Back to the future: Back to the future: innovation in innovation in

manufacturing accountsmanufacturing accounts

Report on study carried out by:Professor David DugdaleProfessor of Management AccountingDr T Colwyn JonesProfessor in the Sociology of Accounting, Stephen GreenResearch Associate

University of the West of England_________________________________________________________________________________________

Powerpoimt presentation by:M C Pratt, St Martin’s College

Back to the future: Back to the future: innovation in innovation in

manufacturing accountsmanufacturing accounts

Presentation Abstract 1Presentation Abstract 1 survey of 34 UK manufacturing companies. manufacturing companies visits led to observation: some companies’ P&L formats not influenced by either

external reporting or ‘mainstream’ standard absorption costing theory.

Chartered Institute of Management Accountants (UK) funding to investigate manufacturing companies’ internal reporting.

Method: review of documentation plus interviews. specimen profit and loss account format for internal reporting

as basis for structured telephone interview

Presentation Abstract 2Presentation Abstract 2

no claim that sample used is representative and, if a ‘response rate’ was calculated, it would be low

because: many companies were contacted to find 34 that

were willing to participate. aim of the research was not generalisation but: identification of innovations in manufacturing

accounting reporting. main findings only are summarised here.

Contribution Reporting 1Contribution Reporting 1

over 50% (23 from 34) used contribution. however, depends on careful interviewing and

interpretation and needs careful analysis of ‘margin’ or ‘gross

margin’ in several companies to see that they were ‘really’ using contribution. full absorption costing is commonplace, but significant number of companies follow academic

advice and use contribution concepts in internal reporting.

Contribution Reporting 2Contribution Reporting 2

some evidence of disillusion with sophisticated standard cost variances and absorption costing.

However, tend not to use activity-based costing Instead, they simplify the P&L presentation, sometimes by using marginal costing. such presentations (in theory) need to be adjusted for

external reporting. Therefore: evidence that (some) manufacturing companies not

dominated by financial reporting requirements

Contribution Reporting 3Contribution Reporting 3

findings have implications for “Relevance Lost” thesis (by Johnson and Kaplan - J&K)

key view: external financial reporting requirements influenced internal reporting

use of marginal or variable costing methods for stock valuation is not permitted in UK for external reporting purposes

more than 50% of companies not inhibited (in this key respect) by external reporting standards.

Contribution Reporting 4Contribution Reporting 4

Companies thrown off external financial reporting requirements shackles since 1980s? or

They have always used marginal methods? But: Some companies consciously chose marginal costing

approaches. Few companies use activity-based methods so: J&K might be right: companies need to adopt internal

business-oriented methods, but: recommendations to replace absorption costing with

ABC (activity-based) not found favour.

Budgets and Forecasts 1Budgets and Forecasts 1

typical P&L format includes comparison of actual results with budgeted figures.

almost all (33 from 34) of companies employed budgets and

vast majority of these also produced forecasts. 29 companies described their forecasts most of these (20) reported that their forecasts

were to the end of the current financial year. the rest (7) generated 12-month ‘rolling’

forecasts.

Budgets and Forecasts 2Budgets and Forecasts 2

evidence of impact of financial regulation: because a number of companies place emphasis on

forecasting to the end of the financial year. and is evidence of budgets giving way to forecasts

in importance. almost half the companies (that expressed a

preference) said that the forecast was more important than the budget in financial reporting.

Bonus SchemesBonus Schemes

companies use executive and/or staff bonus schemes executive bonus schemes and staff bonus schemes

focus on: ‘profit versus budget or target’ as performance

measure or individual performance objectives (Executives) some firms also used profit sharing or ‘efficiency of

production’. no residual income or economic value-added

performance measures

Standard Costing & VariancesStandard Costing & Variances Standard costing prevalent 70% of companies set standard costs and some did not because of the nature of their business however, analysis of variances calculated and their

use in financial reporting led to serious reservations concerning the extent of standard costing use

several companies indicated main use was as convenient means of valuing stock

standards and variances not particularly important in managing the business.

Standard Costing & VariancesStandard Costing & Variances

this observation confirmed by analysis of way financial results were presented.

conclusion that half of the 24 ‘standard costing companies’ were half-hearted in their use of standard costing and variance analysis.

these companies reported actual labour and overhead costs in their Profit and Loss accounts

and employed various combinations of actual and standard material costs.

Standard Costing & VariancesStandard Costing & Variances variances often not integrated into profit and loss

presentation, but most standard costing companies calculated

material and labour variances of various types. 23 companies routinely calculated variances only 11 reported overhead variances and 5 only reported variable overhead variances. Of those companies calculating fixed overhead

variances, none subdivided volume variance into “capacity” and “efficiency” elements.

Standard Costing & Variances Standard Costing & Variances - Conclusions

some companies consider material and, to lesser extent, labour variances to be valuable

overhead variances and, especially, fixed overhead volume variances, not considered useful.

use of standards is commonplace but may be less emphasis on use of variances for

‘management by exception’. several companies want to report ‘actual’ revenues

and expenses, and, in some cases, in relatively simple formats.

Contribution ConclusionsContribution Conclusions

‘Direct’, ‘marginal’ or ‘variable’ costing been textbook recommendation for many years

but previous research indicates that absorption costing presentations have dominated in manufacturing industry.

Perhaps this research indicates a reversion to simpler methods:

Back to the future?

Any QuestionsQuestions ?

Powerpoint presentation adapted by M C Pratt, St Martin’s College, from: Back to the future: innovation in manufacturing accounts, research study by Professor David Dugdale ]Dr T Colwyn Jones ] University of West of EnglandStephen Green ]Web page: http://www.eiasm.org/events/Twente-Dugdale.doc