The management accounting methods that we
have traditionally used in manufacturing industry, were mostly
developed during the age of labour intensive mass production.
The business environment of this era was largely based on home
consumption, secure export markets, stable demand and limited
competition.
This environment is now changing. Much of
manufacturing is no longer labour intensive, and high volume,
low variety production has given way to high variety, low volume
production. Markets have also become more global and dynamic,
and the business environment is much more competitive. Moreover,
manufacturing technology has become more sophisticated, and the
benefits are no longer confined to the place of implementation
and use. The technology can now bring company wide benefits, which
are not only concerned with cost savings, but also with the potential
for revenue generation (for example, as a result of increased
customer responsiveness).
Against this background of change, one aspect
of manufacturing has remained largely unchanged. The management
accounting and investment appraisal methods that we use in today's
manufacturing environment, are much the same as those used fifty
years ago (Johnson and Kaplan 1987, Kaplan 1989). In fact, many
of the basic ideas of management accounting can be traced back
to the scientific management movement started by Frederick Taylor,
in the United States, in the late part of the 19th century (Kaplan
1984, 1989).
There is now increasing criticism of these
outdated methods in the accounting and management literature.
A notable milestone in this critique was the publication in 1987
of Professors Johnson and Kaplan's book, Relevance Lost: the Rise
and Fall of Management Accounting (Johnson and Kaplan 1987). In
the late 1980s and early 1990s activity based costing (ABC) emerged
as an important alternative management accounting method (Brimson
1991, Turney 1992). We will return to ABC in Chapter 9.
In this chapter we wish to examine the criticisms
of our traditional management accounting methods and to consider
some of the problems associated with the financial appraisal of
advanced manufacturing technologies (AMT) such as flexible manufacturing
systems (FMS) and computer integrated manufacturing (CIM) systems.
The reason why we wish to focus our attention
on the management accounting paradigm is because management accounting
forms a central part of any manufacturing business. Management
accounting systems provide us with the financial information that
helps us to make business decisions. In this Chapter we shall
try to demonstrate that our traditional management accounting
systems also provide the framework that supports and keeps alive
many of our outdated manufacturing practices and beliefs. Our
hypothesis is quite simple: if we want to change our traditional
practices and beliefs, one of the first places to start is with
our management accounting systems.
Management accounting is primarily concerned
with three issues: product costing; performance measurement and
control systems; and investment appraisal. We shall, therefore,
briefly examine the basics of each of these areas. At each step,
we will consider why our well established techniques are inappropriate
to Agile Manufacturing environments. We will start with investment
appraisal.
