MANAGEMENT ACCOUNTING EDUCATION

Accounting Education A Plan for Reengineering ANAGEENT ACCOUNTING EDUCATION ased on the IA s Practice Analysis Y ZAFAR U. KHAN, PH.D., CA; S. THOAS A. CIANCIOLO, PH.D., CPA; AND EILEEN PEACOCK, PH.D., CA 1 WINTER 2000

Today s business climate is changing rapidly, and there is considerable evidence that the service sector now dominates. This growth has resulted in an increasing percentage of new accounting graduates seeking positions in service-orientedbusinesses. Yet the undergraduate management accounting course offerings focus on the requirements of manufacturing! The premise that product costing, planning and control, decision making, and performance evaluation methods useful in manufacturing may apply, with minor changes, to other types of businesses may have been validin a simpler business environment but is probably no longer true. Service businesses engage in activities that vary in their potential use of management accounting skills andtechniques. Their needs go beyondtopics covered in existing cost/management accounting textbooks, whose treatment of differences between manufacturing andservice is essentially limitedto an absence of inventory in the latter. There are probably other important differences (and similarities) as well that require, at the least, a different focus. 1 In fact, the growth of service businesses parallels many remarkable developments in the field of management accounting that are applicable to both service and manufacturing: Strategic cost management, Cost of quality, Value chain analysis, Activity-basedcosting/management (AC/), Just-in-time delivery methods, Theory of constraints, and Target costing. Yet how can instructors of management accounting incorporate this growing body of knowledge, especially as they already are struggling to incorporate the latest manufacturing cost management methods into the limitedcourse offerings; expanding course content to incorporate a service business orientation may be impossible. With a focus on identifying the educational needs of management accounting, the IA commissioneda major study to identify corporate accountants work activities (WAs) andthe knowledge, skills, andabilities (KSAs) necessary for competent performance in the workplace. 2 A follow-up study documents the rapid changes taking place in the management accounting profession that are leading to increased visibility for corporate accountants and new demands for their participation in strategic planning andprocess improvement activities, among others. 3 This article explores those issues andpresents a preliminary analysis of the IA s Practice Analysis database that may provide some insight into the question of similarities anddifferences in management accounting practice for manufacturing andservice businesses. And we offer an important first step for academic accounting program reengineering. W HAT W E D ID IA s Practice Analysis documents the following items: The work that management accountants currently do; In a given job category, changes in the relative importance of work activities over the next two to three years; Comprehensive lists of WAs andksas that delineate the scope of corporate accounting; and Requiredcompetencies. 4 Although the original database has 19 industry categories, our focus is centeredon accountants working in the manufacturing andservice sectors. For both sectors, we rankedthe importance of KSAs classifiedas management andcost accounting to determine which ones were needed most by each sector. We compared rankings across the two industry sectors to determine if significant differences existed between them. Importance was measuredas average response value determinedon a five-point scale ranging from Not at all Important to Very Important. The questions were: 1. How important is this KSA to competent performance in your work as a corporate accountant? 2. To what extent does an entry-level accountant have to be competent in this KSA? We also examinedthe responses for work activities classifiedas management andcost accounting, business planning, business analysis anddecision making, control (excluding internal auditing), and organizational change and development to determine their significance to each industry sector. The questions were: 1. How frequently did you engage in this work activity during the past year? 5 2. Assuming you were to stay in the same position for the next two to three years, do you think the importance of this work activity will increase, stay the same, or decrease? 6 W HAT W E F OUND Is the importance (rank) of specific KSAs different for those accountants in the manufacturing sector comparedto the service sector? See Table 1. The columns labeledimportance (IP) show a direct comparison of ANAGEENT accounting quarterly 2

the management andcost accounting KSA rankings in response to the first KSA question. Except for the information needs of internal customers, which placed first, the rank order of the KSAs is very different for manufacturing andservice businesses. Further, there are three KSAs that are different in the top 10 in each business sector andfive that are different in the top 20. For manufacturing: 1. Variable/direct costing, contribution margin* 2. Cost andoverheadallocation* 3. Inventory control 4. Inventory costing methods (AC, job order, etc.) 5. Standard costing For service: 1. Implementing strategy 2. uilding financial models for decision making 3. usiness partnering with internal andexternal customers 4. Formal decision-making models 5. Cross-functional team building * Indicates variation within top 10. These 10 items are highlightedin gray scale in Table 1. The columns in Table 1 labeledentry-level competence (ELC) present responses to the secondksa question. As before, rankings that differ within the top 10 are markedwith an asterisk, andthose differences in the top 20 items are highlightedin gray scale. A comparison of the manufacturing sector rankings for importance andelc shown in Table 1 indicates that there are five KSAs in the top 20 in the importance rankings that are not in the top 20 in the ELC rankings. These differences may be due to expectations of increasedfuture importance of a KSA. For example, the value-added and nonvalue-added costs KSA may not be of much importance now but may be important to future entry-level accountants because of the growing importance of AC. Differences in importance andelc for the KSAs for both the manufacturing and service sectors also may be due to differences in work activities at different hierarchical levels. We also comparedthe rankedresponse for manufacturing andservice businesses for the question, Do you think the importance of this work activity will increase, stay the same, or decrease? The responses for all the work activities are remarkably similar for both sectors. Among those work activities most significantly affected by greater experience are process improvement, customer andproduct profitability, long-term strategic planning, performance evaluation, andcomputer systems andcontrol. The only statistically significant difference is for the project reporting work activity. This WA is rankedsignificantly higher in service than manufacturing. The responses as a whole suggest that accountants working in both manufacturing andservice have similar expectations with regardto changes in the importance of the different WAs. Our analyses of the IA s Practice Analysis database of management accounting WAs andksas for manufacturing andservice businesses highlight some important similarities and dissimilarities between the two industry sectors. The rankings of the KSAs provide useful information for assessing existing management accounting courses, revising them, anddeveloping new courses. S IILARITIES The rankings of the KSAs for both manufacturing and service emphasize the needto provide information for decision making, cost behavior, planning and control, continuous improvement, quality programs, andperformance measures. Surprisingly, neither the manufacturing nor the service industry emphasizes cost estimation, regression, benchmarking, target costing, economic order quantity (EOQ), just-in-time (JIT), or other production operations management-related KSAs. D ISSIILARITIES anufacturing businesses also emphasize product costing, variable costing, andinventory control. Service businesses, on the other hand, emphasize behavioral andmotivational issues, business partnering, strategy implementation, andthe creation of financial models for decision making. The information about entry-level competence on various KSAs highlights that: (1) working accountants expect less from entry-level accountants than seasoned employees, and(2) new hires are expectedto develop further competence on the job. The differences in rankings of KSAs for entry-level competence andcompetence expectedto do a goodjob are minor. Our analysis of the work activities, particularly expectedchange in the importance of the work activities, showeda remarkable similarity between manufacturing andservice businesses. We can therefore conclude that they hold common expectations about what is going to be important in the near future. While there were statistically significant differences in the frequency of performance of quite a few work activities, almost all were performedto some extent in both manufacturing andservice. Interestingly, the results of the analyses suggest that 3 WINTER 2000

Table 1: RANKING OF ANAGEENT AND COST ACCOUNTING KSAS FOR IPORTANCE (IP) AND ENTRY-LEVEL COPETENCE (ELC) WITHIN INDUSTRY SECTORS IP IP ELC ELC ANUFACTURING SERVICE ANUFACTURING SERVICE Information needs of customers 1 1 10 2 Relevant costs for decision making 2 5 3 3 Cost behavior 3 9 9 5 Short-range planning/budgeting 4 3 16 4* Variable/direct costing, contribution margin 5* 23 2* 12 Long-range planning/budgeting 6 2 25 7* Performance evaluation 7 4 18 6* Cost-volume-profit analysis 8* 14 6 8 Cost and overhead allocation 9* 21 4* 13 anagement control systems 10 7 11 10* Time value of money 11 6* 1 1 Continuous improvement and quality programs 12 11 15 18 Inventory control 13 35 7* 26 Standard costing 14 31 8* 30 Nonfinancial performance measures 15 8* 27 16 Inventory costing methods (AC, job order, etc.) 16 37 5* 27 Return on investment and residual income 17 12 12 11 anaging strategic change 18 13 36 31 ehavioral and motivational issues in accounts and budgeting 19 10* 29 15 Capital budgeting 20 17 22 17 uilding financial models for decision making 21 16 13 9* Implementing strategy 22 15 38 29 Cross-functional team building 23 20 19 23 Value-added and nonvalue-added costs 24 29 14 32 Formal decision-making models 25 19 17 14 Strategic cost management 26 22 23 28 usiness partnering with internal and external customers 27 18 31 19 Product-service pricing 28 26 24 20 enchmarking 29 28 26 25 Cost estimation without regression analysis 30 27 32 22 Joint and common costs 31 30 20 21 Transfer pricing and interdivisional transactions 32 34 35 39 Just-in-time (JIT) inventory methods 33 41 21 36 Scope and structure: executive compensation 34 24 40 40 Feasibility studies 35 25 34 24 Target costing 36 36 28 33 aterials requirements planning 37 39 37 38 Process mapping 38 32 33 37 Economic order quality (EOQ) and the reorder point 39 40 30 34 Cost estimation using regression analysis 40 33 39 35 Facility layout issues 41 38 41 41 *Indicates variation in top 10. Shading indicates variations within top 20 rankings. ANAGEENT accounting quarterly 4

Table 2: PROGRA I PLICATION OF R ANKINGS OF I PORTANCE (IP) VS. E NTRY-LEVEL C OPETENCE (ELC) OF ANAGEENT AND C OST A CCOUNTING KSAS COURSE ANUFACTURING ANUFACTURING SERVICE SERVICE LOCATION IP ELC IP ELC Information needs of customers 1 10 1 2 Relevant costs for decision making 2 3 5 3 Cost behavior 3 9 9 5 Short-range planning/budgeting 4 16* 3 4* Variable/direct costing, contribution margin 5* 2* 23 12 Long-range planning/budgeting,s 6 25 2 7 Performance evaluation,s 7 18 4 6* Cost-volume-profit analysis 8* 6 14 8 Cost and overhead allocation 9* 4* 21 13 anagement control systems 10 11 7 10* Time value of money 11 1 6* 1 Continuous improvement and quality programs 12 15 11 18 Inventory control 13 7* 35 26 Standard costing 14 8* 31 30 Nonfinancial performance measures S 15 27 8* 16 Inventory costing methods (AC, job order, etc.) 16 5* 37 27 Return on investment and residual income 17 12 12 11 anaging strategic change (ST) 18 36 13 31 ehavioral and motivational issues in accounts and budgeting S 19 29 10* 15 Capital budgeting, 20 22 17 17 uilding financial models for decision making, 21 13 16 9* Implementing strategy (ST) 22 38 15 29 Cross-functional team building 23 19 20 23 Value-added and nonvalue-added costs 24 14 29 32 Formal decision-making models 25 17 19 14 Strategic cost management (ST) 26 23 22 28 usiness partnering with internal and external customers S 27 31 18 19 Product-service pricing 28 24 26 20 enchmarking (ST) 29 26 28 25 Cost estimation without regression analysis (ST) 30 32 27 22 Joint and common costs 31 20 30 21 Transfer pricing and interdivisional transactions (ST) 32 35 34 39 Just-in-time (JIT) inventory methods 33 21 41 36 Scope and structure: executive compensation (ST) 34 40 24 40 Feasibility studies (ST) 35 34 25 24 Target costing (ST) 36 28 36 33 aterials requirements planning (ST) 37 37 39 38 Process mapping (ST) 38 33 32 37 Economic order quality (EOQ) and the reorder point (ST) 39 30 40 34 Cost estimation using regression analysis (ST) 40 39 33 35 Facility layout issues (ST) 41 41 38 41 = asic, = anufacturing, S = Service, (ST) = Special Topics. *Indicates variation in top 10. Shading indicates variations within top 20 rankings. oxes indicate variation within anufacturing or Service for the top 20 rankings. 5 WINTER 2000

while the work activities are common to both manufacturing andservice, their performance may require somewhat different KSAs. I PLICATIONS FOR C URRICULU A three-course block couldbe developedconsisting of the topics listedin Table 2. A common core or basic course wouldfocus on topics marked in with a respondents indicated these items were important andan expectedentry-level competency for both manufacturing andservice sectors. Information needs of customers Cost-volume-profit analysis Relevant costs for decision making anagement control systems Cost behavior Time value of money Short-range planning/budgeting Return on investment and residual income Long-range planning/budgeting,s Capital budgeting, Performance evaluation,s uilding financial models for decision making, The content for a course focusing on manufacturing wouldinclude those items markedwith an respondents indicated that these were important for an entry-level competency for the manufacturing sector. Cost and overhead allocation uilding financial models for decision making, Continuous improvement and quality programs Cross-functional team building Inventory control Value-added and nonvalue-added costs Standard costing Formal decision-making models Inventory costing methods (AC, job order, etc.) Product-service pricing Capital budgeting, Joint and common costs Just-in-time (JIT) inventory methods The content for a course focusing on service would include those items marked with an S respondents indicated that these were important for an entry-level competency for the service sector. Long-range planning/budgeting,s Capital budgeting, Performance evaluation,s uilding financial models for decision making, Cost and overhead allocation Cross-functional team building Continuous improvement and quality programs Formal decision-making models Nonfinancial performance measures S usiness partnering with internal and external customers S ehavioral and motivational issues in accounts and budgeting S Product-service pricing Joint and common costs Those items markedas special topics (ST) in Table 2 are either not very important or, more likely, important to select groups only. Some topics could be added to the three proposed courses depending on instructor objectives andother considerations. Alternatively, an advanced cost/management accounting elective course couldbe developedbasedon the special topics. This curriculum plan wouldbetter prepare students to function in the two diverse industry sectors of manufacturing andservice. The research, obviously, has several limitations, and any conclusions shouldbe reviewedcarefully. ut the IA Practice Analysis andthe analyses presentedhere provide a reasonable basis on which to build a curriculum plan to improve current management accounting education. Zafar U. Khan, Ph.D., CA, is a professor of accounting at Eastern ichigan University, Ypsilanti, ich. You can reach him at (734) 487-1261 or Zafar.Khan@emich.edu. S. Thomas A. Cianciolo, Ph.D., CPA, is a professor and head of the accounting department at Eastern ichigan University. You can reach him at (734) 487-3320. Eileen Peacock, Ph.D., CA, is a professor and associate dean of the School of usiness Administration at Oakland University, Rochester, ich. You can reach her at (248) 370-4275 or peacock@oakland.edu. 1 Lowery, for example, points to differences in reliance upon feedback andfeedforwardcontrols, as well as less emphasis on efficiency measurement andsophisticatedpo techniques in service; but more emphasis on behavioral issues in budgeting and decision making. See Jack Lowry, anagement Accounting s Diminishing Post-Industrial Relevance: Johnson andkaplan Revisited, Accounting and usiness Research, 23, 90, 1993, pp. 169-180. 2 Gary Siegel, The Practice Analysis of anagement Accounting: Results of Research, The Institute of anagement Accountants, ontvale, N.J., 1996. 3 Gary Siegel andjames E. Sorensen, Counting ore, Counting Less: Transformations in the anagement Accounting Profession, Institute of anagement Accountants, ontvale, N.J., 1999. 4 Gary Siegel andc.s. ud Kulesza, The Practice Analysis of anagement Accounting, anagement Accounting, April 1996, pp. 20-28. Updated in September 1999 issue of Strategic Finance, pp. 39-44. 5 The response scale usedwas 1: Daily, 2: Weekly, 3: onthly, 4: Quarterly, 5: Annually, and6: Never. 6 The response scale usedwas 1: Increase, 2: Stay the same, 3: Decrease, and4: Not sure. The small number of not sure responses was recoded as missing to allow for nominal scale analysis. ANAGEENT accounting quarterly 6