A CRITICAL EVALUATION OF THE DIFFUSION OF COST AND MANAGEMENT ACCOUNTING INNOVATIONS

Transcription

1 A CRITICAL EVALUATION OF THE DIFFUSION OF COST AND MANAGEMENT ACCOUNTING INNOVATIONS Davood Askarany and Malcom Smith University of South Australia s: Key words: management accounting changes; diffusion and innovation ABSTRACT There have been substantial criticisms regarding the lack of efficiency and capability of traditional cost and management accounting practices in the literature during the last two decades leading to call for new techniques [I]; [2]; [3]; [4]; [5]; [6]; [7]. In reply to such criticism, several new techniques such as activity based costing, target costing and the balanced scorecard have been introduced. However, recent survey evidence indicates that the diffusion of these innovations is dismally low'. Although a number of recent surveys on diffusion of cost and management accounting techniques confirm the slow difision rate of management accounting innovations, they do not explain whether such diffusion speed should be considered an issue2. Addressing the above issue, this paper explores a number of factors which are seen to influence the diffusion of cost and management accounting.innovations in practice and provides a general model for diffusion process. ' For example, Innes and Mitchell [SI in the UK, and Chenhall and Langfield-Smith [9] in Australia, find adoption rates for ABC, which are generally below 14%. Further, Ness and Cucuzza [lo], in the US, suggest that as few as 10% of ABC-adopters continue to support the innovation. 'Anderson and Young [l 11; Bjomenak [12]; Booth and Giacobbe [13]; Chenhall and Langfield-Smith [9]; Cooper and Kaplan [14]; Damanpour [ 15],[ 161; Damanpour and Gopalakrishnan [ 171; Gosselin [3]; Hartnett and Lowry [4]; Malmi [18]. 1. INTRODUCTION According to the system approach theory, all parts of a system are related to each other and any change in one part of a system may require the consideration of appropriate change(s) in other parts of the organisation, otherwise, the system may not work properly. The introduction of recent cost and management accounting innovations and their diffusion could be considered to fit such a model. So, it might be suggested that current technological innovations, such as innovations in manufacturing processes, communication and information systems require the consideration of the subsequent innovations necessary in administration systems, particularly in cost and management accounting techniques and practices [ 191. Having accepted this theory, it raises the question regarding the adequacy of change in cost and management accounting techniques or sufficiency of diffusion speed of recently developed cost and management accounting innovations. Although recent survey evidence suggests that the application rate of recently developed cost and management accounting innovations is low, these findings do not reveal the speed of difision of cost and management accounting changes and innovations over time. Thus, it is difficult to determine the period over which the applied changes and innovations took place. If the low application rates of recently cost and management accounting techniques show the extent of changes over a short time period, the diffusion of these innovations may not represent a serious issue. But if these low application rates illustrate the extent of cost and management accounting changes over a long period of time (for example a decade or more) then the slow diffusion of innovations represents a potentially serious problem. This question is the primary focus of this ICMIT /2000/$ IEEE

2 paper; Having addressed this question, the paper identifies the main factors responsible for the issue fi-om users points of view and establishes a framework for further studies. 2. BACKGROUND Lack of efficiency and capability of traditional cost and management accounting systems has been the main impetus for recent cost and management accounting innovations. Since the 1980s several authors (e.g., Ashworth and Gwynne [20]; Cooper [21]; Johnson and Kaplan [22] have criticised traditional cost and management accounting techniques in an attempt to explain the lack of efficient performance of Western industries (particularly U.S.) with regard to new technological innovation. Such criticism relates to the failure of traditional cost and management accounting practices to provide detailed information on activities important for organisations. Lawrence and Ratcliffe [23] support this argument by providing survey evidence of levels of dissatisfaction among both management accountants and managers with the cost and management accounting techniques then being used in industry. Bork and Morgan [2] echo this observation, suggesting that in the last few years traditional cost and management accounting systems have failed to keep up with the increasing demands imposed on them by technological changes in manufacturing environments. They also suggest that most research conducted in the last few years has shown that both the preparers and users of cost accounting information are dissatisfied with their product cost and the management accounting techniques. Unsurprisingly, therefore, management accounting literature has recently witnessed a growing interest into the study of the diffusion of cost and management accounting innovations ([I 13; [13]; [9]; ~41; r31; 141 and ~ 1. According to Chenhall and Langfield-Smith [9], a considerable number of innovations have emerged in the field of management accounting procedures during the last two decades; however, the application of these recently developed cost and management accounting techniques is still far behind those of traditional ones. The low diffusion rate of cost and management accounting innovations should not be considered as an issue by itself. However, if the conditions which have been seen as the main impetus for the introduction of recently developed cost and management (such as the low level of satisfaction of users of current cost and management accounting techniques regarding the performance of their applied techniques) continue to exist then it might be considered as an issue. To contribute to our knowledge in this regard, this paper first seeks information on cost and management accounting changes over a ten-year period to determine whether the extent of change has been slow. Having identified that, it further seeks information on the satisfaction of users of cost and management accounting techniques to see whether the primary impetus for cost and management accounting changes continues to exist. Given this information, the paper would be able to suggest whether the current level of cost and management accounting change should be considered as an issue, and if so, then it establishes a practical framework for further investigation. 3. RESARCH DESIGN A survey was designed to investigate the diffusion of cost and management accounting changes and innovations in a variety of cost and management accounting practices and procedures. These include the extent of changes and innovations in cost structure, costing methods and their uses for decision making; budgetary variance analysis and the extent of change of emphasis on using it for planning, control performance measurement, decision making and product costing, and the extent of change in allocation methods and allocations bases. The survey was administered to 200 manufacturing firms selected from the Australian plastics industry (from a population of 500 firms registered with the industry association), using simple random sampling. The selection of the plastics industry for this investigation was due to the fact that organisations in this industry are known to have undergone considerable innovation and change to their manufacturing procedures during the last two decades Research Instrument A questionnaire was designed to capture information on the diffusion of cost and management accounting changes and innovations. It aimed to understand whether there is any change, or need for change in the management accounting techniques in response to the diffusion of technology in the manufacturing processes, and to identify factors influencing the diffusion of cost and management accounting innovations. ICMIT /2000/$ IEEE

3 The questionnaire3 was divided into three sections: A, B and C. Section A sought general information about organisations. Section B sought information on manufacturing techniques employed in the plastic organisations and section C sought information on cost and management accounting change and innovations. The questionnaires were addressed to the General Manager of each of the firms asking him/her to pass each section of the questionnaire to the appropriate person for response. 4. SURVEY FINDINGS A total of 69 useable responses were received4, representing a response rate of 35%. The survey results show no significant change in any of the applied cost and management accounting techniques such as cost structure, costing techniques and decision making, overhead allocation methods, allocation base techniques, techniques for determining activity level for costing purposes, costing techniques, cost based techniques for depreciation and some other cost and management accounting changes and innovations. Except for allocation methods and costing techniques with less than 15 percent change, the extent of change for other cost and management accounting techniques was less that 10 percent during the ten-year investigation period. Confirming other studies, such as Chenhall and Langfield-Smith, the findings suggest that the speed of change in cost and management accounting techniques is less than other technological innovations such as those in manufacturing processes, communication and information systems. Slow management accounting changes does not imply that current cost and management accounting techniques meet users expectations. The establishments were asked directly to clarify how well they were satisfied with their employed cost and management accounting techniques based on the following scale: very satisfied, moderately satisfied, needs improvement, dissatisfied, and very dissatisfied. Only 8 percent of the establishments were very satisfied and 38 percent were moderately satisfied with their current cost and management accounting techniques. However, the In order to improve the quality of the questionnaire and detect any possible weaknesses in it, a pilot study was first undertaken with more than 30 academic staff and postgraduate students of Australian universities. As a result, some minor revisions were made to the length of the questionnaire and the wording of some expressions. There was no percieved difference between the responses of the early and late receipts, suggesting that non-response bias would not influence the outcomes. majority of the establishments (52 percent) stated that the cost and management accounting techniques they employed needed improvement and 2 percent were very dissatisfied with their current cost and management accounting systems. These results indicate that Kaplan s [27] argument regarding the lack of ability of traditional cost and management accounting techniques for coping with the competitive changing environments and satisfying the users of those techniques is still an issue after more than 15 years. This also implies that the primary motivation for recent cost and management accounting changes still exists and low satisfaction of users of cost and management accounting techniques should be considered as an issue. 5. A DIFFUSION MODEL FOR COST AND MANAGEMENT ACCOUNTING INNOVATIONS The issue of dissatisfaction of the majority of the establishments in using traditional cost and management accounting techniques increases the expectation of higher and faster diffusion of cost and management accounting innovations within the organisations. However, the findings suggest slow diasion of cost and management accounting innovations and changes within the organisations under investigation. The literature on diffusion of innovation highlights a variety of factors influencing diffusion processes of innovations [281. I Figure 1: Influencing Factors and Diffusion Process Characteristics of innovations Characteristics of innovators Other factors / Y Diffusion of innovation Reviewing the diffusion research literature, Rogers [28] identifies that most of influencing factors can be ICMIT /2000/$ IEEE

4 classified into relatively few categories. Figure 1 illustrates the type of conceptual model which can be developed from Rogers work. In developing this general model, it is important to identify factors of primary influence for further investigation. Respondents viewpoints about factors hindering the diffusion of cost and management innovations provide a valuable indication to identify important influencing factors for further detailed investigations. Respondents opinions regarding the strengths and weaknesses of their current systems suggest that diffusion of cost and management accounting innovations somehow might be subject to these characteristics as those strengths and weaknesses can be classified under characteristics of innovations. For example, according to respondents, the most important strengths of traditional cost and management techniques employed by the establishments can be classified as follows: simplicity; being widely understood in the business; moderately satisfying the needs of the establishments; possibility of getting monthly performance criteria by current system; being less costly; still working after a long period; being easily understood by most levels of managements, and having maximum results with minimum cost. The following are seen as some of the common weaknesses of traditional cost and management accounting techniques: allocation of overheads may be arbitrary; none of the current costing systems gives the full picture; although current system captures considerable costing data, it is difficult to extract easily; it takes too long to fully analyse the results; it is still difficult to trace capital expenditure; there is a lack of ability to analyse variances; it is not yet providing accurate information to the system rather than a weakness in the system; easy reporting of captured data is difficult; it is too old, too informal, does not collect and analyse all relevant information properly; costing does not cope well with multi flow mixed lines; there is difficulty in attributing fixed overhead costs on a suitable basis; it is difficult to keep up with change allocation requirements; it is difficult to adapt to rapid changes in demand, and problems of outdated system and being time consuming. The above suggestions along with respondents viewpoints regarding the priority of factors hindering the diffusion of cost and management accounting innovations, strongly emphasise the importance of the influence of characteristics of innovations on their diffusion too. Using a priority scale, respondents were asked to identify the most important/least important factorslinfluencing the diffusion of cost and management accounting innovations. As the following results show, factors related to the characteristics of innovations were identified as among the most important influencing factors affecting the diffusion of cost and management accounting innovations. Respondents viewpoints regarding the priority of factors influencing the diffusion of cost and management accounting innovations can be presented as follows: (1) lack of suitable software programs, (2) cost of system set up and its implementation, (3) cost of maintaining and collecting cost information, (4) lack of information on available costing techniques, (5) management policies and priorities, (6) lack of appropriate cost accounting skills, (7) low benefit arising from change compared with higher required expenditure, (8) lack of confidence in the ability of new accounting techniques, (9) adequacy of current system, (1 0) employee resistance, (1 1) inadequacy of current system not being important enough to require change in the costing system, and (12) extemal financial or cost accounting standards or practices. Although there are some other factors influencing the diffusion processes of innovations, it can be suggested that characteristics of innovations are among the first influencing factors which determine whether there is a need for change, innovation and diffusion of innovation. If innovation relates to a new cost and management accounting technique which is expected to replace an applied technique, the first question in considering or applying the innovation (diffusion of innovation) would be: what are the advantages or disadvantages of the new technique compared with the existing technique? Even before thinking about other influencing factors such as organisational culture, strategy, structures and so on, potential adopters of innovations would ask about the benefits that these innovations are going to offer, and which might not be achievable with their current techniques. Even when no replacement is involved, the characteristics of that innovation are still among the first factors which potential adopters would consider in adopting such an innovation. Consistent with Chenhall and Langfield-Smith [9], the findings emphasise the significant role of Characteristics of cost and management accounting techniques on their implementation and suggest further systematic and detailed investigation to identify the impact of factors representing characteristics of innovations as a group on their diffusion. ICMIT /2000/$ IEEE

5 6. CONCLUSION Having investigated the scope and speed of diffusion of cost and management accounting changes and innovations over a ten-year period, this study suggests that the slow diffusion of cost and management accounting innovation should be considered as an issue. This suggestion is based on both the dissatisfaction of users of current cost and management accounting techniques and the low level of diffusion of cost ad management accounting innovations in a ten year period. Having identified the issue, this study further suggests that characteristics of innovations might be among the primary influencing factors responsible for the difision speed of recent management accounting innovations. This suggestion is also based on respondents viewpoints regarding the priority of factors influencing diffusion of cost and management accounting techniques and the influence of the strengths and weaknesses of those techniques on their diffusion. Given these suggestions, this study recommends further investigation into the impact of the characteristics of recently developed cost and management accounting techniques on their diffusion, and of the interaction between the characteristics of innovation with those of innovators. 7. REFERENCES [l] AK. HL. Beng, H. P. Schoch, and T. H. Yap, Activity Based Costing in the Electronic Industry: The Singapore Experience, Small Business and Enterpreneurship (J.S.B.E.), vol. 11, pp , [2] H. P. Bork and M. J. Morgan, Is ABC really a Need not an Option?, Management Accounting London (MC), vol. 71, pp , [3] M. Gosselin, The Effect of Strategy and Organisational Structure on the adoption and implementation of Activity Based Costing, Accounting, Organizations and Society, vol. 22, pp, , [4] N. Hartnett and J. Lowry, From ABC to ABM, Australian Accountant (AAA), pp , [5] T. Homgem, C. G. Foster, and M. S. Fatar, Cost Accounting A Managerial Emphsis, Eighth Edition ed. Englewood Cliffs: Prentice-Hall, [6] E. Lefebvre and L. Lefebvre, Competitive Position and Innovative Efforts in SMEs, Smal Business Economic, vol. 5, pp , [7] B. H. Spicer, The Resurgence of cost and Management Accounting: A Review of Some Recent Development in Practice, Theories and Case Research Methods, Management Accounting Research (March), vol. 3, pp. 1-38, [SI J. Innes and F. Mitchell, A survey of activity-based costing in the U.K. s largest companies, Management Accounting Research, vol. June, pp , [9] R. H. Chenhall and K. Langfield-Smith, Adoption and benefits of management accounting practices: an Australian study, Management Accounting Research, vol. 9, pp. 1-19, [IO] J. A. Ness and T. G. Cucuzza, Tapping the Full Potential of ABC, Harvard Business Review, vol. 95, pp , [l 11 S. W. Anderson and S. M. Young, The impact of contextual and process factors on the evaluation of activity-based costing systems, Accounting, Organizations and Sociely, vol. 24, pp , [ 121 T. Bjomenak, Diffusion and Accounting: the case of ABC in Norway, Management Accounting Research, vol. 8, pp. 3-17, [13] P. Booth and F. Giacobbe, The impact of demand and supply factors in the diffusion of accounting innovations: the adoption of Activity-Based Costing in Australian Manufacturing Firms, presented at Management Accounting Conference, Sydney, [ 141 R. Cooper and R. S. Kaplan, Profit Priorities from Activity Based Costing, Harvard Business Review, vol. 69, pp , [15] F. Damanpour, The adoption of technological, administrative and ancillary innovations: impact of organisational factors, Journal of Management, pp , [16] F. Damanpour, Innovation type, radicalness, and the adoption process, Communication Research, vol. 15, pp , [ 171 F. Damanpour and S. Gopalakrishnan, Theories of organizational structure and innovation adoption: the role of environmental change, Journal of Engineering and Technologv Management, JET-M, vol. 15,~~. 1-24, ICMlT /2000/$ IEEE

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