Handbook of Management Accounting Research (Volume 2) (Handbooks of Management Accounting Research, Volume 2)

Volume two of the Handbooks of Management Accounting Research consists of two groups of chapters. The first draw together research that has focussed on particular management accounting practices. The second set synthesise contributions to the literature that have been focussed within particular organisational contexts. Volume two concludes with a review of research on how management accounting practice and research varies around the world. Special pricing available if purchased as a set with Volume 1. *Documents the scholarly management accounting literature *Publishing both in print, and online through Science Direct *International in scope

Chapter One

Managing Costs and Cost Structure throughout the Value Chain: Research on Strategic Cost Management

Shannon W. Anderson

Abstract: Strategic cost management is deliberate decision making aimed at aligning the firm's cost structure with its strategy and optimizing the enactment of the strategy. Alignment and optimization must comprehend the full value chain and all stakeholders to ensure long-run sustainable profits for the firm. Strategic cost management takes two forms: structural cost management, which employs tools of organizational design, product design, and process design to build a cost structure that is coherent with strategy; and executional cost management, which employs various measurement and analysis tools (e.g., variance analysis and analysis of cost drivers) to evaluate cost performance. In this chapter, I develop a model that relates strategic cost management to strategy development and performance evaluation. I argue that although management accounting research has advanced our understanding of executional cost management, other management fields have done more to advance our understanding of structural cost management. I review research in a variety of management fields to illustrate this point. I conclude by proposing that management accounting researchers are uniquely qualified to create a body of strategic cost management knowledge that unifies structural and executional cost management.

1. Introduction

The headlines of the business press are replete with news of firms' cost management activities. Some are trimming the workforce or renegotiating wages and benefits. Others are re-engineering processes to use a more economical mix of inputs or to produce a more valued output. Still others are outsourcing work, forming strategic alliances, and partnering with customers and suppliers. What is unclear is whether this frenzy of cost management is guided by strategic intent and if it is, whether it is indicative of best practice in orchestrating organizational change.

In the popular press, "cost management" is often a euphemism for cost cutting, a common response when managers realize that the firm has ceased to be a sustainable profitable concern. However, managers' reluctance to act when uncertainty remains about the source or permanence of problems or when cost cutting is associated with adjustment costs (e.g., severance payments, job redesign, capacity rebalancing) may cause costs to exhibit a "sticky" relationship compared with business activity (Anderson et al., 2003; Balakrishnan et al., 2004; Noreen & Soderstrom, 1997). That is, costs decrease less with declines in activity than they increase with increases in activity, thus:

In contrast to the commonly received model of fixed and variable costs, our results are consistent with an alternative model of cost behavior that recognizes the role of managers in adjusting committed resources to changes in activity-based demands for those resourcesy sticky cost behavior reveals deliberate decision making by managers who weigh the economic consequences of their actions (Anderson et al., 2003, pp. 61–62, emphasis added)

In sum, management matters; the production function and the related cost function that characterize the firm are not adequately specified without considering managers' motivations, skills, and constraints in managing costs in conjunction with demand.

Yet cost management skills are in short supply. As a recent McKinsey & Company study (Nimocks et al., 2005, pp. 107–108) reports:

[Competitive] pressures mean that many businesses desperately need a new approach to managing costs—one that reduces them over the long term ... The process of lowering overhead costs sustainably is deeper and more subtle than most companies realize. The tactical margin improvements that might be enough to meet a one-off quarterly earnings gap or to compensate for a delayed product launch will not bring about deeply embedded change, while more broadly ambitious cost reduction programs often lose their impetus after the initial effort. Companies that truly transform their approach to overhead costs, by contrast, design sustainability into the heart of their programs, aligning their costs with their strategies and maintaining a strong commitment to the effort.

In this chapter, I argue that the need for firms to adopt a new approach to managing costs coincides with a need for management accounting scholars to expand the scope of cost management research. Management accounting is a body of tools and practices that facilitate deliberate decision making by informed managers who are motivated to maximize long-term profits of the firm. For purposes of this chapter, I define "strategic cost management" as deliberate decision making aimed at aligning the firm's cost structure with its strategy and optimizing performance of the strategy. Alignment and optimization must comprehend the full value chain and all stakeholders to ensure long-run sustainable profits for the firm. I distinguish between two forms of strategic cost management. Structural cost management employs tools of organizational design (e.g., determination of firm boundaries, scale, and governance structures), product design, and process design to build a cost structure that is coherent with strategy. Executional cost management employs common management accounting tools to measure cost performance in relation to competitive benchmarks so that improvement opportunities are highlighted.

Early papers on strategic management accounting found fault with management accounting's disproportionate attention to executional cost management and to the production (manufacturing) portion of the value chain (e.g., Bromwich, 1988, 1990; Bromwich & Bhimani, 1989). More than 20 yr later, little has changed (Roslender & Hart, 2003), and, as this chapter illustrates, much of what constitutes advancement in our understanding of strategic cost management-particularly structural cost management—is occurring outside of accounting research journals. From my selective review of the literature, I offer three propositions and a conclusion:

1. Cost management skills are in high demand in the world economy, although they are often most evident in the work of nonaccounting managers and increasingly require a new approach as compared to cost-cutting efforts of the past (Hergert & Morris, 1989; Lord, 1996; Nimocks et al., 2005). Some of the most successful modern firms (e.g., Amazon, Dell Computer, Wal-mart, Southwest Airlines, Tesco, Zara) deliver traditional goods and services using business models with radically different cost structures from those of their competitors. Yet most management accounting educators teach the tools of executional cost management rather than the structural cost management that is associated with creating innovative business models.

2. Researchers from different management traditions have studied the performance effects of organizational design, product design, and process design in isolated parts of the organization (e.g., product development, manufacturing, marketing and sales, and logistics and distribution). Since these strategic decisions typically define the gross parameters of the firm's cost structure, there is much to be learned about structural cost management from these studies. Other management disciplines have also been more attuned than accounting to the prevalence of new organizational forms that span firm boundaries (Hopwood, 1996; Kinney, 2001; Otley, 1994). In that these new organizational forms are explained, in part, as a transaction cost minimizing solution (Williamson, 1985), the importance of cost management is clear. Yet management accounting texts often give only cursory consideration to strategic choices such as outsourcing or make-or-buy decisions. In sum, although many decisions that are taken to align a firm's strategy with its structure have significant implications for the level and volatility of costs, disparate studies on this phenomenon have not yielded a unified body of "strategic cost management" knowledge.

3. Management accounting researchers are well suited to the task of creating a unified body of strategic cost management knowledge. Training in the economics of the firm and the core accounting principles of measurement and management control are essential ingredients for weighing economic consequences of alternative actions. However, in spite of earlier admonitions for accounting researchers to take a more strategic view of cost management (e.g., Bromwich, 1988, 1990; Bromwich & Bhimani, 1989) and in spite of recent developments aimed at linking performance evaluation to strategy (e.g., Kaplan & Norton, 1996, 2004), cost management remains narrowly focused on executional cost management, typically within circumscribed organizational boundaries.

These propositions point to an opportunity to reinvigorate management accounting research and education around complex economic and social forces governing the practice of structural cost management rather than a narrow group of executional cost management tools. As this chapter illustrates, researchers from other traditions have made great progress in outlining the contours of structural cost management for different segments of the value chain. Management accounting researchers' challenge is to first synthesize these research findings into a coherent body of strategic cost management knowledge and to then extend the scope of research to understanding the measurement tools and practices that facilitate deliberate decision making associated with structural cost management.

(Continues...)

Excerpted from Handbook of Management Accounting Research Volume 2 Copyright © 2007 by Elsevier Ltd. . Excerpted by permission of Elsevier Science. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site. Content: Contents Pages v-vii Contributors to Volume 2 Page ix Preface Pages xi-xiii Christopher S. Chapman, Anthony G. Hopwood, Michael D. Shields Managing Costs and Cost Structure throughout the Value Chain: Research on Strategic Cost Management Review Article Pages 481-506 Shannon W. Anderson Target Costing: Uncharted Research Territory Review Article Pages 507-530 Shahid Ansari, Jan Bell, Hiroshi Okano Cost and Profit Driver Research Review Article Pages 531-556 Rajiv D. Banker, Holly Hanson Johnston Analytical Modeling of Cost in Management Accounting Research Review Article Pages 557-571 John Christensen, Thomas Hemmer Transfer Pricing: The Implications of Fiscal Compliance Review Article Pages 573-585 Martine Cools, Clive Emmanuel Budgeting Research: Three Theoretical Perspectives and Criteria for Selective Integration Review Article Pages 587-624 Mark Covaleski, John H. Evans III, Joan Luft, Michael D. Shields Management Control of the Complex Organization: Relationships between Management Accounting and Information Technology Review Article Pages 625-640 N. Dechow, M. Granlund, J. Mouritsen A Review of Activity-Based Costing: Technique, Implementation, and Consequences Review Article Pages 641-671 Maurice Gosselin An Economic Perspective on Transfer Pricing Review Article Pages 673-695 Robert F. Göx, Ulf Schiller A Review of the Literature on Capital Budgeting and Investment Appraisal: Past, Present, and Future Musings Review Article Pages 697-728 Susan F. Haka Management Accounting and Operations Management: Understanding the Challenges from Integrated Manufacturing Review Article Pages 729-752 Allan Hansen, Jan Mouritsen A Review of Quantitative Research in Management Control Systems and Strategy Review Article Pages 753-783 Kim Langfield-Smith A Review of the Literature on Control and Accountability Review Article Pages 785-802 Kenneth A. Merchant, David T. Otley Accounting and Control in Health Care: Behavioural, Organisational, Sociological and Critical Perspectives Review Article Pages 805-829 Margaret A. Abernethy, Wai Fong Chua, Jennifer Grafton, Habib Mahama Management Accounting in the Manufacturing Sector: Managing Costs at the Design and Production Stages Review Article Pages 831-858 Tony Davila, Marc Wouters Management Accounting and Control in Health Care: An Economics Perspective Review Article Pages 859-883 Leslie Eldenburg, Ranjani Krishnan Accounting in an Interorganizational Setting Review Article Pages 885-902 Håkan Håkansson, Johnny Lind The History of Management Accounting in France, Italy, Portugal, and Spain Review Article Pages 905-922 Salvador Carmona Management Accounting Practices in the People's Republic of China Review Article Pages 923-967 Chee W. Chow, Rong-Ruey Duh, Jason Zezhong Xiao The Development of Cost and Management Accounting in Britain Review Article Pages 969-1034 Trevor Boyns, John Richard Edwards Management Accounting Theory and Practice in German-Speaking Countries Review Article Pages 1035-1069 Ralf Ewert, Alfred Wagenhofer The History of Management Accounting in the U.S. Review Article Pages 1071-1089 Richard Fleischman, Thomas Tyson Development of Cost and Management Accounting Ideas in the Nordic Countries Review Article Pages 1091-1118 Salme Näsi, Carsten Rohde A History of Japanese Management Accounting Review Article Pages 1119-1137 Hiroshi Okano, Tomo Suzuki Author Index for Volumes 1 and 2 Pages 1139-1183 Subject Index for Volumes 1 and 2 Pages 1185-1204 Overview of Volumes 1 and 2 Pages 1205-1207 Volume two of the Handbooks of Management Accounting Research consists of two groups of chapters. The first draw together research that has focussed on particular management accounting practices. The second set synthesise contributions to the literature that have been focussed within particular organisational contexts. Volume two concludes with a review of research on how management accounting practice and research varies around the world.

Special pricing available if purchased as a set with Volume 1.

*Documents the scholarly management accounting literature
*Publishing both in print, and online through Science Direct
*International in scope