Back to the future: innovation in manufacturing accounts

1. Back to the future: innovation in manufacturing accounts

3. Presentation Abstract 1 survey of 34 UK manufacturing companies. manufacturing companies visits led to observation: some companies� P&L formats not influenced by either external reporting or �mainstream� standard absorption costing theory. Chartered Institute of Management Accountants (UK) funding to investigate manufacturing companies� internal reporting. Method: review of documentation plus interviews. specimen profit and loss account format for internal reporting as basis for structured telephone interview

4. Presentation Abstract 2 no claim that sample used is representative and, if a �response rate� was calculated, it would be low because: many companies were contacted to find 34 that were willing to participate. aim of the research was not generalisation but: identification of innovations in manufacturing accounting reporting. main findings only are summarised here.

6. Contribution Reporting 2 some evidence of disillusion with sophisticated standard cost variances and absorption costing. However, tend not to use activity-based costing Instead, they simplify the P&L presentation, sometimes by using marginal costing. such presentations (in theory) need to be adjusted for external reporting. Therefore: evidence that (some) manufacturing companies not dominated by financial reporting requirements

7. Contribution Reporting 3 findings have implications for �Relevance Lost� thesis (by Johnson and Kaplan - J&K) key view: external financial reporting requirements influenced internal reporting use of marginal or variable costing methods for stock valuation is not permitted in UK for external reporting purposes more than 50% of companies not inhibited (in this key respect) by external reporting standards.

8. Contribution Reporting 4 Companies thrown off external financial reporting requirements shackles since 1980s? or They have always used marginal methods? But: Some companies consciously chose marginal costing approaches. Few companies use activity-based methods so: J&K might be right: companies need to adopt internal business-oriented methods, but: recommendations to replace absorption costing with ABC (activity-based) not found favour.

9. Budgets and Forecasts 1 typical P&L format includes comparison of actual results with budgeted figures. almost all (33 from 34) of companies employed budgets and vast majority of these also produced forecasts. 29 companies described their forecasts most of these (20) reported that their forecasts were to the end of the current financial year. the rest (7) generated 12-month �rolling� forecasts.

12. Standard Costing & Variances Standard costing prevalent 70% of companies set standard costs and some did not because of the nature of their business however, analysis of variances calculated and their use in financial reporting led to serious reservations concerning the extent of standard costing use several companies indicated main use was as convenient means of valuing stock standards and variances not particularly important in managing the business.

14. Standard Costing & Variances variances often not integrated into profit and loss presentation, but most standard costing companies calculated material and labour variances of various types. 23 companies routinely calculated variances only 11 reported overhead variances and 5 only reported variable overhead variances. Of those companies calculating fixed overhead variances, none subdivided volume variance into �capacity� and �efficiency� elements.

16. Contribution Conclusions �Direct�, �marginal� or �variable� costing been textbook recommendation for many years but previous research indicates that absorption costing presentations have dominated in manufacturing industry. Perhaps this research indicates a reversion to simpler methods: Back to the future?

17. Any Questions ?