Journal of International Accounting,
Auditing & Taxation 10 (2001) 85–109
The international diffusion of new management
accounting practices: the case of India
P.L. Joshi*
University of Bahrain, Bahrain
Abstract
Since 1991, the liberalization of the Indian economy has increased the pressure for international
competition and changed the information needs of Indian companies. This study examines the
management accounting practices in a sample of 60 large and medium size manufacturing companies
in India. The study was conducted through the use of questionnaire to examine the extent to which
Indian manufacturing companies have adopted certain traditional and recently developed management
accounting practices, the benefits received, and their intentions of future emphasis on these practices.
The results for Indian were compared to the results of a study in Australia that looked at the same
factors. The findings reveal that the adoption rate in India for traditional management accounting
practices was higher than for the recently developed techniques and the adoption rate for the newly
developed techniques had been rather slow. Most of the practices adopted relate to traditional
budgeting and performance evaluation systems. The future emphasis in India is on traditional practices
and less on the new techniques, because higher benefits were derived from such techniques. Size (total
assets) has an influential factor in the adoption of the newly developed practices. Apart from some
similarities in practices between Indian and Australian firms, statistically significant differences were
found in respect to adoption rates, benefits derived, and the focus for future emphasis, both for
traditional and newly developed practices. Most of the differences could be attributed to the differences in cultural values. Indian management generally avoids risk, is quite conservative, and less
innovative in adopting new management accounting techniques. Since, Indians have a long history of
their heritage; it takes them longer time to change their societal values and practices, which also seems
true in the case of adopting new management accounting practices. © 2001 Elsevier Science Inc. All
rights reserved.
Keywords: India; Australia; Management accounting; Techniques; ABC; Budgeting; Performance evaluation;
Target costing; Benchmarking; Culture; Size
* Corresponding author.
E-mail address: [email protected] (P.L. Joshi).
1061-9518/01/$ – see front matter © 2001 Elsevier Science Inc. All rights reserved.
PII: S 1 0 6 1 - 9 5 1 8 ( 0 1 ) 0 0 0 3 7 - 4
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P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
1. Introduction
During the last decade, both academics and practitioners have started to question prevailing traditional management accounting thinking. Changes in competition and production
environment, changes in the cost structures of firms, and the rapid development in advanced
technologies have been advocated as imposing pressures for change in management accounting practices. Recent empirical studies in western countries provide evidence that if management accounting is to maintain its relevance in today’s increasing level of globalization,
it needs to meet the changing needs of managers. In the past there were some criticisms that
management accountants in western countries were not able to adapt new management
accounting practices to changing technology and methods of production in manufacturing
organizations (see for example, Johnson & Kaplan, 1987; Ansari, 1997). Kharbanda and
Stallworth (1991) argued that Japanese companies have been successful, to a large extent, in
adopting these practices and they have been dominating in global competitiveness because
they transformed themselves for competition by using automation, cost discipline, continuous improvement and collective decision making.
There is a lack of knowledge concerning the current state of management accounting
practices in developing countries like India. It is argued that due to cultural factors, Indian
manufacturing companies are slow in adopting new management accounting practices.
Instead they rely strongly on traditional management accounting practices. Except for the
findings from a small sample study (Anderson & Lanen, 1999)1, no systematic evidence is
available about the pressure for change in the management accounting practices among
Indian companies.
The purposes of this study are to:
1. determine the extent to which management accounting practices have been adopted by
large and medium size private sector manufacturing companies in India in the last three
years;
2. identify the degree of benefits derived from the adoption of management accounting
practices;
3. discuss the priorities or emphasis which Indian companies will place on each of the
management accounting techniques in the next three years;
4. compare the findings of this study with the results of a prior study completed in
Australia (Chenhall & Smith, 1998).
Thus, this study makes a major attempt to find evidence on how widely traditional and newly
emerging management accounting practices have been adopted by Indian corporate manufacturing companies.
This study also makes a comparison of management accounting practices in an emerging
market, India and a developed capital market, Australia. There are some sharp differences
between the two countries. First, in the last three years, the Indian economy has been growing
on an average of six percentage compared to Australia, where the annual growth rate has
been between nine to ten percentage. Second, as Choi and Mueller (1978) point out, there are
no structured or sophisticated capital markets in third world countries compared to developed
countries, where stock markets are highly sophisticated and structured. For example, the
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
87
aggregate market capitalization of companies listed with the Bombay Stock Exchange was
US$50 billion in 1990 (Bombay Stock Exchange Directory, 1991) compared with over
US$100 billion for the Sydney Stock Exchange. Third, the number of qualified accountants
in developing countries is generally less compared to developed countries. In India, the
number of qualified chartered accountants is about 50,000 (ICAI, 1994), while Australia has
more than 80,000 chartered accountants (National Council Report, 1995). The population per
accountant is 248 for Australia and 18,000 in India. Finally, Rahman et al. (1994) argue that
there are identifiable differences in business environments, ownership structure, users of
accounting information, legal requirements, problems relating to transfer of technology, and
the cultural background and value orientation of people among developed and developing
nations. Despite the fact that India and Australia have their own distinctive culture values,
the trading links between the two countries have substantially increased in recent years.
Therefore, the cross-culture studies of management accounting practices in these two
countries may facilitate a better understanding of the practices of each country and promote
more effective accounting practices for the firms.
2. Previous research
This section presents a comprehensive review of the previous studies on budget planning
and standard costing, performance evaluation practices, ABC, target costing and other newly
developed management accounting practices in various countries.
2.1. Activity based costing
A number of recently developed management accounting techniques, such as activity
based costing (ABC), target costing, product life cycle analysis, value chain analysis,
benchmarking, shareholders’ value analysis, and back flush costing have been suggested as
ways of linking operations to the companies strategies and objectives (Chenhall & Smith,
1998). Among such techniques, ABC has gained a high profile in enhancing product cost
accuracy (Brimson, 1991; Cooper & Kaplan, 1987), providing comprehensive cost data for
performance evaluation (Joshi, 1998; Berliner & Brimson, 1988), providing more relevant
data for managerial decision making (Krumwiede, 1998; Innes & Mitchell, 1995; Cooper &
Kaplan, 1987), greater potential for sensitivity analysis (Shank & Govindarajan 1989),
assisting in cost reduction and cost control (Joshi, 1998; Nguyen & Brooks, 1997; Mitchell,
1994), product and services (Armitage & Nicolson, 1993), and providing a new look at value
added activities (Johnson, 1988).
A number of surveys in different countries reported a very promising growth of ABC
although the adoption rate varied from 10% to 50%. A study by Krumwiede (1998) in the
U.S. reported that more than half (54%) of responding companies that tried ABC were using
it for decision making outside the accounting function. Hrisak (1996) also found that about
53% of survey respondents were using ABC in the U.S., while Armitage and Nicholson
(1993) found that only 14% of their sample companies were implementing ABC in Canada.
Similarly, Shim and Sudit (1995) indicated that 27% of their respondents from U.S.
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companies had adopted ABC and 38% intended to do so. On the other hand, in the U.K.,
Innes and Mitchel (1995) reported that 20% of companies had adopted ABC, while a survey
by Evans and Ashworth (1996) found that 21% of companies had implemented ABC. In
another study, Banerjee and Kane (1996) reported that 22% of a sample of Certified Institute
of Management Accountants members used ABC.
Evidence from Europe is encouraging although the rate of adoption has been slow. In
Finland, Lukka and Granlund (1996) reported a 6% adoption rate, while a study by Rautajoki
(1995) reported that 10% of the companies surveyed were implementing ABC. In Sweden,
Ask et al. (1996) reported a low adoption rate but 25% of the respondents were planning to
adopt ABC. Bruggeman et al. (1996) reported that about 14% of companies in Belgium had
adopted ABC and many more were in the process of doing so. A very low adoption rate was
reported in Germany (Scherrer, 1996) and until recently, there was no evidence of using
ABC in Italy (Barbato et al., 1996). However, in a recent survey of medium and large Italian
firms carried out by Bubbio et al. (1999) found that 14 firms were using ABC, and 7 others
were considering ABC adoption. Results indicated that ABC/Activity Based Management
(ABM) has actually quite a large diffusion in the largest firms.
In Australia, survey studies revealed a low adoption rate of ABC (e.g., Chenhall & Smith,
1998; Clarke & Mia, 1994). The evidence from the survey by Chenhall and Smith (1998)
found that ABC was ranked relatively low compared to activity based budgeting and ABM.
The study by Nguyen and Brooks (1997) in Australia indicated that of the 120 respondents,
12.5% had adopted ABC and another 8.3% firms were planning to adopt ABC in future. In
Singapore, Ghosh et al. (1996) reported that 14 of 106 companies had adopted ABC.
The only evidence available on the adoption of ABC in India is the research survey
conducted by Joshi (1998). This survey reported a 26% adoption rate, but the ABC technique
was implemented very recently. On the other hand, the study by Anderson and Lanen (1999)
found that none of the companies in their study applied ABC in India.
2.2. Target costing
The first non-Japanese article on target costing appeared at the end of the 1980s albeit with
Japanese authors like Monden, Hiromoto, Sakurai and Tanaka. For example, Sakurai (1989)
provides an excellent introduction to target costing and Monden and Hamada (1991)
provides a detailed view of target costing and Kaizen costing from Japanese perspective.
International interest in target costs become apparent with Consortium for Advanced Manufacturing International (CAM-I)’s publication of the results of a research project in 1993.
However, it is said that no detailed and exhaustive information is available on the subject,
principally because this domain is usually protected by the greatest secrecy in the majority
of companies in Japan (Larino, 1995). Larino (1995) further stated that over 80% of large
companies in the assembly industries had already applied target costing in Japan. In another
investigation conducted by Kobe University and quoted by Larino (1995), 88% of the 109
companies that replied to the survey used cost tables. Chenhall and Smith (1998) found that
38% of Australian firms adopted target costing.
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
89
2.3. Performance evaluation practices
Emmanuel et al. (1990) noted that performance evaluation was an important function of
management accounting. The literature indicates that both financial and nonfinancial measures are used to measure performance. In the U.S., McKinnon and Bruns (1992) found that
managers rated budgeted sales compared to actual sales as well as profit and income, as the
most important performance measures out of a list of 96 financial and nonfinancial measures.
Dugdale (1994) determined in the U.K. that high benefits were received from budgeting since
budgeted-related items received third ranking of thirty management accounting techniques
tested by him. Similarly, other studies in Belgium (Bruggeman et al., 1996), and in Denmark,
Israelsen et al. (1996) found that cost-based performance measures were widely used. Return
on investment (ROI) and profit measures were extensively used in the Netherlands (Groot
1996). In the Australian context, Dean et al. (1991) found that variance analysis was used to
some extent by 91% of companies, operating income by 83%, and ROI by 68% of
companies. Chenhall and Smith (1998) found that, in Australia, budget based financial
performance measures continue to be an important aspect of management accounting,
however, these were being supplemented with a variety of nonfinancial measures. Similar
findings were reported by Guilding et al. (1998) in the case of New Zealand. Ghosh et al.
(1996) provided evidence that 56% of companies in Singapore reported using ROI as a
management control technique for performance measurement.
There also is a growing importance for the use of nonfinancial measures. In the U.K.,
Bhimani (1994) and Dugdale (1994) reported that companies were quite receptive to the use
of nonfinancial measures. Pierce and O’Dea (1998) found that over 50% of respondents in
Ireland reported the use of nonfinance measures either very frequently or often. In the United
States, product quality and defects, delivery performance, schedule attainment, and output
per hour were used by companies (Smith and Sullivan, 1990). Measures of customer
satisfaction, quality and innovation were being used by companies in the Netherlands (Groot,
1996). In Australia, Dean et al. (1991) found that measures of throughput, set-ups and
working conditions, were considered important nonfinancial measures by companies, while
Chenhall and Smith (1998) found that, to some extent, balanced scorecard, customer
satisfaction, employees’ attitudes, team performance and qualitative measures were becoming important among Australian firms. However, low benefits were derived from team
performance and balanced scorecard. On the other hand, Anderson and Lanen (1999) found
that in India, productivity was the single most common nonfinancial measure used by the
respondents, although in recent years, customer satisfaction and on-time delivery have
gained in popularity.
2.4. Strategically focused techniques
A number of commentators (for example, Kaplan 1983; Cooper 1988; Shank and Govindarajan 1989; Bhomwich and Bhimani 1994) argued that due to the rapid transition in
technological innovations and emergence of flexible manufacturing systems, have made the
traditional management accounting techniques quite irrelevant. Advocates of Strategic Cost
Management (SCM) propose that firms should shift the focus of their performance mea-
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surement to include multiple indicators, such as: quality, inventory levels, flexibility, set up
times, and innovation (known as ‘balanced scorecard’). In this regard, Bromwich and
Bhimani (1994 p.127) state:
“The aim of SCM approach is to allow managerial accounting, in addition to its conventional
fields, to concentrate upon the consumers value generated relative to competitors. This aids
in monitoring the firm’s performance in the market place using a whole range of strategic
variables over a decision horizon sufficiently long for strategic plans to come to fruition, and
these concepts form the core of the new concept of strategic management accounting.”
Therefore, the newly developed management accounting practices which include, ABC/
ABM, value chain analysis, shareholders’ value analysis, target costing, product life cycle,
benchmarking, back flush costing and so forth have been suggested as ways of linking
operations to the company’s strategies and objectives (Chenhall & Smith, 1998). However,
Pierce and O’Dea (1998) reported low usage of new practices in case of Irish companies and
for Finnish firms (Lukka & Granlund, 1996). Use of balanced scorecard was 88% in case of
Australian companies and it was only 20% in case of Irish companies.
2.5. Budget planning and standard costing
Several previous surveys indicated that budget planning and standard costing still maintain their primacy for operational decisions. Dugdale (1994) found that the U.K. companies
derived high benefits from the use of budgeting planning. In a survey of Fortune 500
companies in the U.S., Sinha (1990) found that formal strategic planning was considered too
risky for divestment decisions. Similarly, Powell (1992) found that strategic planning was
considered important depending on the type of industry. In Australia, Chenhall and Smith
(1998) determined that traditional planning techniques were relatively highly adopted and
high benefits were derived from them. Bonn and Christodoulou (1996) indicated that 72% of
the largest manufacturing companies in Australia used formalized strategic planning systems. Anderson and Lanen (1999) indicated that in India, planning had become more
decentralized and strategic objectives were widely understood by managers.
Some studies reported that the importance of standard costing has been waning as a result
of changes recurring in the manufacturing environment (Drury, 1992; Lessner, 1989; Howell
& Soucy, 1987). Other authors (see for example, Lessner, 1989) have argued that standard
costing will continue to maintain its significance in the future in some revised form like
inclusion of nonfinancial indicators in the standard costing system. A number of studies
reported widespread use of standard costing (e.g., Clarke, 1995; Cornick et al., 1988).
Similar findings were also reported in Ireland (Pierce & O’Dea, 1998), Singapore (Ghosh et
al., 1996; Lukka & Granlund, 1996). On the other hand, the study by Wijewardena and Zoysa
(1999) showed that Australian companies considered standard costing to be more useful for
product costing, budgeting, inventory valuation, management control, whereas Japanese
companies used standard costing for cost control at the production stage. Similarly, surveys
of company practice in several countries reported that approximately 30 to 50% of companies uses variable costing in their internal accounting system (Horngren et al., 1998).
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
91
2.6. The size factor
Studies by Bruns and Waterhouse (1975), Gordon and Narayanan (1984), and Merchant (1984) suggested that size is an important factor in the design of certain characteristics of management accounting systems in the organizations. Other studies have
indicated that large size and multinational companies’ usage levels of both traditional
and the new management accounting techniques are usually high. Moreover, Moore and
Chenhall (1994) provided a review of evidence that size is an important factor in
influencing the adoption of more complex administration system. Pierce and O’Dea
(1998) argued that multinational and large organizations are likely to have broader
exposure to the waves of criticism leveled against traditional management accounting
practices. They also have a greater awareness of the substantial benefits of the new ideas
and techniques claimed by their proponents in the international literature. The nature of
complex operations and a relatively greater access to experiments with administrative
innovations are their other strengths. As large organizations have more resources to
finance the introduction of new systems and the overhaul of existing ones enables them
to test with the new practices. For example, so far empirical evidence in respect of
adoption of ABC system showed that adoption rates are much higher in case of large
firms compared to small firms (e.g., Nguyen & Brooks, 1997).
2.7. Indian companies’ practices
Anderson and Lanen (1999) have conducted the only previous study of Indian management accounting practices. Their study explores, using a contingency theory framework in
the evolution of a broad range of management accounting practices in a small sample of 14
Indian firms. They examined the management accounting practices in 1996 in relation to the
firms’ experiences in and exposure to world markets prior to liberalization and as a function
of contemporaneous differences in competitive strategy. Their study found improvements in
planning and budgeting procedures, employees involvement in planning, collection and
analysis of cost data, and limited evidence that management performance evaluation were
increasingly based on quantitative measures. Evidence was found of some changes associated with shifts in the external environment. However, their study did not shed light on the
adoption of the newly developed management accounting practices.
2.8. Summary – literature review
It is very clear how ABC and other management accounting practices have quickly spread
from the U.S. to Europe, Australia and Asia.2 This indicates a gradual shift in the adoption
of newly developed management accounting practices as a supplementary support to the
traditional management accounting practices. However, in India, there appears to be barriers
to such prompt diffusion, such as culture, publicity for ABC, availability of material on ABC,
and lack of promotion by consultants and so forth.
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Table 1
Cultural dimension
Cultural dimension
India index
Rank
Australia index
Rank
Power distance
Uncertainty avoidance
Individualism
Masculinity
Confucius/dynamism*
77
40
48
56
61
42
9
30
31
6
36
51
90
61
32
13
17
49
35
11–12
* The fifth cultural sub-dimension was reported later by Hofstede and Bond (1998).
3. Concepts of culture and management accounting practices
Recently, researchers have attempted to study the impact of culture on accounting
practices in different countries. For example, Ueno and Wu (1993), Chang et al. (1995),
Anthony and Govindarajan (1995) examined six aspects of budget control systems in the
comparison of the national culture of Japan and the U.S., and Japan and Taiwan. Others
researchers have studied the relationship between job performance and management control
systems in the context of national culture (see for example, Lau et al. 1997; Harrison 1992;
Birnberg and Snodgrass 1988). Many of these studies found that national culture had an
impact on certain aspects of accounting practices.
According to Birnberg and Snodgrass (1988), culture consists of a variety of elements,
such as attitudes, beliefs, values, and norms. These elements of culture affect the behavior
of the people living within a given society and they may be reflected in the management
accounting practices of the society. Attitude in the context of this study refers to the
managers’ predisposition that is, liking or disliking of management accounting practices.
Beliefs refer to the utility of adopting management accounting practices that a manager tends
to accept as true. Similarly, the term norm refers to socially shared values and standards
which are reflected in the extent to which specific behavior is considered socially acceptable
(see for example, Wagner and Moch 1986). On the other hand, values refer to a manager’s
judgment of certain things which are considered to be correct or preferable (see, Ueno and
Wu 1993).
Hofestede (1980) defines culture as “the collective mental programming of people who
live in a particular society.” Hofestede developed a score (index) to represent each of the four
cultural dimensions for each of the fifty countries he studied. Later a fifth cultural subdimension was also identified namely, confucius dynamism. Culture as discussed here, refers
to national culture, which is a broader notion than that of organizational culture. One way to
summarize the cultural differences between India and Australia is to compare the scores of
the four cultural dimensions developed by Hofstede (1980). Culture scores for both the
countries are presented in Table 1.
The cultural dimensions of power distance and individualism- collectivism serve as the
variables to explain differences in the management accounting practices, between India and
Australia. The two countries’ scores on these two dimensions, indicate that Indians tend to
view themselves in collective rather than individualistic terms and also exhibit the existence
of a hierarchical order type for power distance. The two dimensions have many consequences
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
93
with regard to management practices in each country. Both the dimensions affect the type of
leadership (Hofstede and Bond, 1988). Large power distances are associated with greater
centralization and benevolent autocrat (or good father) leadership. Indians tend to have a
relatively high need to avoid uncertainty, which means that they try to avoid risk.
However, Hofstede and Bond (1988) argued that uncertainty avoidance might not be a
relevant cultural subdimension with Asian societies. Instead they suggested that the dimension of confucism/dynamism is a more relevant factor. In fact, the postconfucian hypothesis
has been proposed to explain the economic success of some Asian countries (Kahn 1979).
A significant difference can be noted in the scores on this count between India and
Australia. Indian societies believe in long term orientation whereas, Australian societies’
outlook is short term oriented. Indians are considered as having perseverance toward
achieving gradual results, a willingness to subordinate personal interests to achieve purpose,
a concern for virtuous approach to life. A respect for their tradition impedes innovation.
Since Indians have a long history of their heritage, it takes a longer time for them to change
their societal values and practices. Therefore, in the context of the newly emerging management accounting techniques, it can be hypothesized that Indian companies are more likely
to be late adopters rather than early adopters when compared to Australian companies.
4. Research methodology
The study was conducted using a questionnaire survey. The sample of companies selected
for this study was taken from the Center for Monitoring Indian Economy’s (CMIE) list of
500 companies. A list was prepared of all manufacturing companies whose sales turnover
was more than US$25 million in 1995–96 and whose head offices were located in four
metropolitan cities, namely, Mumbai, Delhi, Calcutta and Chennai (Madras). Two hundred
and forty six (246) companies were selected for the present study based on their sales
turnover in 1995–96. The list of companies selected represents different industry sectors,
such as textiles, heavy engineering, soft drinks, automobiles, chemicals, pharmaceuticals,
petroleum and refinery, food and beverage, steel and aluminum, cement, electronics, fertilizers, metals, pulp and papers.
The study design was modeled after the survey of Chenhall and Smith (1998) and Miller
et al. (1992) who included approximately 42 management accounting practices in the survey
instrument. The present survey included 45 management accounting practices/techniques.
Pilot tests were conducted with four companies in Mumbai. Based on the feedback, the
questionnaire was revised. In the first phase of the study, an eleven-page questionnaire, with
a cover letter and a self-addressed envelope, was mailed to each company’s General
Manager/Vice-president/Management Accountant/Head of Accounting and Finance in June
1998. The respondents were given six weeks to return the questionnaire. Reminders were
sent two weeks after the initial mailing. The questionnaire comprised two parts. Part A
consisted of a number of questions about the general characteristics of the respondents’
companies. The questions concerned sales turnover, assets, employee strength, industry,
parent/subsidiary relationships (if any), breakdown of plant costs and methods for allocation
of manufacturing overheads. Part B consisted of questions relating to the adoption, benefits
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Table 2
Respondent type and size of the sample companies
Respondents who completed the
questionnaires
Frequency
% of total
Size2
Frequency
% of total
Accounting and finance managers
Non-accounting managers*
Total
44
16
60
73.3%
26.7%
100%
Large
Medium
Total
39
21
60
65%
35%
100%
* Non-accounting managers include production manager, design engineer, plant manager, marketing manager,
General manager (operations) etc. The median (US$56 milion) of total assets was used to classify companies into
large and medium groups (see footnote).
derived from, and future priority for, management accounting practices. In other words,
respondents were asked to indicate whether their companies had adopted each management
accounting practice, and then for those who had adopted each management accounting
practice, to assess the benefits gained over the past three years. Respondents were also asked
the degree of emphasis that their companies would give to each practice over the next three
years. The adoption rate was measured using a rating scale anchored (3) high adoption to (1)
low adoption. The benefits gained were measured on a Likert-type scale ranging from (7)
high benefits to (1) no benefits. Similarly, the degree of emphasis that would be given by
respondent companies was measured on a Like-type scale ranging from (7) high emphasis to
(1) no emphasis.
5. Results
Sixty four of the 246 questionnaires were returned since the four questionnaires were
incomplete, there were 60 usable questionnaires, resulting in a useable response rate of
24.4%. Although the response rate was 26.1%, the usable rate was 24.4%. Information about
the respondents is presented in Table 2.
Table 2 shows that majority of the respondents who completed the questionnaires were
from accounting, costing and finance departments and the rest were from manufacturing and
other functional departments. In more than half of the cases, it was the head of the
department who gave the response. The average length of experience was 14.2 years. They
had been in their present position in the company, an average of 8.2 years.
Total assets measured the size of the sampled companies and they were further grouped
into large and medium categories based on the median of their total assets.3
5.1. Type of manufacturing processes, level of automation and cost structure
Data on production processes and level of automation of all the sampled companies were
also investigated (Table 3). Table 3 indicates that generally, batch production is applied as
the primary production method used in many companies included in the sample, followed by
the continuous production method. Furthermore, it should be noted that in less than half of
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95
Table 3
Production methods and level of automation
Production method
Frequency
% of total
respondents
Level of automation
(in %)
Frequency
% of total
respondents
Batch
Continuous flow
Paced assembly
Job shop
Total
25
16
11
8
60
41.7%
26.7%
18.3%
13.3%
100.0%
Manual
⬍33%
33–66%
⬎66%
Total
—
16
29
15
60
—
26.7%
48.3%
25.0%
100.0%
the companies’ surveyed, manufacturing process was automated in the range of 33% to 66%.
Moreover, in one-fourth of surveyed companies, the manufacturing process was automated,
over 66%. None of the companies had a complete 100% manual system. This clearly
indicates that the pace of automation that has been taking place in Indian manufacturing
industries is indeed significant.
Table 4 shows the cost structure of the sampled companies. Material cost was the largest
cost item, since the study deals expressly with manufacturing units. Even though, the
proportion of direct labor cost seems somewhat smaller than is assumed in the traditionally
cost accounting literature, it has not dropped below 10%, in Indian manufacturing companies, as proponents of new management accounting techniques tend to claim (e.g., Kaplan,
1993). These observations indicate that no dramatic change has taken place in the cost
structure of the Indian manufacturing companies.
With regard to the question of allocating manufacturing overhead, it is to be noted (Table
4) that the majority of the sampled companies used departmental (multiple) rates and others
used plant-wide single rates. Among the large and medium size companies, no significant
difference was observed in the methods of allocating manufacturing overhead to products
(Mann -Whitney, p ⬎ 0.05). This indicates that the majority of the Indian manufacturing
companies, irrespective of their size, generally use multiple rates in allocating of manufacturing overheads.
The findings are also compared to Australian practices (Chenhall & Smith, 1998) by
comparing the mean scores for each practice and then using the t test. Furthermore, for
discussion purposes, the adoption rate, benefits derived, and future emphasis are classified
into high, moderate and low categories, based on percentile analysis.
Table 4
Product cost structure and overhead allocation for all sample companies
Cost element
Mean
Minimum
Maximum
Overhead allocation methods
Direct materials
Direct labor
Overheads
Total
59%
16%
25%
100%
41%
10%
12%
—
86%
32%
39%
—
Departmental (multiple rates)
Plant-wide single rate
Total
Frequency
65%*
35%
100%
* Forty eight percent of companies used direct labor hours along with direct materials cost. More than thirty
four percent of companies used machine hours in combination with other rates e.g., product group overhead rate.
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5.2. Adoption rate
Table 5 presents the results of the adoption of traditional and newly developed management accounting techniques, by the Indian manufacturing companies and the adoption
practices are compared with Australian practices. For the purpose of detailed discussion, the
items were divided into three broad groups namely high adoption, moderate adoption, and
low adoption. It is clear from Table 5 that 8 items are classified as relatively high adoption,
the next 6 as relatively moderate adoption, and the remaining 31 items as relatively low
adoption. It can be seen that the Indian manufacturing companies had adopted budget and
performance- related management accounting techniques as high adoption, which are basically traditional management accounting practices. There is a relatively low adoption rate in
respect of modern or recently developed management accounting practices.
The highly ranked practices adopted are: (1) budgeting to plan day-to-day operations; (2)
budgeting for cash flow: (3) performance evaluation: ROI; (4) performance evaluation:
budget variance analysis; (5) performance evaluation: division profit; (6) budgeting for
coordinating activities across business units; (7) budgeting for controlling costs, and (8)
budgeting for planning financial position. When comparing these findings with those of the
Australian study, a similar trend emerged in the management accounting practices, except
that formal strategic planning and long range planning were accorded high ranking by
Australian companies. These techniques were found in the low adoption category in the
present study. Additionally, capital budgeting tools (ranked 2), benchmarking of operational
processes (ranked 6), and benchmarking of strategic priorities (ranked 8) were included in the
high adoption category in Australian study, but the same items were included in the moderate
and low adoption categories in the case of India.
The present study found that there were a good number of companies which prepared
strategic formal planning (63%) and long range forecasting (58%). Though the two techniques were included in the low adoption category, they were ranked somewhat higher than
many other techniques. One explanation for this low adoption can be that as a group, Indians
tolerates uncertainty well and they don’t invest in uncertainty avoidance mechanisms. As
such, Anderson and Lanen (1999) argued that since long range planning is meant to reduce
uncertainty, we might expect to find lower use of formalization of this practice among the
Indian firms.
Furthermore, performance evaluations based on financial measures were still relied upon
heavily by Indian companies and less reliance on the use of nonfinancial measures. Andersen
and Lanen (1999) also found, by and large, similar conclusion. On-going suppliers’ evaluation (ranked 5), customer satisfaction surveys (ranked 9) were found in the moderate
adoption category. This finding supports the study finding by Anderson and Lanen (1999)
that customer satisfaction and on-time delivery as well as suppliers’ evaluation gained most
in popularity between 1991 and 1996. For Australia, ongoing supplier’s’ evaluation and
customers’ satisfaction surveys were also found in the moderate category of adoption. Other
measures for example, team performance, employees’ attitudes, balance scorecard and so
forth were included in low adoption category. When compared with those of the Australian
practices, the nonfinancial measures in India were included either in high or moderate
adoption categories.
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
97
Table 5
Adoption of management accounting practices by Indian and Australian companies: a comparison
Techniques/practices
India
High Adoption:
% Adoption
Australia
Budgeting to plan day-to-day operations
Performance evaluation: return on investment
Performance evaluation: budget variance analysis
Performance evaluation: divisional profit
Budgeting for planning cash flows
Budgeting for coordinating activities across
business units
Budgeting for controlling costs
Budgeting for planning financial position
Moderate Adoption:
Performance evaluation: ongoing suppliers evaluations
Capital budgeting tools
Performance evaluation: controlling profit
Product profitability analysis
Performance evaluation: customer satisfaction surveys
Performance evaluation: cash flow return on
investment
Low Adoption:
Performance evaluation: team performance
Benchmarking for operational processes
Cost-volume-profit analysis
Formal strategic planning
Long range forecasting
Strategic plans developed separate from budgets
Performance evaluation: non-financial measures
Product costing: variable costing
Product costing: absorption costing
Product life cycle analysis
Performance evaluation: residual income
Performance evaluation: balanced scorecard
Benchmarking with the wider organization
Operational research techniques
Performance evaluation: qualitative measures
Strategic plans developed with budgets
Target costing
Benchmarking with outside organizations
Benchmarking of product characteristics
Benchmarking of management processes
Value chain analysis
Budgeting for compensating managers
Benchmarking of strategic priorities
Performance evaluation: employees attitudes
Shareholders value analysis
Activity based costing
Activity based management
Activity based budgeting
Standard costing
Back flush costing
Zero base budgeting
100%
100%
100%
100%
95%
95%
1
1
1
1
2
2
60
60
60
60
57
57
99%
96%
95%
90%
99%
94%
93%
91%
3
4
56
55
99%
100%
88%
85%
83%
82%
80%
80%
5
6
7
8
9
9
53
51
50
49
48
48
86%
99%
89%
89%
88%
84%
14
2
10
10
11
14
MA
HA
MA
MA
MA
MA
67
77
69
69
69
66
70%
65%
65%
63%
58%
53%
53%
52%
50%
45%
43%
40%
38%
38%
37%
37%
35%
32%
32%
30%
25%
25%
23%
22%
20%
20%
13%
7%
68%
15%
5%
10
11
11
12
13
14
14
15
16
17
18
19
20
20
21
21
22
23
23
24
25
25
26
27
28
28
29
30
—
—
—
42
39
39
38
35
32
32
31
30
27
26
24
23
23
22
22
21
19
19
18
15
15
14
13
12
12
8
4
41
9
3
87%
93%
88%
91%
90%
70%
92%
76%
80%
70%
60%
88%
84%
55%
87%
87%
38%
77%
87%
91%
49%
86%
91%
88%
64%
56%
68%
78%
—
—
—
12
6
11
8
9
20
7
19
16
20
23
11
15
25
12
12
27
18
12
8
26
13
8
11
22
24
21
17
—
—
—
MA
HA
MA
HA
HA
LA
HA
LA
MA
LA
LA
MA
MA
LA
MA
MA
LA
LA
MA
HA
LA
MA
HA
MA
LA
LA
LA
LA
—
—
—
68
73
69
71
70
55
72
59
62
55
45
69
66
43
68
68
30
60
69
71
38
67
71
69
50
44
53
61
—
—
—
Rank
* HA ⫽ high adoption; MA ⫽ moderate adoption; LA ⫽ low adoption.
N
% Adoption
Rank
2
3
4
9
2
5
HA*
HA
HA
HA
HA
HA
2 HA
1 HA
N
77
75
74
70
77
73
77
78
98
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
There has been a lot of criticism in the US on the use of ROI based performance
evaluation. ROI is oriented towards stockholders and it is believed that ROI leads managers
to place excessive emphasis on short-term profitability, which in turn reduces R & D costs.
Indian companies rely heavily on ROI and budget based variance analysis for organizational
and divisional performance as all companies had adopted them (ranked 1). Similar situation
seems to be for the Australian manufacturing companies. Sixty eight percentage of Indian
companies used standard costing for budgeting and cost control purposes.
In recent years, an increased attention has been devoted to the discussions of operations
research techniques in management accounting. It can be noted that only 38% companies in
India adopted operations research techniques compared to those of the Australian companies
(55%).
One noteworthy feature of the analysis is that in those companies where new techniques
are being introduced, it seems that it is done by way of an integrated process. New techniques
of analyzing and presenting information are gradually introduced to supplement the existing
practices and methods and abandonment of the traditional techniques is slow on the introduction of the new techniques. Consequently, traditional techniques of management accounting still heavily dominate the Indian companies.
In the present study, the survey responses showed that, on an average, less than 30% of
companies had adopted these strategic oriented techniques compared to 50% of companies
in case of Australia. In Indian context, the percentage of companies adopted these techniques
include balanced scorecard (40%), target costing (35%), value chain analysis (25%), shareholders’ value analysis (20%), ABC (20%), Back flush costing (15%), ABM (13%), and
ABB (7%).
Deregulation of manufacturing industries, dropping protection policies, entrance of multinational companies, globalization of Indian business and so forth has been a very recent
phenomenon in India. Such changes bring new challenges and uncertainty in the working
environments of Indian companies. The conservative attitudes of Indian management towards new changes and challenges may be the factors explaining for the low adoption of the
new management accounting techniques. Many Indian companies believe that it is quite
expensive to adopt the new management accounting techniques particularly, for benchmarking. Lack of training and expertise in these areas are other possible reasons. Furthermore,
Gandhi’s philosophy of ‘swadeshi’ (self-reliance or one’s own country) still dominates the
minds of many Indian managers in which they are reluctant to subscribe to foreign ideas, to
buy foreign goods and resources. Thus, Indian companies still believe that the traditional
management accounting techniques are important as can be seen later from the benefits
derived from these techniques. Several companies believed that standard costing is the
answer to many cost management problems as 68% companies had adopted standard costing.
Results of significance differences between large and medium size companies are presented in Table 6. In the present study, an analysis by size shows that large size companies
do have the tendency to use newly developed management accounting practices more than
medium size companies. The size criteria were determined based on the median value of total
assets. This resulted in large companies being defined as greater than US$56 million and less
than US$56 million as medium size companies, using the total asset criterion. Thirty-nine
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
99
Table 6
Results of t-test for large and medium size companies in adopting new management accounting techniques
Management accounting techniques
T-test
df
Probability
Activity based management
Benchmarking for operational processes
Formal strategic planning
Performance evaluation qualitative measues
Benchmarking of product characteristics
Benchmarking within the wider organization
Value chain analysis
3.00
2.12
2.31
2.43
2.14
1.78
2.09
6
37
36
20
17
21
13
P
P
P
P
P
P
P
⬍
⬍
⬍
⬍
⬍
⬍
⬍
0.05
0.05
0.05
0.05
0.05
0.10
0.05
companies were included in the former category (large size) and 21 companies in the latter
category (medium).
The findings provide convincing evidence of greater usage of newly developed techniques
by large size companies because for the reasons cited earlier. Multinational companies also
have a tendency to adopt ABC, value chain analysis, and benchmarking based on scorecard
at a higher rate than the domestic companies.
5.3. Benefits derived from the management accounting techniques
Table 7 presents data on the benefits derived from the adoption of management accounting
techniques by Indian companies. Mean and standard deviation were computed and each
practice was ranked in the order of higher mean values. The findings then were compared
with those of the Australian study (Chenhall & Smith, 1998). The t test was used to analyze
the differences in mean values for each practice.
Results presented in Table 7 show mixed benefits reported by the respondent companies.
High benefits were identified with budgeting for controlling costs (ranked 1), cost-volumeprofit-analysis (ranked 2), performance evaluation: customers’ satisfaction survey (ranked 3),
target costing (ranked 4), budgeting for planning for cash flows (ranked 5), and performance
evaluation: cash flow ROI (ranked 6), which are traditional management accounting techniques. Most of them had high adoption rates (see Table 6) except a few of them. Anderson
and Lanen (1999) also found that firms reported greater use of standard procedures for
developing budgets and long-range plans and customers’ satisfaction and on-time delivery to
the customers were improved. Furthermore, they found that cost data were presented in more
disaggregate form that were more amenable to analysis and action.
On the other hand, it is to be noted that only the two newly management accounting
techniques namely, target costing (ranked 4) and ABC (ranked 14) which had low adoption
rates, in fact, were providing somewhat higher benefits. It seems that Indian companies have
started understanding that costs should be managed and avoided during the product planning
and development cycle rather than after products have entered full-scale production. That
seems the reason why target costing received second ranking (see Table 8) for the future
emphasis in the next three years.
The t test was computed to compare the differences in means for each of the 42 practices.
A glance at the results reveals that there were significant differences in the mean values in
100
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
Table 7
Results of t-tests of benefits from management accounting techniques
Techniques/practices
India
High Benefits:
Mean SD
Australia
Budgeting for controlling costs
Cost-volume-profit analysis
Performance evaluation: customer satisfaction
surveys
Target costing
Budgeting for planning cash flow
Performance evaluation: cash flow ROI
Formal strategic planning
Product profitability analysis
Strategic plans developed separate from budgets
Performance evaluation: non-financial measues
Product costing: absorption costing
Performance evaluation: divisional profit
Performance evaluation: ongoing suppliers
evaluations
Activity based costing
Strategic plans developed with budgets
Moderate benefits:
Budgeting for coordinating activities across
business units
Budgeting for compensating managers
Long range forecasting
Product costing: variable costing
Performance evaluation: budget variance analysis
Budgeting for planning financial position
Benchmarking of management processes
Budgeting to plan day-to-day operations
Standard costing
Performance evaluation: team performance
Capital budgeting tools
Performance evaluation: return on investment
Benchmarking of strategic priorities
Shareholders value analysis
Activity based management
Low benefits:
Benchmarking with outside organizations
Performance evaluation: qualitative measures
Performance evaluation: controlling profit
Product life cycle analysis
Zero base budgeting
Back flush costing
Benchmarking within the wider organization
Performance evaluation: balanced scorecard
Performance evaluation: employees attitudes
Benchmarking for operational processes
Operational research techniques
Performance evaluation: residual income
Benchmarking of product characteristids
Activity based budgeting
Value chain analysis
5.72
5.53
5.43
1.30
1.10
1.36
1
2
3
5.25
5.24
5.22
5.19
5.13
5.06
5.05
4.86
4.81
4.79
0.93
1.78
1.46
1.32
1.31
1.07
1.49
1.17
1.36
1.04
4
5
6
7
8
9
10
11
12
13
4.71
4.70
1.80 14
1.70 15
8 3.23
22 4.83
1.86 36 LB
1.56 6 HB
44 2.128*
68 0.318
4.68
1.32 16
57 4.31
1.31 16 MB
73 1.584
4.66
4.54
4.47
4.43
4.43
4.42
4.38
4.37
4.35
4.34
4.33
4.33
4.27
4.25
0.85
0.93
1.47
1.12
1.41
0.82
1.54
1.25
1.06
0.94
1.30
0.83
1.30
0.71
17
18
19
20
20
21
22
23
24
25
26
26
27
28
15
35
31
60
55
18
60
41
42
51
60
14
12
8
4.17
4.04
4.18
5.11
4.83
3.90
4.21
—
3.99
4.87
5.18
3.66
3.38
3.02
1.63
1.46
1.49
1.48
1.56
1.58
1.73
—
1.44
1.61
1.45
1.62
1.74
1.46
23 MB
26 MB
21 MB
3 HB
7 HB
29 MB
19 MB
—
28 MB
5 HB
2 HB
33 LB
37 LB
42 LB
67
70
59
74
78
71
77
—
68
77
75
71
50
53
1.653
2.130*
0.986
3.022*
0.771
1.933*
0.612
—
1.506
2.349*
3.526*
2.627*
3.216*
3.829
4.18
4.18
4.07
4.04
4.01
3.76
3.73
3.56
3.51
3.37
3.30
3.11
3.04
2.50
2.38
1.07
1.06
1.73
1.67
0.89
1.56
0.88
0.85
1.45
1.34
1.81
1.75
1.53
1.29
1.69
29
29
30
31
32
33
34
35
36
37
38
39
40
41
42
19
22
50
27
3
9
23
24
13
39
23
26
19
4
15
3.61
4.09
4.75
3.16
—
—
3.74
4.17
3.65
4.09
3.20
4.21
4.02
3.58
3.17
1.53
1.39
1.40
1.39
—
—
1.40
1.52
1.52
1.49
1.52
1.53
1.53
1.55
1.27
35 lb
24 MB
8 HB
41 LB
—
—
32 LB
22 MB
34 LB
25 MB
39 LB
20 MB
27 MB
38 LB
40 LB
60
68
69
55
—
—
66
69
69
73
43
45
69
61
38
1.809
0.319
2.297*
2.367*
—
—
0.039
2.421*
0.316
2.604*
0.225
2.670*
2.472*
2.218*
1.637
rank N
Mean SD
Rank
N
t-test
56 5.26
42 3.79
48 4.49
1.28 1 HB*** 77 1.960*
1.46 31 LB
67 7.073*
1.56 11 HB
69 3.481*
21
57
48
38
49
32
32
30
60
53
1.73
1.40
1.38
1.21
1.42
1.69
1.51
1.76
1.50
1.59
3.85
4.40
4.31
4.55
4.32
4.37
4.35
4.69
5.06
4.26
30 LB
12 HB
17 MB
10 HB
15 HB
13 HB
14 HB
9 HB
4 HB
18 MB
30
77
66
71
69
55
72
62
70
67
1.065
2.953*
3.364*
2.490*
3.201*
2.664*
2.204*
0.539
0.997
2.199*
* indicates significant at 0.05 level; ** indicates significant at 0.10 level; *** HB ⫽ high benefits; MB ⫽
moderate benefits; LB ⫽ low benefits
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
101
Table 8
Management accounting practices: future emphasis
Techniques/practices
High Emphasis:
Budgeting for planning cash flows
Target costing
Budgeting for planning financial position
Product profitability analysis
Product costing: variable costing
Performance evaluation: return on investment
Performance evaluation: divisional profit
Budgeting for controlling costs
Performance evaluation: budget variance analysis
Budgeting to plan day-to-day operations
Shareholders value analysis
Performance evaluation: qualitative measures
Cost-volume-profit analysis
Performance evaluation: cash flow return on
investment
Benchmarking with the wider organization
Budgeting for compensating managers
Product life cycle analysis
Capital budgeting tools
Moderate Emphasis:
Performance evaluation: ongoing suppliers’
evaluation
Activity based costing
Performance evaluation: customer satisfaction
surveys
Strategic plans developed separate from budgets
Performance evaluation: non-financial measures
Performance evaluation: balance scorecard
Performance evaluation: team performance
Performance evaluation: controlling profit
Back flush costing
Budgeting for coordinating activities across
business units
Standard costing
Activity based management
Product costing: absorption costing
Value chain analysis
Performance evaluation: residual income
Activity based budgeting
Low Emphasis:
Formal strategic planning
Long range forecasting
Performance evaluation: employees attitudes
Benchmarking of management processes
Benchmarking of product characteristics
Strategic plans developed with budgets
Operational research techniques
Zero base budgeting
Benchmarking for operational processes
Benchmarking of strategic priorities
Benchmarking with outside organizations
* indicates significant at 0.05 level
India
Australia
Mean
SD
Rank
N
Mean
SD
Rank
N
t-test
5.93
5.93
5.90
5.75
5.32
5.31
5.27
5.22
5.21
5.21
5.18
5.17
5.14
5.10
1.68
1.18
1.10
1.00
1.75
1.23
0.96
1.35
1.22
0.79
0.86
1.04
1.25
1.62
1
1
2
3
4
5
6
7
8
8
9
10
11
12
58
39
59
60
44
58
43
54
60
47
46
48
56
53
5.24
3.48
5.41
5.61
4.47
5.60
5.51
5.85
5.49
5.05
4.25
4.78
4.37
4.88
1.25
2.17
1.17
1.11
1.69
1.46
1.50
1.01
1.53
1.34
2.09
1.54
1.46
1.55
10
40
8
3
32
4
5
1
6
17
37
26
35
22
77
30
77
69
59
75
70
77
74
77
50
68
67
66
2.633*
5.593*
2.512*
0.755
2.478*
1.244
1.030
2.909*
1.181
0.837
2.897*
1.631
3.135*
1.023
5.10
5.09
5.03
5.01
0.75
0.72
1.27
1.37
12
13
14
15
36
29
44
60
4.96
4.41
3.67
5.44
1.44
1.74
1.76
1.33
18
33
38
7
66
67
55
77
0.641
2.698*
4.470*
0.593
4.95
0.90
16
60
4.94
1.71
19
67
0.042
4.94
4.93
1.06
1.24
17
18
31
58
4.68
5.17
1.97
1.59
29
12
44
69
0.738
0.956
4.93
4.93
4.87
4.87
4.84
4.81
4.74
1.11
1.29
1.22
1.07
1.15
1.17
1.06
18
18
19
19
20
21
22
44
51
53
56
57
22
58
4.37
4.94
4.83
4.89
5.09
—
5.08
1.79
1.50
1.50
1.56
1.50
—
1.48
34
20
23
21
15
—
16
55
72
69
68
69
—
73
2.382*
0.039
4.69
4.65
4.64
4.63
4.62
4.50
1.70
1.05
1.17
0.87
0.89
0.90
23
24
25
26
27
28
44
17
32
34
27
12
—
4.33
4.80
3.24
3.66
4.63
—
1.80
1.83
1.82
2.10
1.85
—
36
25
42
39
30
—
53
62
38
47
61
—
0.903
4.47
4.43
4.42
4.37
4.23
4.22
4.16
4.15
3.97
3.80
3.74
0.98
0.75
0.83
0.88
0.69
0.96
1.17
1.03
1.18
0.68
1.06
29
30
31
32
33
34
35
36
37
38
39
44
47
53
41
49
37
26
3
44
45
44
5.73
5.21
4.63
5.12
4.69
5.39
3.36
—
5.15
4.81
4.78
1.05
1.37
1.60
1.48
1.56
1.69
1.89
—
1.50
1.62
1.63
2
11
31
14
28
9
41
—
13
24
27
71
70
69
71
69
68
43
—
73
71
60
1.980*
3.479*
0.941
3.363*
0.087
1.059
—
1.531
4.212*
2.742*
0.369
4.756*
2.173*
—
4.738*
4.654*
3.939*
102
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
respect of 28, out of 42 management accounting practices between India and Australia.
However, only in respect of budget related practices, there seems to be some similarities
between the two countries. The reasons for such differences may be attributed due to
differences in cultural values between the two countries as described earlier.
Furthermore, Ueno and Uma (1992) point out that many decisions made by companies
over a period of years have an impact on the long-term growth and success of companies.
Such significant contributions become evident only with the passage of time. The real
benefits from the various performance evaluation techniques may be derived over longer
periods of time. The time horizon for performance evaluation (short vs. long term) is
directly influenced by the individualism-collectivism dimensions and not by the uncertainty avoidance dimension since one cannot predict if one is going to be more effective
performer in the short or long term. Therefore, companies operating in the individualistic
culture would try to evaluate their employees using a short-term time horizon and expect
the benefits from the performance evaluation techniques quickly. Since Australia is very
high on the individualism index, Australian companies would expect benefits from the
performance evaluation techniques in the short run compared to Indian companies
which, being collectivism in nature, would tend to prefer long-term frames for performance evaluation and benefits.
5.4. Future emphasis
The study also investigated the future emphasis placed by the Indian companies for the
next three years in the use of management accounting practices. The results are presented in
Table 8.
The survey respondents perceived budgeting, performance evaluation and financial
measures to be the most important management techniques for the future. Some recently
developed management accounting techniques like, target costing, shareholders’ value
analysis, ABC, and benchmarking with wider organization received somewhat higher
emphasis.
One important aspect of these responses is that the traditional techniques for example,
budgeting for financial planning, budgeting, variance analysis, variable costing, cost-volumeprofit analysis, capital budgeting tools, product profitability analysis will retain their importance in the future also. Surprisingly, respondents gave low ranking to strategic planning and
benchmarking for strategic priorities. Furthermore, using budgets for compensating managers also received high emphasis for the future. This shows that Indian companies have started
realizing that managerial compensation should be linked to the performance factors.
Again a comparison of Indian practices with those of Australian practices showed that
there were tremendous differences in the future emphasis in their practices. The t test shows
statistically significant differences in respect of twenty practices between the two countries.
One striking feature is that these differences are more in respect of the newly developed
management accounting practices like, target costing, ABC, shareholders value analysis,
value chain analysis, and benchmarking.
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
103
Table 9
A comparison of ranking between past benefits and future emphasis of management accounting practices by
Indian companies
Management accounting practices
Increased ranking:
Product costing: variable costing
Variance analysis
Budget planning for financial position
Budgeting for day-to-day operations
Capital budgeting tools
Performance evaluation: ROI
Shareholders value analysis
Performance evaluation: qualitative measures
Performance evaluation: controlling profits
Product life cycle costing
Back flush costing
Benchmarking with wider organization
Performance evaluation: balanced scorecard
Performance evaluation: residual income
Benchmarking of product characteristics
Activity based budgeting
Value chain analysis
Decreased Ranking:
Cost-volume-profit analysis
Customer satisfaction surveys
Formal strategic planning
Performance evaluation: non-financial measures
Product costing: absorption costing
Strategic plans developed within the budgets
Long range forecasting
Benchmarking for managerial processes
Benchmarking for strategic priorities
Benchmarking with outside organization
Relative ranking
Past benefits
Future emphasis
19
20
20
22
25
26
27
29
30
31
33
34
35
39
40
41
42
4
8
2
8
15
5
9
10
20
14
21
12
19
27
33
28
26
2
3
7
10
11
15
18
21
26
29
11
18
29
18
25
34
30
32
38
39
* Derived from Tables 7 and 8 respectively.
5.5. Comparison of rankings of past and future emphasis
An analysis also was done to highlight which management accounting techniques may
have a changed emphasis in the future compared to past. Table 9 depicts those management
accounting practices that had at least a seven-point difference in the ranking between past
benefits (Table 7) and future emphasis (Table 8). The analysis shows those management
accounting practices of the Indian companies where the degree of emphasis is expected to
change in the future.
Table 9 indicates that Indian manufacturing companies will continue to focus on the
traditional management accounting techniques, for example, variable costing, budget for
day-today- operations, capital budgeting tools, ROI based performance evaluation, and
performance evaluation: controlling profits. At the same time, Indian companies will slowly
adopt or refine the newly developed practices in the next three years. The newly developed
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P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
practices which showed an increased ranking include, shareholders’ value analysis, performance evaluation: qualitative measures, product life cycle costing, back flush costing,
activity based budgeting, value chain analysis, benchmarking for product characteristics and
with wider organizations, and performance evaluation: balanced scorecard.
When comparing the findings with those of the Australian study, the differences are very
clear. Australian companies give high emphasis on the newly developed practices and are
usually early adopters of these practices. Indian companies, on the other hand, are slow and
late adopters. Perhaps, this is reflected in their confucious/dynamism cultural subdimension.
Since there is always some element of risk involved in the adoption of any new technique
in terms of its success and failure, Indian management seems to follow a wait and watch
policy. In fact, Indian management has been generally labeled as having a suspicious attitude
towards new ideas and methods. They will adopt new ideas and methods only at the costs of
other organizations where such ideas and methods are successfully applied and positive
results become transparent.
6. Summary and conclusions
This study examined the management accounting practices of Indian manufacturing
companies in terms of adoption, benefits, and future emphasis and compared the results to
the findings of the Chenhall and Smith (1998) study. The following conclusions emerge from
this survey:
1. Across the sample it was found that Indian manufacturing companies adopted most of
the practices reported in the literature. However, Indian companies rely heavily on the
traditional management accounting techniques. The adoption rates of recently developed practices have been rather low and slow. The study reveals that in most of the
cases, higher benefits were derived from the traditional practices compared to the
newly developed practices. A few of the newly developed practices for example, target
costing, customer satisfaction surveys, ABC, product profitability analysis that had low
adoption rates, reported higher benefits. However, there is definitely a signal towards
a shift in their practices. The study supports the view that size has a major influence in
determining the adoption of newly developed practices. Other reasons for this low
adoption are the conservative attitude of Indian management, autocratic leadership, and
long term orientation. Many of the companies have gone into modernization plans only
in last seven and eight years.
2. Indian companies currently place high emphasis on cost control tools, such as budgeting, standard costing, and variance analysis at the production stage. There is some
indication that more and more companies will start placing more emphasis on target
costing. Shareholders’ value analysis and performance evaluation based on qualitative
factors are the other newer techniques in which Indian companies intended to place
greater emphasis in the future.
3. Though there are certain striking similarities between Indian and Australian practices,
particularly with respect to reliance on budgetary and control-related traditional man-
P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
105
agement accounting techniques, statistically significant differences in the adoption of
several practices were found. These differences could be attributed to the differing
cultural values in respect of individualism, power distance and confucious/dynamism
between the two countries.
Thus, the overall conclusion that emerges from this study is that there is a need to find
ways to reduce the lag in diffusion to countries, such as India.
7. Limitations of the study
The findings of this study should be viewed in light of their limitations. The sampling
design of this study restricts generality since only companies listed in CIME publications
were included. The use of a postal survey imposes some restrictions in terms of the nature
and volume of questions and it does not facilitate follow-up questions to explore potentially
interesting areas or apparently inconsistent responses. The possibility of inconsistent interpretation of questions by respondents can never be ruled out.
It is possible that some of the respondents might have provided average or noncommittal
answers because a few of them responded on the neutral range of the scale. More than 73%
of the questionnaires were completed by accounting and finance professionals and the rest by
operating managers. The results, however, are presented on an aggregated basis on a sample
that may not be homogeneous. As the study examined a large number of items, it is possible
that respondents may have misinterpreted some items. Furthermore, the results were derived
from the responses of a majority of accounting managers who are considered as the
implementators rather than direct users. An implementator usually has some political and
emotional stake in the projects that would make it difficult to admit failure. Therefore,
implementators will likely have some biased views in the success of management accounting
techniques and practices.
The nonresponse bias was measured by running a separate analysis on early respondents
and comparing them to the late respondents. Although the latter respondents cannot be
presumed to typify those not responding, the lack of any difference between early and late
respondents led the researcher to conclude that the error due to nonresponse bias was
negligible.
Notes
1. The survey by Anderson and Lanen (1999) consisted of a sample of 30 manufacturing
companies, which were the members of the Academy of Management Excellence
(ACME), Madras, India. However, they received the completed questionnaires from
only 14 companies. It took the respondents about 90 min to complete each questionnaire. Researchers had also made field visits with the responding companies. For
analyzing the results, they classified their respondents into ‘domestic defender’ (well
established firms selling traditional industrial goods), ‘domestic prospector’ (firms
have strong position in market prior to liberalization), ‘international defender’ (firms
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P.L. Joshi / Journal of International Accounting, Auditing & Taxation 10 (2001) 85–109
with opportunities to acquire technologically superior capital equipment and raw
materials from abroad after liberalization), ‘international prospector’ (firms having
opportunities to compete in the world market after liberalization).
2. Shield (1998) argued that the new management accounting practices in Europe and
other nations are spreading due to certain factors for example, increased global
competition, availability of similar operating technologies, cheap and fast communication methods, the increasing global homogenization of management education, the
rise of global consulting firms and global corporations.
3. Companies having total assets of greater than US$56 million were considered large
size and less than US$56 million as medium size companies. For the sample companies
taken together, the average of total assets was US$75 million (minimum US$33
million: maximum US$520 million). Some respondents failed to provide sales turnover
figures, so size based on the sales turnover was not considered.
Acknowlegement
This paper was presented at the International conference on Accounting in the Emerging
Economies, University of Michigan Business School, USA, April, 2000. The author highly
appreciates the comments received from Dr. Shanon Anderson, Dr. William Lanen, Dr.
Michael Sheilds and other conference participants on the paper. Suggestions made by Dr. F.
Michell on the earlier draft of this paper is acknowledged with thanks. Special thanks to the
two anonymous reviewers for their very useful comments and suggestions and to Dr.
Kathleen E. Sinning for editing this paper.
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