetary terms for decision evaluation and/or validation.