Applications of contemporary management accounting techniques in

Indian industry: An empirical study –PhD (2006), by Liaqat Ali, Faculty of

Business Management and Commerce, PU, Chandigarh.

Management accounting identifies, collects, measures, and reports information

that is useful to managers in planning, controlling and decision-making.
Management accounting is concerned with the provision of information to those
responsible for managing businesses and other economic organisations to help
them in making better decisions about the future of organisation and in
controlling the implementation of decisions they make.

Management accounting has a variety of techniques and tools, including

traditional volume-based costing system, budgeting, variance analysis and
responsibility accounting, to meet the needs of managers in traditional
manufacturing environments. The management accounting systems have played
a vital role in the affairs of large corporations such as Du Pont and General
Motors in the early part of twentieth century. However, the effectiveness of these
tools in more contemporary settings has been questioned.

In a series of articles, Cooper and Kaplan have also drawn attention to the
limitations of traditional product cost systems. One of the main criticisms of
management accounting during 1980s was the techniques used to allocate
overheads to products/services. Conventional product costing systems use
volume based measures such as labour hours or labour dollar to allocate indirect
costs. The direct labour-based measures that were suitable to the allocation of
overheads in the 1920s were not found suitable to the advanced manufacturing
environment of 1980s. Advanced manufacturing techniques dramatically
changed the manufacturing processes in many oarganisations. The companies
produce a wide range of products, direct labour cost represent only a small
portion of total manufacturing cost in such organisations, and overheads are of
considerable importance. Further intense global competition of the 1980s
created a need by managers for more accurate information on how product mix,
introduction and abandonment decisions affect their organisations’ profitability.

1
Traditional cost systems also provide inadequate information to support
organizational continuous learning and improvement. The new competitive
environment requires that managers and operators have timely and accurate
information to help them make processes more efficient and more customer
focused. Traditional standard cost/flexible cost systems prepare and issue
summary financial information according to the cycle of the organization’s
financial reporting process, typically monthly or every four weeks. This financial
information has some serious limitations to support the organizational continuous
learning and improvement. The information on variances against standards
promotes a controlling not learning view. The variances are not easily
understandable by frontline employees and do not promote an integrated
process view of the organisation. Employees need an appropriate mixture of
financial and non-financial measurements. Japanese have developed innovative
cost management systems such as Kaizen costing and pseudo-profit centers for
their front-line employees to enhance their ability to develop efficient and cost
effective processes.

In response to these criticisms, a number of innovative management accounting

techniques have been developed across a range of industries. These include
activity based costing, target costing, strategic performance measurement
systems, benchmarking and value chain analysis.

The survey of related literature provides the systematic evidence regarding the
usage of contemporary management accounting techniques in many countries.
There is lack of knowledge concerning the current state of management
accounting practices in developing countries like India. It is argued that due to
cultural factors, Indian manufacturing companies are slow in adopting new
management accounting practices.

The existing literature on the subject brings home the fact that there is a need for
conducting a study to examine the extent to which contemporary management
accounting practices have been used in India. There is also a need to study the
association between the use of contemporary management accounting
techniques and financial performance.

2
This study makes a major attempt to find evidence on how widely traditional and
contemporary management accounting practices have been adopted by the
Indian industry.

Empirical Findings of the Study:

The results of the study found that the needs to ‘improve overall profitability’ and
‘cost reduction’ are the major priorities for management accounting in Indian
companies.

Budgeting for planning and control is the most widely used tool of management
accounting. About 97% respondents use it moderately or extensively.

However, findings of the study showed that current usage level for newly
developed management accounting techniques is comparatively more as
compared surveys on Indian manufacturing firms.

Results indicate that the firms using or implementing contemporary management

accounting techniques such as activity based costing, activity based
management, life cycle costing have greater business size vis-à-vis non-users,
except target costing. This finding is consistent with literature.

Around 73.3% of respondents implementing/using activity-based costing

indicated that the need to have accurate cost information for product pricing is
the most important reason.

Results of the study found a positive association between the adoption of ABC
and company characteristics such as degree of customisation, pressure of
competition, business size, and proportion of overhead to total cost. However,
none of the differences was found to be significant at 10% level.

Product costing decisions are the most popular application of activity based
costing in Indian companies as about 80.0% are using it extensively or
frequently. Sixty per cent of the ABC user respondents indicated a significant or
somewhat significant improvement in the Return-on-Investment (ROI) followed
by operating income (46.7%).

3
Results of the study indicate that companies exposed to low pressure of
competition have significantly different and greater priorities for ‘automating
processes’ as compared to the companies having high pressure of competition,
whereas companies exposed to high pressure of competition had significantly
greater priorities for ‘developing a more profitable product mix’ as compared to
companies having low pressure of competition. Further, results show that that
the companies exposed to high pressure of competition have significantly
different and greater importance for the need to have ‘improved processes’ as
compared to the companies having low pressure of competition.

The extent of usage of ABC for ‘product launch decisions’, ‘product redesigns’,
and process redesign, choice of marketing channel decisions was significantly
different and greater in case of companies exposed to high pressure of
competition as compared to the companies having low pressure of competition.

From this research, we can conclude that Indian companies use various
management accounting techniques and practices. However, this research
provides less insight into precise nature and details of these practices, and the
organizational processes and actions that precede or are initiated by these
techniques. Using alternative approaches (e.g., case study research, and
interview method), one may attempt to investigate why and how companies
implement various contemporary management accounting techniques, pitfalls in
implementing and their success in achieving intended goals. Also one could
study, whether adoption of these practices was designed to improve
performance or to give external appearance of being modern, rational and
efficient.