How to make accounting a positive tool in management's hands.

How to Make Accounting A Positive Tool in Management's Hands

During the past few years, accounting practices have been blamed for many of the shortcomings that have befallen American industry. Cost accounting has been called the number one enemy of productivity and an albatross around

management's neck. Budgeting and variance-based performance appraisals may elicit negative attitudes toward the supervisor and the organization, and are often considered inappropriate measures of performance by subordinates. However, our study demonstrates that the accounting techniques of budgeting and variance analysis can be positive tools if the accounting information/communication process is functioning appropriately.

Without a doubt, advances in technology and new management philosophies have dramatically changed the manufacturing environment. However, beneath this new environment are basic principles, such as participative management, waste reduction, improved efficiency, better productivity, and incentives tied to performance, that have been woven into the literature and practice of accounting for years. For example, firms adopt a participative approach to budgeting in order to facilitate cooperation, build organizational goal congruence, and motivate managers to meet their cost targets. They use standard costs and value-based performance reports to help managers reduce waste and improve efficiency, thus increasing productivity. Companies tie incentive systems to the budget so that managers will be more motivated to control their variances.

Underlying the modern manufacturing environment is the belief that total quality control (TQC) will significantly increase productivity. Successfully implementing a TQC program requires the use of such strategies as goal-setting between management and labor, work measurement based on employee input, daily performance information, and incentives based on realistic performance standards. Nothing about these strategies obviates the use of traditional accounting techniques. Work must still be measured and performance evaluated, whether a standard cost, running average cost, or some other baseline measure is used. Incentive schemes still require feedback in the form of a budget-based report that indicates if performance goals have been achieved.

Since these accounting techniques appear to support the new manufacturing environment, the key question becomes: "Why is accounting blamed for the problems confronting American industry?" Field interviews and questionnaires involving four corporate and 68 plant-level managers suggest that the answer lies in the way accounting information is packaged and communicated to users.

Our study involved two plants in each of two corporations, and covered four managerial levels and ten departments (rough machine through shipping) in each plant. The 68 managers consisted of four plant managers, nine superintendents, 40 departmental managers, and 15 assistant supervisors. The plants manufacture residential furniture and are mid-range in size compared to their domestic competitors. One corporate president, a corporate controller, two vice presidents of manufacturing, and four plant managers were personally interviewed; all of the remaining managers completed an anonymous 62-item questionnaire personally administered by one of the researchers.

Each of the four plants faced strong foreign competition, was labor intensive, and had used standard costing for some time. The corporate managers were well aware of the importance of quality, as were the overwhelming majority of the managers who completed the questionnaires. For example, 94 percent of them agreed with the statement, "My supervisor emphasizes my production quality," while all agreed with the statement "I am concerned about the quality of my work." These managers also recognized that their salaries and bonuses were affected by the quality of their own - and their work group's - performance.

The accounting department provided both corporate and plant managers with the same detailed financial accounting reports and variance information in the form of P&L statements. The controller indicated that he had no idea what plant managers did with the reports. Corporate managers relied heavily on the accounting reports they received. They felt that it was necessary and appropriate to measure performance against standards, and strongly supported the system that tied managers' bonuses to standard cost variances. For example, one vice president of manufacturing checked plant variances daily to determine which plants to visit and the problems to discuss with the plant manager. The president also used the accounting information to assess whether budgeted profit goals were being achieved or were in need of revision.

Although corporate management depended on the accounting information they received, plant managers consistently and openly disdained it. In some cases, they abstracted important information from these reports and provided it to lower-level managers. Often they generated their own variance reports from data they had collected in-house. For example, one plant manager maintained a record of the standard and actual cost for every item manufactured by line-item cost. All of the VPs of manufacturing and plant managers understood how standard and actual costs were used, determined what information would best serve their subordinates, and gave it to them. For instance, the plant managers provided their subordinates with only controllable cost information for their particular areas.

Plant managers were generally open and democratic in their dealings with lower levels of management. During weekly give-and-take meetings, the plant manager and lower-level managers discussed production and scheduling problems, unfavorable variances, interdepartmental conflicts, and related issues. All of the managers appeared knowledgeable about the causes of variances and how they could be improved. Although slightly over 50 percent of the managers did not graduate from high school, they understood and used cost variances, mainly because the plants had used this information for some time. Additionally, plant managers provided abbreviated forms of accounting information and discussed the meaning attached to the particular variances with their subordinates.

Since each of the plant managers actually used and distributed information pertaining to cost variances, the plant managers were clearly not averse to using cost information for evaluation and control purposes. They were simply opposed to using reports that originated in the accounting department. The plant managers recognized, though the accounting department did not, that the same information was not appropriate for all levels of management. As one plant manager said, "There is no sense of upsetting my managers by telling them about negative variances that they can't do anything about or giving them information they won't understand."

If plant and departmental managers rejected these accounting procedures per se, they would have expressed negative feelings about the use of variances for control and bonus purposes. In fact, the use of variance information for both purposes was perceived quite favorably. Ninety percent of all responding managers indicated that variances were a good way to measure their performance, and 86 percent of them felt that standards were being used fairly. All of these managers indicated they relied on this information for evaluation and bonus purposes. Nearly 93 percent of them indicated they used the variance information to identify problem areas and improve performance.

Additionally, the managers were grouped according to whether they felt variance reports positively or negatively influenced them to improve performance and increase their bonuses. Nearly ninety-seven percent of all participating managers viewed their performance reports favorably. The negative-perceiving group generally indicated unfavorable attitudes toward their supervisor, the company's goals, their own performance level, and their ability to earn a bonus. The negative group's responses are shown on the previous page. This indicates that negative attitudes are related to problems with the information/communication process rather than the accounting data. For example, top management had not been successful in communicating the performance goals or the fact that bonuses were really tied to variances. Furthermore, the communication between the superiors and subordinates was not satisfactory to the subordinates, because they did not understand the goals, did not feel a sense of participation, and did not know if their supervisors were satisfied with their work.

Since 97 percent of the managers viewed the variance information positively, it appears that the accounting information was being used effectively, despite the fact that the plant managers renounced the use of the accounting-generated reports for daily control purposes. Furthermore, most superiors and subordinates agreed regarding the ranking assigned to the subordinate's performance. Thus, the way accounting data is packaged and communicated, rather than the data itself, appears to cause a positive or negative attitude toward its use in performance evaluation and control.

The interviews revealed that few people below the corporate and plant manager levels really understood what the accounting reports contained, why they were prepared, and what they meant in terms of improving performance. Apparently the accounting department had chosen to limit its purview to corporate management, all of whom were well-educated and knowledgeable about the roles of accounting. Plant managers, on the other hand, recognized that their subordinates would be overwhelmed by the accounting reports and would not be able to use them in day-to-day operations. Plant managers, rather than the accounting department, bridged the gap between corporate and lower-level management by redrafting the relevant accounting information into a more usable form.

Apparently, management will use accounting-based measures only if they are perceived as fair and understandable. It also appears that accountants will need to work more closely with plant management to identify the needed measures, determine how they will be used, and how they should be reported if the acceptability of accounting-based reports is to improve. In general, highly aggregated accounting reports will need to be trimmed down into more simplified versions like those supplied by the plant managers. Other guidelines for motivating managers to use accounting data are listed on this page.

Guidelines for Motivating Managers

To Use Accounting Data

* Managers need to be in agreement regarding how they are

evaluated and how they evaluate. * The performance measures must be perceived as appropriate

and fair. * Managers must understand the amount of importance the

organization attaches to a performance measure. * Managers must know how Incentives are tied to performance

measures. * The purpose of a performance measure must be clear and

understandable. * Performance measures must be assigned to tasks that are

relatively certain, predictable or easy to measure.

The information obtained from the interviews and questionnaires does not suggest the need for drastic change in traditional management accounting systems. Instead, it identifies the importance of communication and understanding. Managers need and use accounting numbers to evaluate and control production. That this information will emanate directly from the accounting department appears to depend on the relationships that managers and accountants establish with each other.

Accountants can improve these relationships by finding out what information lower level managers need, what information they use, and how this information can be improved. Accountants should be prepared to spend more time on the shop floor to discover the typical problems that managers face, and to meet regularly with them to determine if their information needs are being met. Once more appropriate measures and reporting formats are developed, and the level of interaction increases, accounting should be perceived as a more positive tool by managers.