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6 Asian Economic Growth and Management Accounting 6.1 Introduction In the middle of the 1980s, Japanese management accounting attracted worldwide attention, as did the phenomenon of Japan’s bubble economy. Japanese management accounting was considered to have contributed to the high growth rates of the Japanese economy. As a result, corporations in foreign countries began to introduce the Japanese model of management accounting in order to bring about the integration of low cost and high quality. At the same time, Japanese corporations started to transfer the management accounting system as well as production plant and technology to foreign countries in order to counteract the losses in exports which had resulted from the appreciation of the yen. Some Western scholars commented on some aspects of Japanese style management and regarded them as a ‘threatening form of social control’ or ‘organizational presser’ (see Note 10). Black and Mendenhall (1993) pointed out, from the viewpoint of different national traits, that ‘to Americans, Japanese may seem like chameleons because their behavior changes so much more radically in response to context’. However, in Europe some paid attention to the accounting system connected with the cooperation type of organizational management and were willing to accept the ‘Japanization’ of their management accounting systems in order to gain an edge in cost and quality in world markets (Oliver and Lowe, 1992). Taking this movement into consideration, Japanese corporations believed that the Asian economy would continue to grow with the support of their management accounting systems, when they were transferred to other Asian countries. Unfortunately, following the devaluation of the Thai baht, enthusiasm for the Japanese management accounting system has waned, resulting in a reduction in its transfer overseas. The Asian economic recession has now turned into a world economic problem. Therefore, some may conclude that any consideration of the overseas transfer of the Japanese management accounting method is no longer meaningful. 70 Asian Management Accounting 71 Before accepting this conclusion, we need to clarify the actual situation with regard to management accounting in Asia and to conduct a serious examination of the problems involved in its transfer. Moreover, we should analyse the Asian economy from both a long-term and a short-term perspective as well as considering the differences in characteristics between the ideas and methods of the Japanese management accounting and traditional methods. We may then be able to show that the transfer of the accounting system is not a thing of the past, but is, in fact, an important issue to be connected with Asian economic growth in the future, when the new ideas and methods are applied in a suitable fashion to Asian management control. Thus, the aim of this study is to examine the actual situation of Asian management accounting in a context of internationally developed stages of management accounting and to consider the implications of the transfer of Japanese management accounting for various Asian countries. 6.2 Development of management accounting and Japanese management accounting The development of management accounting is generally divided into four stages, as shown in Table 6.1. In the first stage, an independent calculation system of management accounting was not established, and financial accounting data were used for business management. During this stage, management through accounting had a strong character of ‘drifting’ (nariyuki) management, since business was managed according to the development of the situation and by using past financial accounts. At this time the financial ratio analysis or comparative business analysis was principally adopted as a method of controlling production and business management. At the beginning of the twentieth century scientific management was advocated by F. Taylor. This philosophy, as well as the idea of government budget, influenced the formation of the second stage of management accounting. To be exact, this stage is the formative period of management accounting. The methods in this stage were mainly budget control, standard costing, and break-even point analysis. In particular, budget control was used to control corporation production and business wholly, and the standard costing to control jobs partially. The standard cost or the planned profit was thought to be a criterion or a standard that should be realized. Efficiency was measured by the standard value or the criterion. Thus, if the actual cost was at variance from the standard or the plan, it should be revised towards the standard. Cost variance should be eliminated in the following step. In this case, the standard was true, and variance between the standard and the actual costs was abnormal. Thus, variance analysis and control played an important role in this stage of management accounting. This stage may be named ‘traditional management accounting’ since its fundamental contents still exercise 72 Management Accounting Table 6.1 The development stages of management accounting Stage Management accounting Features Methods First ‘Drifting’ management accounting Application of financial accounts to management control Efficiency management based on scientific management (control through plan) Optimum profit management based on management science (control decision-making process) Financial ratio analysis, Business comparative study Second Traditional management accounting Third Quantitative information management accounting Fourth Integrated management accounting Integration of accounting management and organizational management, strategic and feed forward management (proactive and preventive management) Budgetary control, Standard costing, Break-even point analysis, Cost variance analysis Inventory management, LP, Information analysis, Behaviour science, Profit prediction, Opportunity cost analysis Cost design, Continuous cost improvement, Target costing, Activity-based management, Balanced scorecard considerable influence on today’s management accounting systems, even if their forms have changed over time. Quantitative and information theory gained more innovative power than traditional management accounting during the 1970s. In this third stage, the management accounting system rested on the philosophy of management science. The optimum profit was pursued in profit management instead of the break-even point, or profitability in traditional management accounting. Probability, linear programming, economic optimum stock model, and information theory were used broadly for profit management. At the same time, behaviour science and agency theory, relating to this idea, became conspicuous during this stage. The fundamental point at this stage was to control planning process itself and to forecast the future of business precisely according to corporation environments and conditions. That is to say, to control the abilities and process of managers’ planning and to make the evaluation of their performance more reliable. Asian Management Accounting 73 It is further ascertained that the third stage of management accounting depended basically upon two fundamental ideas of control concept: feedback and feed forward. In the process of shifting from the drifting management to the traditional management accounting, the feedback control exerted a strong influence on the accounting system. This control philosophy took a completed form through development from traditional management accounting to quantitative and information management accounting. At the same time, feed forward control thinking was beginning to develop. In particular, Demski (1967, 1969) used the idea to develop a new theory to control the decision-making process consistently. According to feedback control thinking, actual performance was compared with the original plan and standard after completion of an action and the following plan was revised. Variance will also be corrected by various methods. In contrast to such a reflective and reactive activity, feed forward control is preventive and proactive. Managers who advocate this control idea adopt various kinds of method to amend the plan frequently and control planning process incessantly in accordance with changing environments, and to realize an expected performance. Actual performance will be almost the same as that expected. In other words, a difference is interwoven beforehand in the planned value or the standard cost (Bromwich and Bhimani, 1996). Cost design (genka kikaku) is based on feed forward control thinking. This is the preventive and proactive management system in which managers utilize various methods in controlling the planning process to create an actual performance almost equivalent to the planned value. Cost variance analysis and revision activity had an important meaning in the traditional, and the quantitative management accounting systems as it did before. However, in today’s management accounting, it is more important to interweave cost variance in the planned value beforehand and to take measures to get rid of variance before actual performance. Of course, feed forward management cannot be executed solely by an accounting system. The integration of organization management and accounting management is indispensable for feed forward management. Feed forward management accounting would not be able to fulfill its function without organizational management. Thus, this is named ‘integrated management accounting’.15 As a result, although low cost and high quality had been regarded hitherto as trade-offs, their relation is now considered to be complementary in integrated management accounting. Accordingly, cost design represents the integrated management accounting, since it has the peculiar characteristic of preventive and proactive management in the process of planning and control. At the same time, cost design is a market-strategic cost management system which was born in order to realize the target profit by forecasting the potential market demands, then uncovering them in international markets, and meeting their demands from the viewpoints of high quality, low cost 74 Management Accounting and prompt delivery. It may be said that management accounting has developed from a feedback to a feed forward control system, and from a production orientation to a market orientation, when we presume that the integrated management accounting, or the latest management accounting has the two characteristics of market orientation and of feed forward control system. We can describe the development stages of management accounting in accordance with the above-mentioned point of view in the following figure. Judging from the four stages of management accounting outlined earlier, where does Japanese management accounting fit in? Here, the suggestive research report, carried out in the period 1993–95 by the Accounting Research Institute of the Faculty of Commercial Science at the Nihon University, is pertinent. First, as Table 6.2 shows, the management accounting practice of Japanese manufacturing corporations arrives at the fourth Table 6.2 firms Present situation of management accounting in Japanese manufacturing Items (number of respondents) Number % 1. Standard costing (203) 2. Direct costing (205) 3. Appraisal method of economic calculation of equipment funds (203) (1) Accounting profit (ROL) (2) Payback period (3) Intra-company profit rate (4) Present value method (5) Annual cost sum method 4. Responsibility centre of division (139) (1) Cost centre (2) Profit centre (3) Investment centre 5. Appraisal standard of division (332) (1) Sales (2) Rate of sales growth (3) Profit (4) Return on capital (5) Return on sales 6. Kind of budget (194) (1) Budgeted profit and loss (2) Sales budget (3) Production budget (4) Selling expenses budget (5) General administrative expenses budget (6) R & D expenses budget (7) Capital budget 130 102 64 49.8 72 133 31 32 33 35.5 65.5 15.3 15.8 16.3 5 104 28 3.6 74.8 20.1 102 49 131 14 31 30.7 14.8 39.5 4.2 9.3 168 175 163 174 180 163 59 86.8 89.7 84 89.2 92.8 84.1 82 Asian Management Accounting 75 7. 8. 9. 10. 11. 12. 13. 14. 15. Cost table (202) Variance analysis (203) Intra-company transfer price (136) Short-term profit goal (255) (1) Sales (2) Rate of sales growth (3) Profit (4) Return on profit (5) Return on sales Method of budget decision (191) (1) Top-down (2) Bottom-up (3) Combination Method of budgeting (243) (1) Simulation model (2) Zero-base budget (3) Direct costing (4) Linear programming (5) Break-even point analysis Adoption of cost design (187) (1) Systematic execution all over firm (2) Execution in divisions (3) Temporary execution Adoption of activity-based costing (191) Usage of LP in decision-making (197) 138 123 111 68.3 61 81.6 46 15 175 3 13 18 5.9 68.6 1.2 5.1 21 35 134 10.9 18.8 69.8 24 35 38 4 36 115 59 24 32 22 10 9.9 14.4 15.6 1.6 14.8 61.5 31.6 12.8 17.1 11.5 5.1 Source: Construction of General Data Base on Costing Practice, Research of Accounting, Faculty of Commercial Science at the Nihon University, vol. 8, no. 9, March 1996. stage after completing the second stage – that is, skips the third stage – because traditional management accounting such as budget control, standard costing, and variance analysis, as well as cost design, has its roots deep in managerial and operational management and the quantitative methods have hardly been practiced at all. Because the Japanese tax law demands actual cost for valuation of inventory and ‘Cost Accounting Standards’ based on Business Accounting Principles takes a viewpoint near to the tax law, standard cost is calculated at approximately actual cost. Although its diffusion rate falls owing to recent technical development and changing business environments, most Japanese enterprises have practiced standard costing and direct costing. At the same time, the diffusion rate of cost design exceeds 60 per cent, and cost improvement ( genka kaizen) is also seen as important. Cost design and cost improvement are generally utilized in various forms in Japanese enterprises. However, contrary to this, the spread rate of quantitative and information management accounting is low. By and large, Japanese manufacturing corporations have not practiced quantitative models such as linear programming, the present value method, and probability. 76 Management Accounting Management physical information and non-financial information are broadly used in management control. However, they are not connected to a system of quantitative management accounting. Although the diffusion rate of the quantitative and information management accounting in US enterprises is higher than that in Japan, this management accounting system is not practiced more extensively than other management accounting systems. Therefore, it should be clear that the third stage was to some extent an academic construct, and although academic circles discussed the ideas and methods of quantitative and information management accounting enthusiastically, its implementation in the USA and Japan was rather limited. It follows from the above that Japanese manufacturing enterprises have more often connected financial accounts and managerial actual results (payback period, profit, sales, and others) to the traditional and integrated management accounting systems than they have to the quantitative management accounting system. They enter the fourth stage having experienced the first and the second stages. This relates to those characteristics of Japanese management accounting that emphasize safety, intelligibility, and simplicity. It also shows that, after the Second World War, the tax law and the commercial code have had a stronger influence on accounting than generally accepted accounting principles, and that the enterprises have been supported sufficiently by government authorities. These conditions were good for raising cost and profit consciousness, and for developing quality improvement movement and mutual cooperation relations within the enterprise and among the affiliates. The following section will give some consideration to an analysis of management accounting in some Asian countries. 6.3 The present situation and the characteristics of management accounting in Asia An investigation of Taiwanese accounting conducted by Professor Tsai (1995) suggests that business budget and inventory control spread have been the most widely used accounting techniques in Taiwanese manufacturing corporations, followed by capital budgets, cost efficiency analysis, responsibility accounting, incremental cost analysis, break-even point analysis, and productivity measurement (see Table 6.3). However, quantitative management accounting of management science and integrated management accounting (cost design or activity-based costing) are not widely practiced (Wu et al., 1997). The spread rate of traditional management accounting (budget control and standard costing) is popular in the Republic of Korea, as shown by the report in which Professors Ahn and Lee (1994) discussed the management accounting practices at many electronic machinery and machine industry corporations. The payback period method Asian Management Accounting 77 Table 6.3 Management accounting practices in Taiwan manufacturing firms Items of management accounting 1 Traditional costing (1) Full costing (2) Batched costing (3) Direct (variable) costing (4) Standard costing (5) Processing costing 2 Planning, control, and decision-making (1) Operating budget (2) Cost-effective analysis (3) Capital budget (4) Responsibility accounting (5) Incremental cost analysis (6) Cost–volume–profit analysis (7) Contribution margin analysis (8) Cost behaviour analysis (9) Transfer pricing 3 Quantitative methods (1) Inventory control (2) Decision tree analysis (3) Network analysis (4) Regression analysis (5) Learning curve (6) Linear programming 4 Techniques under current manufacturing environment (1) Productivity measures (2) Analysis of the cost of quality (3) Target costing (4) Activity-based costing (5) Product lifecycle costing Manufacturing (459) Total (818) No. of firms % No. of firms % 202 195 163 177 193 44 42.5 35.5 38.6 42 273 271 228 227 213 33.4 33.1 27.9 27.8 26 278 303 312 241 275 235 218 206 190 82.4 66 68 52.5 59.5 51.2 47.5 44.9 41.4 681 511 495 431 384 361 326 305 272 83.3 62.5 60.5 52.7 46.9 44.1 39.9 37.3 33.3 351 62 36 42 47 37 76.5 13.5 7.8 9.2 10.2 8.1 477 97 63 60 53 49 58.3 11.9 7.7 7.3 7 6 277 114 80 61 14 49.5 24.8 17.4 13.3 3.1 306 139 118 92 20 37.4 17 14.4 11.2 2.4 Sources: Tsai, W. (1995), An Investigative Study of Management Accounting Education and Practices in Taiwan; F. H. Wu, J. Kang, C.-C. Yeh, and S.-H. Lin, Management Practices in Taiwan, in N. Baydoun, A. Nishimura, and R. Willett (eds), Accounting in the Asia-Pacific Region (Singapore: John Wiley & Sons), 254. for capital budgeting and the sales profit ratio for performance evaluation of divisions are also widely operated (see Table 6.4). Surprisingly, the spread rate of target costing, or cost design, is 39.1 per cent, which is comparatively high in comparison with other Asian countries. This might be related to their investigation method being restricted to the electronic machinery and machine industry (Ahn and Lee, 1994). 78 Management Accounting Table 6.4 Management accounting practices in Korea Item 1 Cost management technique (1) Standard costing (2) Target costing or cost design (3) Budget system 2 Overhead allocation basis (1) Direct labour (2) Machine hour (3) Material (4) Product unit (5) Combination (6) Others 3 Basis for pricing (1) Variable cost (2) Absorption cost (3) Others 4 Capital budgeting techniques (1) Payback period (2) Internal rate of return (3) Net present value (4) Accounting rate of return (5) Subjective judgment (6) Others 5 Key division performance evaluation measure (1) Return on investment (2) Return on sales (3) Profit (4) Budget vs actual (5) Value added (6) Others No. of firms Ratio (%) 51 45 19 44.3 39.1 16.5 43 6 10 12 25 3 43.4 6.1 10.1 12.1 25.3 3 62 50 3 55 45 2.6 34 27 6 23 16 2 31.5 25 5.6 21.3 14.8 1.9 5 47 9 31 8 2 4.9 45.6 8.7 30.1 7.8 1.9 Source: T. Ahn, Financial and Management Accounting Practice in the Public of Korea, in N. Baydoun, A. Nishimura, and R. Willett (eds), Accounting in the Asia-Pacific Region (Singapore: John Wiley & Sons), 224. In Singapore, the practices of business budget, long-term planning, capital budget, and cash budget have been widely adopted. The spread rate of break-even point analysis, capital return rate, and payback period method is comparatively highly ranked. It is noted that the rate of present value method is 51 per cent. According to Ghosh’s survey (Ghosh and Chan, 1997), local medium-sized enterprises adopt the same advanced methods as Japanese and multinational companies. In Hong Kong, where there has been a great deal of discussion of management accounting in the course of the 1990s, the spread rate of cash budget and capital budget is high, and, generally, performance evaluation management is exercised through the Asian Management Accounting 79 Table 6.5 Management accounting practices in Singapore Items Execution rate (%) 1 2 3 4 5 95 68 75 55 6 7 8 9 Operating budget Long-term plan Cash budget Break-even point analysis Standard costing (1) for management control (2) for partial usage Return on capital Capital budget Payback period Present value method 16 32 64 82 69 51 Source: A. MacGregor, M. Hossain, and K. Yap, Accounting in Malaysia and Singapore, in N. Baydoun, A. Nishimura, and R. Willett (eds), Accounting in the Asia-Pacific Region (Singapore: John Wiley & Sons), 114–17. monthly comparison of budget and actual result. The budget control system in Hong Kong is as complicated as in the West. However, the techniques of linear programming and estimate prediction connected to probability are rarely, if ever, used (Chan et al., 1997). In the four countries discussed above, which belong to NIEs, the use of traditional methods of management accounting (in particular budget control) is widespread. However, the quantitative and information management accounting and the integrated management accounting have only recently begun to be introduced simultaneously under the influence of Western and Japanese multinational enterprises. In other words, on the basis of management accounting at the second development stage, these nations and areas have established the phase of advanced management accounting systems. Their introduction from overseas accompanies the acceptance of direct investment and multinational enterprises from the West and Japan and development of joint ventures during the past 12 years. In contrast to the development of management accounting in the NIEs, management accounting in some countries of ASEAN is still at the stage of ‘drifting management’, since there are a lot of small and medium-sized businesses and the instance of guanxi (personal relationship) management is overwhelming. However, multinational enterprises have been investing widely in some ASEAN countries from the 1980s to the 1990s in the same way we saw in the NIEs, and local subsidiary enterprises have adopted the traditional management accounting techniques. This is owing to the influence of their parent companies. In Brunei, large foreign multinational enterprises draw up management accounts reports once every quarter. They also prepare annual budgets,