USEFULNESS OF MACS IN HONG-KONG BASED COMPANIES:
IS IT FOR STRATEGIC IMPLEMENTATION OR STRATEGIC PLANNING?
I. Introduction
Management accounting control systems (MACS) are crucial to any firm’s effort to develop and sustain competitive advantage (1992). Tools such as balance scorecards, activity-based accounting (ABC) approach and performance-based budgeting are few examples on how the organization measures its strategic success. Without such measurement, the firm is not only confronted with substantial risks but also huge costs of strategic failure. MACS are actually monitoring tools to provide feedback on potential problems or opportunities of implemented strategies. In the contrary, it is also useful in the planning stage (e.g. planning tool) where strategy formulation is conducted (e.g. future decisions based on historical performance). The argument, therefore, is its role as monitoring and/or planning tools and their impact on corporate strategy and competitive advantage.
II. Case Study of Hong-Kong Based Company
In its old cost accounting system (CAS), ZTC Sign Company failed to include overhead cost as well as accurate measure of labor costs when issuing quoted prices to their customers (1985). The president, who prices a job order, uses arbitrary values to cover overhead costs with regards to arrive at a profit. Such process is practical for ZTC because it is a small company which employs seven people. In the contrary, the company and the president cannot determine if the quoted prices really cover costs and provide profit due to lack of cost control particularly on overhead costs.
As a result, the company introduces a new system that would capture overhead costs in a more accurate manner (1985 ). There is a need to independently accumulate the overhead costs of each job so that customer will be charged at a “reasonable” price quotation. However, overhead costs such as depreciation, repairs, maintenance, heating and lighting cannot be allocated to specific jobs. This is aggravated by the fact that the management is only able to get such information at the end of an accounting month. In effect, the president would continue a subjective approach to pricing because quotation must be handed to customer before the work even started.
In view of this problem, the company used the overhead cost projection based on an annual basis (1985). The method might not be as accurate as it can be but considering the small size of the business it can be a practical as well as useful guide. In adapting the new system, the company does not want to increase the load of its accounting-secretary employee. It chose to undermine financial benefits of accurately capturing overhead head in favor of its human resources. This resulted in classifying overhead costs as cost of goods sold that are accumulated at the end of the accounting month. Coupled in this strategy, clock sheet (e.g. records direct labor costs) and material usage (e.g. records all materials used) are installed when a job order is on-going.
III. Analysis of the Case
ZTC can benefit from a more accurate measurement of direct labor, direct materials and of course overheads. This can be achieved by using a certain cost accounting system (CAS). When CAS is installed, the most likely positive influence in the operations of the business is increased in profitability, improved in resource allocation and better managerial decision-making. However, these benefits are only attainable under specific conditions and the ability of the company to integrate CAS and other limiting factors to the extent of its effectiveness should be closely examined.
When CAS is implemented, it should be updated from time-to-time in an organized fashion because information is continuously acquired and can be used to include in the present CAS (1995 ). Such can result to a more dynamic and pro-active CAS. For example, the new policy of ZTC requires a tight annual cost control which may necessitate lesser use of electrical appliances (e.g. air-conditioning in certain parts of the company premises). Without the company updating its CAS, its overhead costs may obtain the projections of current years without reference to a tight electricity control. In effect, the quality of the current CAS is blemished.
The significance of CAS update has also implications to a more successful framework than totally replace the old with a new CAS. For its accounting department, a new manufacturing environment for ZTC is likely less affected compared to its manufacturing ( 1993). In the contrary, CAS needs to be integrated and adjusted based on the operational changes of the company. The caution of this endeavor is to prevent the organizational culture of ZTC to be deflected by accounting adjustment. There should be harmony in case of culture shock after a change in manufacturing setting. Today, companies are aspiring to provide low-cost and high-quality products. This is a shift from the traditional one-sided strategy. As a result, the traditional way of accounting for overhead costs should be evaluated. For example, human resource requirements became more stringent which necessarily requires adjustment of direct labor due to higher salaries.
Simple adaptation is useful but drastic change in CAS structure can be destructive and unacceptable to the existing corporate culture (1993). Thus, resistance may ensue and strategic components of the company are at risk. In effect, accounting system must be change to measure the new values. CAS should be a follower to the manufacturing changes and be a diligent yardstick to control and account for cost and establish a reasonable profit. This is because, unlike the other departments in an organization, accountants are more in a reactive position (e.g. over-funded projects, costly acquisitions, expensive monetary incentives) which makes them form their own subculture away from the mainstream culture (). Due to this, adaptive and updating behavior of CAS should be in place to allow optimal benefit of an organizational strategy.
In the case of ZTC, its newly applied CAS is exposed to the adverse risk of recency effect (1995). It is a managerial mind-set in which the recently received information is given more weigh at times when there is information overload. In pricing, overhead costs can be understated or overstated negligibly if this theory applies. For example, ZTC has furnished a job quotation using the projected electric bill fees but decided to include the recently increased fees. Assuming that electricity is a primary component in carrying its business, the lack of “averaging” can lead to customer dissatisfaction due to abrupt increase in quote. In effect, its pricing is not really that effect when it customer relations is in focus.
Further, based on the case, ZTC has implemented records-keeping for works that are in-progress to organized and allocate cost at the end of every work. This can be applauded because records management has long been proved to be a tool to protect corporate assets and reduce business risk ( 1992). In analogy, financial assets (e.g. cash flows and revenues) and risk of not covering overhead and other costs are taken into consideration. However, the new CAS is no use to control customer bargaining especially when the latter is already embedded in the business history and current strategy (e.g. big customers, key partners, retailers). As a result, the records-keeping capability of the new CAS can undermine “personal transactions” between the president and vital customers. And because the president has the final decision in pricing, data in the records is revisable with just a simple guarantee from him.
ZTC is a closely-held and small corporation which makes it a potential customer-driven business (1985 ). In effect, all else equal, it is likely to make corporate polices flexible which necessarily undermines the usefulness of recording costs. This can be the reason why the new CAS is revised with little financial, human resource and managerial upheaval because the final determinant of decisions are the customers. Such tactic can also identify the planning rationale of the management in building the new CAS. On the other hand, measuring performance through record-keeping is very imminent. The effort given by individual employees, level of expended materials and new cost trends for the overheads are verifiable to obtain efficiency indicators.
When it comes to expertise in cost accounting, ZTC employee pool lacks the needed skill to maximize the benefits of the new CAS. The responsible accounting employee also does two tasks (e.g. records keeping and accounting) which can undermine emphasis on the cost management. In effect, the quality of advice he can provide the president would be in minimum. With the perceived improved process, the organization should not expect too much with the new CAS. There is no technology infused or skilled accountant integrated in the new system which only mitigate their problem on costing but far eliminated it. Its size is the foremost determinant of such minimal effort because the cost of a completed CAS overlaps its potential benefits. In the contrary, the learning curve of ZTC may not have enough experience to appreciate the full implementation of a CAS which made it more risk-averse.
IV. How Do Implementation or Planning Contribute to Strategic Success?
Planning is a forward-thinking approach and this covers activities to be done throughout the project especially for contingent situations. Project planning is applied in feasibility study, build method, execution strategy and all the way down to risk management (2003). With just one management lapse in estimating parameters for every stage in the project, objectives that focuses on cost, time and quality can be overlooked. The caution becomes more valuable when implementing a new project in which an organization is not familiar with. For example, several emission control technologies are “proved” to be very efficient pollutant remover but are “found” to be very expensive emission technologies (2004).
When planning is essentially corrupted, execution stage would be readily accumulating the poor management outcomes. Scheduling, resource allocation and cash flow analysis are derived from absurd parameters. This situates implementation where contingent actions are the only key to revert the poor planning. However, even if contingent actions are applied, potential value and level of impact are in very low heights with the cost of changing original plans accelerate in its highest trend ( 2003). On the other hand, if as early as the planning phase poor management is eliminated, the reverse positive side of revising plans can be obtained. Nevertheless, these only shows that the accumulated problems at the hype of execution stage tend to aggravate the project’s failure to address its objectives especially when actual cost (e.g. employee turnover, machine repair, low productivity) emerges.
V. Implementation Tool versus Planning Tool
V. A. Implementation Tool
It is reflected in the case of ZTC that MACS are less useful in strategic planning as the firm avoid long-term actions transforming their assets to be highly tied to departments. As a result, their flexibility is reduced which is crucial to meet customer expectations. In effect, MACS are only applied in certain manufacturing stages for costing efforts to be more accurate rather including them in the mainstream strategic plan. ZTC’s evolutionary adaptation of MACS is consistent with its avoidance of drastic operational changes. This latter situation may adversely affect corporate culture as employees will tackle a new issue almost instantaneously without proper adjustments or training. In this regard, integrating MACS as a component of corporate strategy is not tapped rather this is only an issues of manufacturing department. It is also designed to measure obvious cost-drivers for simplicity.
The loophole of the current strategy of ZTC is the lack of ability to mitigate managerial risk to recency effects. This is the failure to use historical, current and forward-looking approach in determining price. This is because they are preventing information overload which is potential in the new system. However, introducing a new managerial approach to price determination can lead to abrupt increase in product price since overhead costs (e.g. rise in electricity fees) will automatically absorb by the pricing mechanism. As a result, customers will choose other companies that can cope with recent rise in overheads to maximize their purchasing power. This inhibits an integrated system where the planning of strategies is conducted. The firm will just monitor the overall costs contributed by increasing overheads to decide of any need for price hike or the time that it cannot cover the increase in overheads.
V. B. Planning Tool
There are also points in ZTC case that MACS are used as planning mechanism. The fact that the current MACS require time-to-time update to include new information is potential planning requirements/ guidelines. This is when ZTC management is reminding the employees to integrate current data to the database to improve the current system and make it accurate representation of current and potential situations. The MACS will therefore be applied with constraint (e.g. monitoring of new data) which can affect implementation of the new MACS due to additional work to be done. In addition, ZTC is relatively a small company which limits most of its focus on operational level. As a result, inclusion of such guideline in the overall strategy can trickle down the effects on potential extension in employee functions.
MACS and organization process are closely related to each other. The change of one necessitates adjustment of another. Otherwise, cost estimation cannot be precise. Planning strategies on how to increase sales and be profitable requires contribution from MACS to have internal audit regarding the changes in the company processes after an operational cycle (e.g. annual). If there is significant variance between the current MACS and the current operations, MACS should adjust to include new cost-drivers that the current operations introduce. Lastly, MACS can aid in strategic planning such as recruitment and need of training of human resources. When current MACS is too complex for an average accounting personnel (e.g. as in the case of ZTC), tighter recruitment techniques can be tapped such as hiring only those that have sufficient or license to assure accelerated adoption of corporate MACS system.
VI. Conclusions
Many books denounce financial priority over strategic issues because the latter is more long-lasting and carries more potential for growth than the former. However, working capital (e.g. solvency) of the firm is achieved through robust current cash and assets. On the other hand, the inability of the company to spend for the sake of its overall goal attainment may only position it on minimal gains. This paper discussed the strengths and limitations of a value-creating and financially-supporting method called CAS based on the ZTC case. It allows evaluation to the boundaries of CAS in terms on how well it addresses financial and strategic issues.
CAS has financial merits to obtain more accurate pricing. However, primarily due to the presence of customer approach and anonymity of accounting department, CAS is unable to surpass many strategy-related issues in decision-making, planning, control and performance measurement. This is because CAS can bring efficiency but less on profitability and growth. As reflected in ZTC’s minimal effort to support the new CAS, sustainability and persistence of system of costing is unshielded to the supremacy of other strategy-related issues (e.g. customer relations management). In the contrary, CAS is more relevant when a firm is very large, very known and very efficient. This would require less customer power (because they are diverse and numerous) and more pressure to use cost-related strategies (e.g. because cost is what makes most companies in an industry successful like in real estate).
Credit:ivythesis.typepad.com
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