Summery of The Role Of The Management Accountant by Robert Kaplan

The article by Robert Kaplan is a concise detailed presentation of the development of the practice and profession known as management accounting. He also challenges the current practitioners to realize that most of the key aspects of cost accounting had been developed around 1925. In light of this knowledge Kaplan encourages a reexamination of current processes that are being applied in today's business climate, and may not be appropriate for contemporary business needs.

Kaplan traces key innovations in the early years of the Second Industrial Revolution circa 1850 through the culmination in 1925 with the management control improvements of DuPont and Sloan. The modern aspects began with the growth of large factory mills, railroad, and distribution concerns that needed reliable methods to track conversions costs and related efficiencies. Railroads were vast organizations that handled considerable dollar amounts and transactions. Subsequently, methods were developed to manage and record the operational results. About 20 years later, these new cost accounting procedures were applied to the emerging industries of mass distribution and production enterprises. Of main importance was the application of the voucher system in the steel industry, especially Andrew Carnegie's steel company. The next major development was accounting for the "factory burden" or factory overhead. J Maurice Clark of the University of Chicago made chief contributions regarding factory overhead cost analysis and treatment. He also proposed the use of statistical methods in cost behavior analysis and warned against over-reliance on such methods. Thus, through these academic discussions of Clark, refined cost accounting theories had been developed by 1925.
The next major innovation was the managerial control systems that were initiated at the DuPont Company. Kaplan outlines the history of the reorganization of the DuPont Powder Company and the best practices that were implemented during the period between 1903-1910. These organizational breakthroughs, decentralized departmental leadership, return on investment formula, prioritized capital allocation, and systemic budgeting and forecasting procedures allowed the successful organization of large industrial corporations. The basic application of ROI concepts at the departmental level is still in use today. The work Pierre DuPont and Alfred Sloan began at GM was basically a codification of modern managerial control practices. By 1925, decentralization, ROI performance evaluations, capital appropriation process, budgeting and planning cycles, flexible budgeting and other innovations were firmly in place.

After the major improvements preceding 1925, Kaplan writes there have been little new innovations outside of academia. Some of these ideas are modern capital budgeting processes, the use of discounted cash flows, transfer-pricing analysis, and the application of quantitative techniques such as regression analysis, linear programming, and probability theory to cost accounting problems. Kaplan states that firms have not accepted many of the academic developments because much of the research is not linked to actual companies, such as the innovations with DuPont and GM. Therefore, the academic models were not corporately developed or tested in actual firms.

Kaplan then proceeds to discuss some of the problems that have arisen from the profit center concept that treats each division like a miniature company, mainly the short-term management decisions. Often, decisions are made for short-term financial gain at the expense of the long-term competitive position of the enterprise. Kaplan raises the question; why did this problem not reveal itself sooner? Several potential reasons are given. First, there was less pressure on short-term profit goals in 1920s than in the 1980s. Secondly, the frequency of manager turnover has increased; therefore there is greater focus on short-term financial objectives than in the past. Thirdly, today's larger organizations are more susceptible to short-term profit maximization decisions by profit center managers if the control systems have changed to accommodate the larger enterprise. Forth, a possible shift in hiring practices during the last 60 years. Employees in the past tended to stay with the firm longer and subsequently would look after the long-run interests of the organization. The current situation is the opposite. A fifth reason is the wide use of executive compensation schemes, which place operational focus on achieving annual profit goals in order to meet personal bonus objectives. Sixth, the overall business environment of the 1980's and beyond is substantially different then that of the 1920s and likewise the management control system that worked well previously are inadequate for today's needs. Kaplan explains that financial measures alone will continue to be important factors in determining performance in profit center operations. But, a more balanced approach will need to be utilized to better serve the long-term objectives of the firm.

Kaplan states that the inclusion of non-financial measures in an organizations control and planning systems will be unfamiliar and uncomfortable for managerial accountants. Financial performance measures are easy to manipulate, therefore, other more ambiguous measures will need to be utilized for performance evaluation.