‘Relevance (1987:22) state “costs get distributed to products” through

‘Relevance lost, Rise and fall’ describes the development of Management
Accounting in American organisations, from the successful “textile mills
founded in the first half of the 19th century first” (Kaplan,1987:22)
to technological advances from manufacturers in the present day. Johnson and
Kaplan (J&K) strongly argue that most of the initial phases of cost
accounting and management control since the mid 1920s in the US have not
evolved. In their view, the latest period of management accounting systems history
has been one of stagnation. They believe that the process of driving
organisational and accounting systems up have halted. Their book also discusses
how costs are the result of managerial decisions. The relevance lost theory has “been criticised from the
viewpoints of the Foucauldian perspective on power (Ezzemal et al) and the
labour process perspective (Hopper and Armstrong)” as they have contrasting views
on stagnation (Kholeif, 2008:43). In this essay, I
will be comparing these other authors reasons with that of J&K supporting
my points with evidence and at the end coming to conclusion on whether or not I
agree with J&K.


Prime cost reporting was developed in the early days to enable factory
owners to monitor and compare the performance of different departments and
improve efficiency to create profits. J&K criticise how modern management
accounting systems has moved away from such a clear system “which characterised
the pioneering systems of DuPont and General Motors” (Armstrong,1991:426). Armstrong (1991:426) state that “the efforts of managers and engineers to
solve real-life problems” enabled most of the current techniques to be
established. They believe that the teaching and practice of management
accounting has declined since the early days, resulting in them falling behind “with
the new competitive manufacturing environment” (Armstrong,1991:426).

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J&K claim that cost accounting has been held back “through its subservience to external financial reporting” during the 20th
century (Armstrong,1991:426). This has resulted in it becoming less relevant to decisions
made by managers but created “more widespread public ownership
of corporations” causing the demand for financial statements to increase (Kaplan,1987:28).
Kaplan (1987)
first mentioned at the start of their book, “management accounting information is produced too late”
due to “the procedures and cycle of the organisations financial reporting
Financial reporting is more useful for
businesses and management accounting is better used as performance measure.


Johnson & Kaplan argue that “the management accounting system fails to provide accurate product
costs” by
failing to provide information which is useful for cost management (J&K:22).
Kaplan (1987:22) state “costs get distributed to
products” through direct- labour. They disagree with using rates based on
direct labour hours to assign overhead, “the practice of allocating indirect
costs on the basis of direct labour costs is arbitrary and tends to make labour-intensive processes appear costly” (Armstrong,1991:432).
Hopper and Armstrong’s(H) views fit well the present era of labour
segmentation, workers on modern labour-intensive processes tend to be unskilled
and easy to recruit. Direct labour for businesses became a small part of
production so overhead allocation should not have been based on hours. J
are concerned that too much attention is given to direct labour cost and hours while
“management accounting systems do not provide
detailed information on process efficiencies” (Kaplan,1987:220).

Kaplan (1987:27) said that “cost accounting
system is the only system for estimating product costs”. Kaplan (1987:22) criticise
this cost control system, ‘management accounting reports are of little help to
operating managers as they attempt to reduce costs and improve productivity. J&K
blame university departments for training modern managers to “manage by the
numbers” which Ezzamel et al encourage. Students are taught that product costs from
overhead allocations should not be used for decision-making purposes. Overhead
allocations are taught in order to explain what bases to use and textbooks are
also to blame because they write direct labour hours as the base. This is done to
meet the requirements of external financial reporting. Therefore, they believe
that academic writers have contributed the most to this relevance lost by over
simplifying the decision making of problems that managers face in real life.


Armstrong (1991:411) express that “evolution of accounting systems is
analysed as an aspect of overall changes in the pattern of control of the
labour process”. H&A reiterate what these authors say by simply pointing out
that management and cost accounting evolved and improved for labour, to result
in higher profits. J&K and H&A both make valid points; it is true firms
what J&K say in that firms used budgeting and ROI and that it was used to
control labour.


According to Armstrong (1991:413), “the Lyman
Mills accounting records consisted of records of operatives’ wages and other
prime costs of production”. However, J&K’s understanding is that this
information was used by management with the aim of increasing efficiency. Clawson
(1980) also has a contrasting view to J&K, “writings in the labour process
tradition emphasise that the gain in profitability from the early factory organisation
of production came from the ability of owners/entrepreneurs to intensify labour
through close disciplinary control and to extend the working day”. Marglin
(1974) also agrees with this by mentioning how the factories initial competitive
edge when starting out was the levels of labour and much improved discipline from
owner and managers.


H&A were critical of J&K’s theoretical claims and their views on
cost accounting in textile mills. Armstrong (1991:427) state that the “concerns
in accounting education has produced a breed of managers who manage by the
numbers, on the basis of obsolescent cost systems” with its main concern on
timing, quality and long run performance. This is a solution
to what J&K discuss as using old systems may be able to fix current
problems. Kaplan (1987:427) did not recognise “that?systems of the General Motors type were, in part administrative devices”
which showed a change in the DNA of management accounting systems from the
1930s. J&K were unable to understand the magnitude of a change in the
balance between labour and management. H&A consider J&K’s statements
very harsh and bold because management accounting systems cannot be solely
blamed as other factors came into effect during the 20th century. An increase in
global competition, particularly from Japan led to many firms going bust and a
decline in the international competitiveness of American organisations. The market
became too big and there was no room for expansion.