The lean, mean brief

Japanese methods have created a new manufacturing environment - perhaps out of pace with accountants' techniques.
It is well known that - chiefly as a result of the influence of Japanese companies - British manufacturers are changing the habits of generations. But to what extent are the accountants working in these organisations adapting their working methods in order to fit in with such techniques as just-in-time (JIT) production?

That is the question that a study from the Institute of Chartered Accountants' research body sought to answer. By the researchers' own admission, the answer is not conclusive, but the findings are at least encouraging for members of the profession.

The report, "Accounting and the New Manufacturing", points out that "some people have accused accountants and their techniques of retarding manufacturing improvements", and says that in three of the four companies studied "accountants were actively involved in the advances being implemented". In the fourth case, the management accountant "was not involved but had not inhibited change".

But just in case it appeared that all was sweetness and light, the researchers - Christopher Cowton of Huddersfield University and Richard Vail of Trinity College, Dublin - add that in two cases the accountants reported having had difficulty in persuading their peers in other companies that they had no need to fear JIT.

Lacking in earth-shattering substance as its findings may be, the report is important because it carries on the examination of the role of management accounting that has been continuing for the past decade or so.

Pressure for adoption of such systems as activity-based costing (ABC) has been intense, while writers like Robert Kaplan have argued that management accounting has lost its relevance. Much of the blame has been laid at the door of academics - for conducting research at a distance far removed from practice and for teaching techniques that rely on an outdated view of manufacturing industry.

Kaplan, in particular, has argued that traditional costing systems, performance measures and approaches to investment appraisal are inappropriate in this "new manufacturing environment" and may have seriously retarded the revitalisation of western manufacturing industry. He argues for the abandonment of old practices that are no longer suitable and for the development and adoption of new measurements and techniques. He himself has been associated with the establishment of what is known as the "balanced scorecard" as a way of providing a better guide to the health of an organisation.

Cowton and Vail acknowledge that there are many elements to the new manufacturing approach - and so have devoted their energies to one of the best known, JIT.

Their questions of each of the four organisations - all anonymous and representing different sizes and types of plant - were divided into three main parts. First, planning JIT - were accountants involved and what role did financial measures play in its introduction? Second, product costing and production control - what sort of information was being produced by accountants? And third, a group of questions under the heading "Miscellaneous", including the likes of "How is the accounting function expected to develop?" and "What are the sources of initiatives for change in accounting?"

While finding that accountants in their studies were generally supportive of the moves towards new manufacturing methods, Cowton and Vail do acknowledge that "for all accountants, whether enthusiasts or not, the introduction of JIT does appear to entail some technical issues for accounting systems, the addressing of which will involve change, uncertainty and, possibly, resistance".

To examine these more closely, they look at three broad categories of accounting: labour, overhead and inventory.

In relation to the first, they point out that, while JIT may not be solely responsible for the move from direct to contracted-out labour, accounting for labour needs to reflect such changes in the way that it records it. At the same time, overheads have grown in importance. Sometimes, this has been a direct result of the decline in direct labour, ie when machines, with salaried employees overseeing them, have replaced workers.

Much more important, though, are changes involving inventory. Work in progress has traditionally been seen as an asset, but the JIT philosophy - carried to its extreme - would see it as "an evil to be eliminated", and hence a liability. There are, therefore, certain technical issues to be sorted out here.

But where does the report as a whole leave the management accounting profession?

According to the study's authors, the case studies "should serve to give some confidence about the ability of accountants to cope with, and indeed to support and promote, manufacturing change". But while some individual cases will give readers ideas and insights, Cowton and Vail stress that they do not provide a "simple blueprint for a uniform approach to accounting for JIT".

They accept that this might be disappointing for some, but emphasise that it also means that accountants are able - required, even - to make "their own considered, professional response to the technical and other challenges that JIT presents"n

`Accounting and the New manufacturing: a study of the implications of Just-in-Time Production' by Christopher Cowton and Richard Vail is available from Jacqui Modeste, The Research Board, The Institute of Chartered Accountants. Tel 0171-920 8508. Price pounds 15.