Handbook of Management Accounting Research
Volume 2


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Handbook of Management Accounting Research
Volume 2

Edited by
CHRISTOPHER S. CHAPMAN
University of Oxford, UK

ANTHONY G. HOPWOOD
University of Oxford, UK

MICHAEL D. SHIELDS
Michigan State University, USA

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ISBN-13:
ISBN-10:
ISBN-13:
ISBN-10:

978-0-08-044754-4 (Volume 2)
0-08-044754-6 (Volume 2)
978-0-08-045340-8 (Volumes 1+2)
0-08-045340-6 (Volumes 1+2)

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Contents

Contributors to Volume 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ix

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

xi

MANAGEMENT ACCOUNTING PRACTICES
1.

2.

3.

4.

5.

6.

7.

8.

9.


Managing Costs and Cost Structure throughout the Value Chain: Research on
Strategic Cost Management
Shannon W. Anderson . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

481

Target Costing: Uncharted Research Territory
Shahid Ansari, Jan Bell and Hiroshi Okano . . . . . . . . . . . . . . . . . . . . . . . .

507

Cost and Profit Driver Research
Rajiv D. Banker and Holly Hanson Johnston . . . . . . . . . . . . . . . . . . . . . . .

531

Analytical Modeling of Cost in Management Accounting Research
John Christensen and Thomas Hemmer . . . . . . . . . . . . . . . . . . . . . . . . . . .

557

Transfer Pricing: The Implications of Fiscal Compliance
Martine Cools and Clive Emmanuel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

573

Budgeting Research: Three Theoretical Perspectives and Criteria for Selective
Integration
Mark Covaleski, John H. Evans III, Joan Luft and Michael D. Shields. . . . .


587

Management Control of the Complex Organization: Relationships between
Management Accounting and Information Technology
Niels Dechow, Markus Granlund and Jan Mouritsen. . . . . . . . . . . . . . . . . .

625

A Review of Activity-Based Costing: Technique, Implementation, and
Consequences
Maurice Gosselin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

641

An Economic Perspective on Transfer Pricing
Robert F. Go¨x and Ulf Schiller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

673
v


vi
10.

11.

12.

13.


A Review of the Literature on Capital Budgeting and Investment Appraisal: Past,
Present, and Future Musings
Susan F. Haka . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

697

Management Accounting and Operations Management: Understanding the
Challenges from Integrated Manufacturing
Allan Hansen and Jan Mouritsen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

729

A Review of Quantitative Research in Management Control Systems and
Strategy
Kim Langfield-Smith. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

753

A Review of the Literature on Control and Accountability
Kenneth A. Merchant and David T. Otley . . . . . . . . . . . . . . . . . . . . . . . . .

785

MANAGEMENT ACCOUNTING PRACTICE CONTENTS
14.

15.

16.


17.

Accounting and Control in Health Care: Behavioural, Organisational, Sociological
and Critical Perspectives
Margaret A. Abernethy, Wai Fong Chua, Jennifer Grafton and
Habib Mahama . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

805

Management Accounting in the Manufacturing Sector: Managing Costs at the
Design and Production Stages
Tony Davila and Marc Wouters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

831

Management Accounting and Control in Health Care: An Economics
Perspective
Leslie Eldenburg and Ranjani Krishnan . . . . . . . . . . . . . . . . . . . . . . . . . . .

859

Accounting in an Interorganizational Setting
Ha˚kan Ha˚kansson and Johnny Lind . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

885

MANAGEMENT ACCOUNTING AROUND THE WORLD
18.

19.


20.

21.

The History of Management Accounting in France, Italy, Portugal, and Spain
Salvador Carmona . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

905

Management Accounting Practices in the People’s Republic of China
Chee W. Chow, Rong-Ruey Duh and Jason Zezhong Xiao . . . . . . . . . . . . .

923

The Development of Cost and Management Accounting in Britain
Trevor Boyns and John Richard Edwards . . . . . . . . . . . . . . . . . . . . . . . . . .

969

Management Accounting Theory and Practice in German-Speaking Countries
Ralf Ewert and Alfred Wagenhofer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1035


vii
22.

23.


24.

The History of Management Accounting in the U.S.
Richard Fleischman and Thomas Tyson . . . . . . . . . . . . . . . . . . . . . . . . . . .

1071

Development of Cost and Management Accounting Ideas in the Nordic Countries
Salme Na¨si and Carsten Rohde . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1091

A History of Japanese Management Accounting
Hiroshi Okano and Tomo Suzuki. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1119

Author Index for Volumes 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1139
Subject Index for Volumes 1 and 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1185


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Contributors to Volume 2
Margaret A. Abernethy
Shannon W. Anderson
Shahid Ansari
Rajiv D. Banker

Jan Bell
Trevor Boyns
Salvador Carmona
Chee W. Chow
John Christensen
Wai Fong Chua
Martine Cools
Mark Covaleski
Tony Davila
Niels Dechow
Rong-Ruey Duh
John Richard Edwards
Leslie Eldenburg
Clive Emmanuel
John H. Evans III
Ralf Ewert
Richard Fleischman
Maurice Gosselin
Robert F. Go¨x
Jennifer Grafton

Markus Granlund
Susan F. Haka
Ha˚kan Ha˚kansson
Allan Hansen
Thomas Hemmer
Holly Hanson Johnston
Ranjani Krishnan
Kim Langfield-Smith
Johnny Lind

Joan Luft
Habib Mahama
Kenneth A. Merchant
Jan Mouritsen
Salme Na¨si
Hiroshi Okano
David T. Otley
Carsten Rohde
Ulf Schiller
Michael D. Shields
Tomo Suzuki
Thomas Tyson
Alfred Wagenhofer
Marc Wouters
Jason Zezhong Xiao

ix


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Preface
Researching the practice of management accounting is challenging and interesting, because management
accounting is a set of practices that are often loosely coupled to one another and varying across both time and
space. A variety of ways of researching management accounting practice also have emerged, changed over
time, and have been diffused unevenly around the world. Even management accounting terminology is neither
uniform nor constant, with the term ‘‘management accounting’’ itself seemingly appearing in the 1930s and
1940s in America after many of the individual practices had already emerged.
Focussing on facilitating economic decision-making and the wider planning and control of organizations,

the practices of management accounting have tended to have separate trajectories of development and modes
of organizational functioning, thus making management accounting a loosely coupled set of fragmented
practices. Costing and its various derivatives, capital and operational budgeting, internal financial (and increasingly non-financial) performance measurement, transfer pricing between the subunits of an organization,
and organization-wide financial planning and control systems can all be subsumed under the mantel of
management accounting, although what practices are considered to be management accounting and, indeed,
what other fields management accounting is considered to be related to varies around the world. In Sweden,
for instance, budgeting is considered as a component of general management rather than accounting, and
certainly in Japan and in some countries of Continental Europe, cost accounting is considered as having more
to do with engineering than a more narrowly conceived accounting. Indeed, cost engineering is a recognized
term in Japan. However, although until now these separate management accounting practices have often been
loosely coupled, developments in information systems may be requiring and enabling a much greater degree of
integration with other practices in and between organizations. Costing systems are increasingly a part of
enterprise-wide planning and control systems. Budgeting, in turn, is increasingly a part of strategic and
operational planning, thereby becoming a component in a wider complex of systems and practices geared to
organizational coordination and development. Similarly, performance measurement increasingly is being expanded to include non-financial measures and integrated with strategy. But interestingly, such trends, in turn,
often stimulate the development of more ad-hoc local elaborations of these practices as employees at a variety
of organizational levels seek to relate their own information needs to their local circumstances and requirements. So paradoxically, processes of integration can set into motion counter processes of disintegration and
fragmentation. In this way, management accounting can take on a variety of forms and produce different
information as decision contexts, organizational assumptions, and time horizons that change in time and
space. More informal information flows attuned to a variety of information needs can reside alongside the
structures of more centralized and standardized management accounting practices.
These developments may be part of a much more general diffusion of economic calculation throughout
organizations. What might in some countries have been the preserve of the accountant is increasingly becoming a significant part of the functioning of the marketing manager, the operations manager, the research
manger, those responsible for strategy, for product design, and so on. Management accounting is in the
process of becoming a much more dispersed practice because in organizations today economic information
and calculation appear to be permeating all of their key management processes.
Faced with such changes and developments, it is hardly surprising that there is an interest in the state of
systematic knowledge in the field of management accounting and in the research processes that develop this
knowledge. To satisfy that interest is the aim of the Handbook of Management Accounting Research.
Systematic enquiries into what is now known as management accounting have a long history, particularly in

Continental Europe, but by research as we now know it is largely the product of the twentieth century,
particularly the latter half of it. Key pioneering enquiries were made as part of the development of economic
theories of cost accounting and controllorship in Austria, Germany, and Italy in the earlier part of the
twentieth century, and the school of costing associated with the London School of Economics in the 1930s was
particularly influential. In the USA there were related attempts to explore the nature of cost accounting and
xi


xii
controllorship practice from an economic perspective, not least with respect to understanding the design and
functioning of costing in a regulatory context. However, it was largely with the growth of research-oriented
business schools and departments of business administration in the 1960s that management accounting research received its greatest impetus.
Varying by country and changing over time, the business school and related departmental arrangements
provided an interdisciplinary setting for the systematic analysis of management accounting. Economics and
quantitative analysis provided the most influential initial frameworks for doing this but over time other
disciplines represented in these academic settings were also drawn upon to investigate the nature and functioning of management accounting in organizations. In the USA, psychology was initially the most influential
but organization theory also came to play a role. In Australia and Europe organizational and sociological
approaches have been more prevalent, providing a basis for exploring ways in which management accounting
relates to wider organizational designs and influences and shapes wider cultural and social forces.
After two initial chapters in Volume 1 of the Handbook which provide a bibliographic and a substantive
review of the management accounting research literature, the next several chapters review research on management accounting practices that are motivated by or viewed from the lens of various theoretical perspectives.
Detailed discussions are given in the ways in which theories from economics, history, organizational studies,
psychology, and sociology have analysed and influenced management accounting research and our understanding of management accounting practices. Within economics, separate consideration is given to the
influential role played by agency theoretic perspectives in recent times. Recognizing the wide array of perspectives available within organization theory, separate analyses are provided of contingency theories of
management accounting and control systems and more recent attempts to understand the functioning of
management accounting in organizations as a form of practice. At the sociological level, a separate discussion
of critical theorizing is included.
The remainder of Volume 1 of the Handbook is devoted to a consideration of different research methods
used in management accounting research. Detailed attention is given to qualitative and quantitative research
approaches, cross-country comparative research, and interventionist research. Other chapters provide focussed discussions of analytical modelling, archival research, experimental research, and survey methods.

The chapters in Volume 2 provide insights into research on different management accounting practices.
These practices include costing, such as activity-based costing, managing costs, and target costing, as well as
practices related to organizational planning and control, including financial accountability, budgeting, transfer
pricing, and performance measurement. Chapters in Volume 2 also review particular issues associated with the
design and functioning of management accounting in the special contexts of health-care and manufacturing
organizations. Although obviously far from comprehensive, these latter reviews nevertheless serve to alert us
to the importance of designing and operating information systems in particular organizational contexts. Their
partiality also reflects the limits of existing research in the area. There is a paucity of research which addresses
the specialized needs of many important sectors of the economy including retail, the service sector, media and
communications industries, and so on. A further chapter in this section of the Handbook addresses research
issues associated with the functioning of management accounting in interorganizational contexts, an increasingly important topic now that there is a much more active management of supply chains.
Volume 2 of the Handbook concludes with a review of research on how management accounting practice
and research varies around the world. Once again this is far from comprehensive, the gaps largely reflecting the
limitations of existing research and literatures. Be that as it may, consideration is given to management
accounting in many countries: China, Europe (Britain, Germanic, Nordic, and Latin), Japan, and the USA.
Taken as a whole, the two volumes of this Handbook identify the enormous scale and scope of management
accounting research. A great deal has been achieved. The task of researching management accounting practices nevertheless remains challenging and interesting. Many of the chapters conclude with agendas for future
research. Research on management accounting practice is a moving target as its economic, organizational, and
societal contexts continues to change across space and time. New sectors emerge with new information
challenges. Organizational designs and strategies continue to be modified. Technical advances in information
processing provide the ever new possibilities. Regulatory agencies demand different flows of information, in
different ways with different timings. Management accounting practice is increasingly dynamic, with its
knowledge bases changing and seemingly remaining ever incomplete. The need for research on management
accounting practices will certainly remain and continue to be challenging and interesting.


xiii
In conclusion, we would like to thank the many researchers and chapter authors who have made this
Handbook possible. These authors have put in an enormous amount of work despite having to operate to very
tight time deadlines. We would also like to thank Takamasa Fujioka for all his help in producing the

manuscript. Finally, we gratefully acknowledge the support provided by Elsevier and particularly by Sammye
Haigh and Mary Malin.
Christopher S. Chapman
University of Oxford
Anthony G. Hopwood
University of Oxford
Michael D. Shields
Michigan State University


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Management Accounting Practices


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Handbook of Management Accounting Research
Edited by Christopher S. Chapman, Anthony G. Hopwood and Michael D. Shields
r 2007 Elsevier Ltd. All rights reserved

Managing Costs and Cost Structure throughout the
Value Chain: Research on Strategic Cost Management
Shannon W. Anderson1,2
1

Jesse H. Jones Graduate School of Management, Rice University, USA
Department of Accounting and Business Information Systems, University of Melbourne, Australia


2

Abstract: Strategic cost management is deliberate decision making aimed at aligning the firm’s
cost structure with its strategy and optimizing the enactment of the strategy. Alignment and
optimization must comprehend the full value chain and all stakeholders to ensure long-run
sustainable profits for the firm. Strategic cost management takes two forms: structural cost
management, which employs tools of organizational design, product design, and process design
to build a cost structure that is coherent with strategy; and executional cost management, which
employs various measurement and analysis tools (e.g., variance analysis and analysis of cost
drivers) to evaluate cost performance. In this chapter, I develop a model that relates strategic
cost management to strategy development and performance evaluation. I argue that although
management accounting research has advanced our understanding of executional cost management, other management fields have done more to advance our understanding of structural
cost management. I review research in a variety of management fields to illustrate this point. I
conclude by proposing that management accounting researchers are uniquely qualified to create
a body of strategic cost management knowledge that unifies structural and executional cost
management.

1. Introduction
The headlines of the business press are replete with
news of firms’ cost management activities. Some are
trimming the workforce or renegotiating wages and
benefits. Others are re-engineering processes to use a
more economical mix of inputs or to produce a more
valued output. Still others are outsourcing work,
forming strategic alliances, and partnering with customers and suppliers. What is unclear is whether this
frenzy of cost management is guided by strategic intent and if it is, whether it is indicative of best practice
in orchestrating organizational change.
In the popular press, ‘‘cost management’’ is often a
euphemism for cost cutting, a common response

when managers realize that the firm has ceased to be
a sustainable profitable concern. However, managers’
reluctance to act when uncertainty remains about the
source or permanence of problems or when cost cutting is associated with adjustment costs (e.g., severance payments, job redesign, capacity rebalancing)
may cause costs to exhibit a ‘‘sticky’’ relationship
DOI: 10.1016/S1751-3243(06)02001-3

compared with business activity (Anderson et al.,
2003; Balakrishnan et al., 2004; Noreen & Soderstrom, 1997). That is, costs decrease less with declines
in activity than they increase with increases in
activity,1 thus:
In contrast to the commonly received model of fixed
and variable costs, our results are consistent with an
alternative model of cost behavior that recognizes the
role of managers in adjusting committed resources to
changes in activity-based demands for those resourcesy sticky cost behavior reveals deliberate decision making by managers who weigh the economic
1
Anderson et al. (2003) find this asymmetric relation between SG&A costs and revenues for a sample of more than
7,500 firms over a 20-yr period. Cross-sectional differences
in the degree of stickiness are related to firm-specific measures of revenue uncertainty and adjustment costs. Although
they interpret their findings as being consistent with deliberate actions of managers, they do not measure management
action directly.

481


Shannon W. Anderson
consequences of their actions (Anderson et al., 2003,
pp. 61–62, emphasis added)


In sum, management matters; the production function and the related cost function that characterize
the firm are not adequately specified without considering managers’ motivations, skills, and constraints in
managing costs in conjunction with demand.
Yet cost management skills are in short supply. As
a recent McKinsey & Company study (Nimocks
et al., 2005, pp. 107–108) reports:
[Competitive] pressures mean that many businesses
desperately need a new approach to managing
costs—one that reduces them over the long termy
The process of lowering overhead costs sustainably is
deeper and more subtle than most companies realize.
The tactical margin improvements that might be
enough to meet a one-off quarterly earnings gap or to
compensate for a delayed product launch will not
bring about deeply embedded change, while more
broadly ambitious cost reduction programs often
lose their impetus after the initial effort. Companies
that truly transform their approach to overhead
costs, by contrast, design sustainability into the heart
of their programs, aligning their costs with their
strategies and maintaining a strong commitment to
the effort.

Volume 2
management employs common management accounting tools to measure cost performance in relation to
competitive benchmarks so that improvement opportunities are highlighted.3
Early papers on strategic management accounting
found fault with management accounting’s disproportionate attention to executional cost management
and to the production (manufacturing) portion of the
value chain (e.g., Bromwich, 1988, 1990; Bromwich &

Bhimani, 1989). More than 20 yr later, little has
changed (Roslender & Hart, 2003), and, as this chapter illustrates, much of what constitutes advancement
in our understanding of strategic cost management—
particularly structural cost management—is occurring outside of accounting research journals. From
my selective review of the literature, I offer three
propositions and a conclusion:

In this chapter, I argue that the need for firms to
adopt a new approach to managing costs coincides
with a need for management accounting scholars to
expand the scope of cost management research. Management accounting is a body of tools and practices
that facilitate deliberate decision making by informed
managers who are motivated to maximize long-term
profits of the firm. For purposes of this chapter, I
define ‘‘strategic cost management’’ as deliberate decision making aimed at aligning the firm’s cost structure with its strategy and optimizing performance of
the strategy.2 Alignment and optimization must comprehend the full value chain and all stakeholders to
ensure long-run sustainable profits for the firm. I
distinguish between two forms of strategic cost management. Structural cost management employs tools
of organizational design (e.g., determination of firm
boundaries, scale, and governance structures), product design, and process design to build a cost structure that is coherent with strategy. Executional cost

1. Cost management skills are in high demand in the
world economy, although they are often most evident in the work of nonaccounting managers and
increasingly require a new approach as compared
to cost-cutting efforts of the past (Hergert & Morris, 1989; Lord, 1996; Nimocks et al., 2005). Some
of the most successful modern firms (e.g., Amazon,
Dell Computer, Wal-mart, Southwest Airlines,
Tesco, Zara) deliver traditional goods and services using business models with radically different
cost structures from those of their competitors.
Yet most management accounting educators teach

the tools of executional cost management rather
than the structural cost management that is associated with creating innovative business models.
2. Researchers from different management traditions
have studied the performance effects of organizational design, product design, and process design
in isolated parts of the organization (e.g., product
development, manufacturing, marketing and sales,
and logistics and distribution). Since these strategic decisions typically define the gross parameters
of the firm’s cost structure, there is much to be
learned about structural cost management from
these studies. Other management disciplines have
also been more attuned than accounting to the
prevalence of new organizational forms that span
firm boundaries (Hopwood, 1996; Kinney, 2001;

2

3

Clearly cost management is only one piece of the complex
challenge of long-term profit maximization. Although this
chapter does not explicitly consider ‘‘strategic revenue management’’ (typically the domain of marketing research), at
several junctures I identify important interdependencies between the cost and the revenue function that cause the literatures to converge.
482

An economist might characterize structural cost management as a choice among alternative production functions
that use different combinations of inputs to produce similar
goods or services. In contrast, executional cost management
takes as given the production function and is instead concerned with whether the firm is producing on the efficient
frontier.



Chapter 1

Managing Costs and Cost Structure throughout the Value Chain

Otley, 1994). In that these new organizational
forms are explained, in part, as a transaction cost
minimizing solution (Williamson, 1985), the importance of cost management is clear. Yet management accounting texts often give only cursory
consideration to strategic choices such as outsourcing or make-or-buy decisions. In sum, although many decisions that are taken to align a
firm’s strategy with its structure have significant
implications for the level and volatility of costs,
disparate studies on this phenomenon have not
yielded a unified body of ‘‘strategic cost management’’ knowledge.
3. Management accounting researchers are well
suited to the task of creating a unified body of
strategic cost management knowledge. Training in
the economics of the firm and the core accounting
principles of measurement and management control are essential ingredients for weighing economic consequences of alternative actions.
However, in spite of earlier admonitions for accounting researchers to take a more strategic view
of cost management (e.g., Bromwich, 1988, 1990;
Bromwich & Bhimani, 1989) and in spite of recent
developments aimed at linking performance evaluation to strategy (e.g., Kaplan & Norton, 1996,
2004), cost management remains narrowly focused
on executional cost management, typically within
circumscribed organizational boundaries.
These propositions point to an opportunity to reinvigorate management accounting research and education around complex economic and social forces
governing the practice of structural cost management
rather than a narrow group of executional cost management tools. As this chapter illustrates, researchers
from other traditions have made great progress in
outlining the contours of structural cost management

for different segments of the value chain. Management accounting researchers’ challenge is to first synthesize these research findings into a coherent body of
strategic cost management knowledge and to then
extend the scope of research to understanding the
measurement tools and practices that facilitate deliberate decision making associated with structural cost
management.
The chapter is organized in seven sections. Section 2
reviews previous commentaries on the strategic management accounting literature and presents a schematic model that relates strategic cost management to
strategy development and performance evaluation.
The model incorporates elements from Tomkins
& Carr’s (1996) model of strategic investment,
Shank & Govindarajan’s (1994) characterization of

cost drivers, and Kaplan & Norton’s (1996, 2004)
multistakeholder, multiperiod perspective on performance. I structure my review of research to follow the
stakeholder and value chain analysis that is central to
the model. Given the breadth of material and disciplines covered in the chapter, it is important to note
that this is not an exhaustive literature review. Rather,
it is a selective literature review intended to illustrate
and support my thesis: a significant body of research
exists that warrants inclusion in a unified body of
strategic cost management knowledge, and that management accounting researchers are well positioned to
do the important integrative work that remains. The
next two sections of the chapter correspond roughly to
internal operations and operations at the boundaries
of the firm. Thus, Section 3 covers research on product/service design and process development, production, and product distribution/service delivery and
Section 4 covers research on strategic cost management practices in the extended value chain where cost
management requires consideration of mutual advantage of self-interested trading partners (e.g., supplier
and partner relations and customer interactions). Section 5 takes up dynamic issues of managing costs
throughout the value chain for long-term, sustainable
profits. Section 6 addresses enterprise risk management, an aspect of cost management that also spans

the value chain and has become increasingly important with globalization, the emergence of hybrid organizational forms and recent corporate governance
failures. Section 7 concludes with observations on the
role for management accounting research in contributing to a unified body of ‘‘strategic cost management’’ knowledge.

2. Strategic Cost Management
For 25 yr, Porter’s (1980, 1985) seminal work has
defined how strategy is taught to management students and has shaped the way that firms evaluate
competitive conditions and develop strategy. During
the same period, many management accounting researchers have questioned how the source of competitive advantage relates to the decisions that
managers face, and by extension, the form that management accounting takes to facilitate decisions.
In a special journal issue dedicated to the subject,
Tomkins & Carr (1996) concluded that strategic
management accounting lacked a general conceptual
framework. In a more recent survey, Roslender &
Hart (2003) conclude that there is still little agreement
about what constitutes ‘‘strategic management
accounting’’; indeed, diverse research streams that
employ the term only add to the ambiguity.
483


Shannon W. Anderson
Lord (1996) identifies four streams of research under the heading of ‘‘strategic management accounting.’’4 For purposes of this chapter on strategic cost
management, the literature that she describes as studying the ‘‘y analysis of ways to decrease costs and/or
enhance differentiation of a firm’s products, through
exploiting linkages in the value chain and optimizing
cost drivers (p. 348)’’ is most relevant. Lord subdivides cost management research into two streams:
1. research that examines whether and how firms
configure accounting data to support the value
chain analysis that Porter (1985) advocates (e.g.,

Hergert & Morris, 1989; Shank, 1989; Shank &
Govindarajan, 1992; Tomkins & Carr, 1996), and;
2. research that attempts to derive the relations between a firm’s strategy, cost structure, and the
causal relation between activity levels and the resources that are required (i.e., ‘‘cost drivers’’) (e.g.,
Anderson, 1995; Banker & Johnston, 1993; Ittner
et al., 1997; Maher & Marais, 1998).5
These research streams take as given the organization’s strategy and structure, differing only in
whether they seek to reflect or detect the economics
of the given strategy and structure in accounting
records. In this chapter, I go further, arguing that
much of what constitutes modern cost management is
found in the choices about organizational strategy
and structure. In agreement with Lord’s (1996) findings, I conclude that these choices, which are often
taken by general managers rather than cost accountants, typically have not been studied by management
accounting researchers.
I draw upon several research frameworks to define
the scope of this review. Tomkins & Carr’s (1996, p.
276) model of strategic investment (which draws
upon work by Shank & Govindarajan (1992, 1994))
provides an important linkage between strategy formulation, value chain analysis, and cost driver analysis. In Tomkins and Carr’s model, cost driver
analysis is the catalyst for cost management and cost
4
Three research streams are not the subject of this chapter.
One focuses on extending management accounting to collecting data on competitors. A second stream of research
focuses on the contingent relation between the choice of
particular strategies and the configuration of management
accounting systems. A final research stream takes a critical
perspective, positing that strategies are emergent, rather that
deliberately chosen. Thus, according to this view, management accounting is unlikely to reflect a deliberate, rational
effort to enact a specific strategy.

5
See Banker & Johnston (2006) for a survey of this literature.

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management takes one of two forms: cost reduction
efforts and efforts to re-engineer the value chain to
produce a different cost structure. The two forms of
cost reduction are related to Shank and Govindarajan’s contention that cost drivers are of two types:
structural cost drivers that are determined by organizational structure and by investment decisions that
define the operating leverage of the firm, and executional cost drivers that are determined by the efficacy
and efficiency with which the strategy is executed.
Accordingly, in this chapter, I label cost management
activities aimed at changing the firm’s cost structure,
structural cost management, and cost management
activities aimed at improving performance for a given
strategy, executional cost management.
A second framework that influences this review is
Kaplan & Norton’s (1996, 2004) work that highlights
how firm-level strategy and constituent business-level
strategies are linked to performance measures
through an integrated performance management
process. Cost (and more generally, financial performance) is only one aspect of performance. Indeed an
important feature of their models is the inclusion of
metrics of performance as defined by multiple stakeholders (i.e., employees, suppliers, alliance partners,
customers, shareholders, governments, and society at
large). Although this chapter focuses on cost management activities, I consider multiple stakeholders in
the value chain. Specifically, I assume that the firm
cannot enjoy long-term sustainable profits unless all

critical stakeholders enjoy adequate returns (financial
or otherwise) while participating in the value chain as
compared to their alternative opportunities. Thus
strategic cost management demands that the firm
spend as little as possible to achieve the desired results, but spend as much as needed to keep all key
stakeholders at the table. I further assume that many
opportunities for optimizing the cost structure of the
enterprise lie at the boundaries of the firm. Together
these propositions mean that strategic cost management must extend beyond the firm’s current chart of
accounts—encompassing costs borne by all critical
stakeholders and extending to more distant future
periods (Hergert & Morris, 1989). Outside parties
and future events interject uncontrollable and uncertain forces in the cost management process. Consequently, I highlight the need to manage both the level
and the volatility of costs in an uncertain environment—one component of applied risk management
(DeLoach, 2000).
In Fig. 1, I synthesize insights from these frameworks and from other writings in the strategic cost
management literature to provide a schematic
that relates strategic cost management to strategy


Chapter 1

Managing Costs and Cost Structure throughout the Value Chain
Market and
Competitive
Analysis

Evaluate
Competitor
Offerings


Identify
Customer
Requirements

Strategy
Development
and Initial Cost
Structure

Structural
Cost
Management

Ongoing
Strategic Cost
Management

-

Specify the Value
Proposition
product and service
attributes
process capabilities
risk bearing
value to stakeholders

Assess Firm
Capabilities and

Assets

Specify Organizational
Design
- scale
- value chain scope &
firm boundaries
- strategic partners
- governance &
management controls

Analysis of Sustainability
- Are all stakeholders receiving fair market value on their
contributions as compared to alternative enterprises in which they
could participate?
- Is each part of the value chain contributing value in proportion to
its costs?
- Could changes in the value proposition or the organizational
design produce greater net value while compensating all
stakeholders fairly?
Stakeholders
Employees
Suppliers & Service
Providers
Customers
Shareholders & Debt
holders
Community
Governments & regulating
bodies

Non-governmental
organizations (NGOs)

Value Chain
Product and Process
development
Inbound logistics
Internal Operations
Outbound logistics
Sales, Marketing &
Distribution
After-sales service
Product take-back and
disposal or reuse

Analysis of Performance
- Are the level and volatility of costs in each part of the value chain
Executional
appropriate as compared to competitive benchmarks?
Cost
- Is cost performance improving as compared to appropriate learning
Management
curves and in conjunction with technology investments?

Figure 1. A schematic representation of strategy development and strategic cost management. (Tomkins &
Carr (1996), Shank & Govindarajan (1992, 1994), Kaplan & Norton (1996, 2004).)

development. The upper portion of the table depicts
the market and competitive analysis that informs
strategy development. Strategy development has two

foci, the value proposition and the organizational
design. To a great degree, choices that are made in
developing these elements of strategy define the longterm cost structure of the firm. My contention in this
chapter is that in focusing more on these choices,
research outside of management accounting provides
a foundation for understanding this important part
of structural cost management. Taking these choices
as given in the short term, firms then engage in strategic cost management of the activated value chain
with its contributing stakeholders. This requires two

levels of ongoing analysis: (1) analysis of the sustainability of the value chain, and (2) analysis of the performance of the value chain. While evidence of failure
on the sustainability dimension may accompany failures of performance and require changes to either the
value proposition or the organizational design, failures of performance may simply indicate inadequacies in executing the strategy rather than inadequacies
of the strategy.
In the sections that follow, I use value chain activities as the primary organizing device and within
each section, consider how prior research has demonstrated the use of both structural and executional
cost management approaches to create an attractive
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Shannon W. Anderson
value proposition for stakeholders. I then turn to cost
management for the full value chain over an extended
time horizon and in the presence of uncertainty about
the level or structure of future costs. Before I begin, a
caveat is in order. Although the broader field of strategic management accounting clearly includes choices
about governance structures and management controls (noted under ‘‘organizational design’’ in Fig. 1),
for purposes of this review on strategic cost management I focus on cost management as primarily an
informational challenge rather than an issue of
motivation or incentives. Clearly this distinction becomes strained at the boundaries of the firm, and

Section 4 includes more discussion on management
controls that accompany cost management approaches in these settings. I do not wish to give the
false impression that management controls are less
important to strategic cost management within the
firm. Rather, I would simply refer the reader to more
comprehensive reviews of strategic management accounting such as Lord (1996) and Roslender & Hart
(2003).
3. Cost Management Practices within the Firm’s Value
Chain
In this section, I consider cost management practices
in the portion of the value chain that typically falls
within the boundaries of the firm. I start with product
design and development as well as the related and
complementary stages of process design. Then I turn
to operations, including production of manufactured
goods and associated logistics within the firm as well
as delivery of services.
3.1. Strategic Cost Management in New Product and
Process Development and Design
Strategic cost management associated with new product development is a relatively new field of inquiry in
management accounting. Distinctive features of this
literature as compared to those related to the later
stages of the value chain are the considerations of
both structural and executional cost management
practices and the extent to which research considers
the extended value chain, including key suppliers.
These distinctions probably owe much to the genesis
of the area. The impetus for this research in management accounting and for parallel developments in operations management of ‘‘lean’’ manufacturing and
innovative product development practices (Clark &
Fujimoto, 1991; Cusumano, 1985; Womack et al.,

1990) was the success of Japanese manufacturing
firms in the 1980s. In product development, lean
practices translate into key decisions about product
and process design and about the organization of
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product development (i.e., in Fig. 1, the value proposition and organizational design), aimed at simultaneously optimizing three dimensions of performance
(e.g., Clark & Fujimoto, 1991; Cooper, 1995; Gupta
et al., 1992; Wheelwright & Clark, 1992):
1. speed to market, or development time (e.g., Crawford, 1992; Millson et al., 1992; Ulrich et al., 1993);
2. quality, including both conformance to specifications and fulfillment of customer requirements
(e.g., Anderson & Sedatole, 1998; Garvin, 1988;
Hauser & Clausing, 1988; Srinivasan et al., 1997;
Ulrich & Ellison, 1999); and,
3. productivity, the residual value created after paying for all inputs to production.6
Although costs are explicit in the latter performance dimension, the level and structure of costs are
also affected by decisions taken to balance sometimes
conflicting demands for quality and development
speed. An oft-repeated logic clarifies the role that
design and development play in structural cost management (Cooper & Chew, 1996) and the eventual
commercial success of products (Hise et al., 1989):7
Experience in a variety of industries suggests that a
significant fraction (as much as 80 percent in some
cases) of total product cost is established during the
product engineering stage of developmenty Pressure
for continual improvements in cost and quality has
led to a focus on effective management of engineering
design. (Clark & Fujimoto, 1991, p. 3)


Hiromoto (1988), Cooper (1995), Cooper & Slagmulder (1997), Daniel et al. (1995), Kato (1993), Tani
et al. (1994), Tani (1995), and Yoshikawa et al. (1995)
are examples of early studies of Japanese management accounting practices; in particular, target costing, an approach to managing product design to
6

Cooper (1995) terms this the ‘‘cost-price’’ dimension of a
product. Ulrich & Eppinger (1995, pp. 234–252) distinguish
development costs from the cost of producing the product to
highlight tradeoffs that may arise when decisions taken
during development may cause costs to shift between development, production, and after-sales service.
7
Ulrich & Pearson (1998) provide evidence on how manufacturing product costs vary with alternative design choices
for a set of functionally similar products. Browning &
Eppinger (2002) model the relation between how product
development is managed and the upfront cost of product
development and the predictability of the duration for completing development activities. In counterpoint, Cooper &
Slagmulder (2004) describe a case study that draws into
question the premise that costs are determined in product
design and that only cost containment and marginal efficiency are possible during production.


Chapter 1

Managing Costs and Cost Structure throughout the Value Chain

ensure the lowest possible product cost that is consistent with customer requirements and the target
price.8 Target costing relies heavily on iterative stages
of value engineering, ‘‘a systematic interdisciplinary
examination of the factors affecting the cost of a
product in order to devise a means of achieving the

required standard of quality and reliability at the
target cost (Cooper, 1995 pp. 352–353).’’ The analysis
may involve engineering and marketing techniques,
such as quality function deployment or conjoint
analysis to link customer requirements to specific design choices (e.g., Hauser & Clausing, 1988; Pullman
et al., 2002; Tottie & Lager, 1995). Engineering
cost analysis tools such as tear-down analysis (what
Ulrich & Pearson (1998) term ‘‘product archaeology’’), quality and reliability testing (Taguchi et al.,
1989), functional analysis (Yoshikawa et al., 1995),
and parametric cost estimation (e.g., Anderson &
Sedatole, 1998; Boothroyd et al., 1994) may then be
used to determine the lowest total cost of manufacturing and assembling a design (i.e., DFM/A). In
addition to product development and production
costs, total costs include costs (and foregone revenues) associated with delayed product launch and
with engineering changes to fix problems that are detected in production or that arise with product use
(Clark & Fujimoto, 1991, pp. 187–194; Smith &
Eppinger, 1997a, 1997b; Ulrich et al., 1993; Ulrich &
Eppinger, 1995).
Often, value engineering crosses organizational
boundaries, as for example when suppliers collaborate with the firm to find new approaches to lowering
total costs, or when ‘‘first-tier’’ suppliers take their
assigned target cost and engage in target costing and
value engineering with their suppliers (Bonaccorsi &
Lipparini, 1994; Carr & Ng, 1995; Clark, 1989;
Cooper & Slagmulder, 2003, 2004; Peterson et al.,
2003; Ragatz et al., 1997; Tatikonda & Stock, 2003;
Yoshikawa et al., 1995). And, as in the case of lean
methods of production and product development,
Japanese firms offered new insights in how these collaborative arrangements (i.e., keiretsu) might be
structured and governed (Cooper & Slagmulder,

2004; Cusumano, 1985; Dyer, 1996; Walker, 1994;
Wasti & Liker, 1997) to manage the costs of coordination that accompany collaboration (e.g., Anderson et al., 2000; Anderson & Dekker, 2005; Baiman
et al., 2001; Baiman & Rajan, 2002; Dekker, 2004;
Novak & Eppinger, 2001; Randall & Ulrich, 2001).
Finally, creating organizational strategies for sharing
relevant knowledge among related products may also

8

Ansari et al. (2006) review the literature on target costing.

facilitate value engineering (e.g., Clark & Fujimoto,
1991; Meyer et al., 1997; Robertson & Ulrich, 1998;
Thomke & Fujimoto, 2000).
The above discussions focus on opportunities for
structural and executional cost management that
arise in the design and development of a product or
group of products. Researchers who specialize in new
product development also focus on the performance
of product development activities (e.g., Nixon, 1998;
Ulrich & Eppinger, 1995). Speed to market is a defining performance dimension for new product development capabilities of the organization (and the
value chain). However, along with project staffing
levels, development duration is highly correlated with
the cost of new product development. Thus, for example, while accounting research has focused on the
cost of products that emerge from new product development work, Ulrich & Eppinger (1995) urge
managers to separate production costs from costs of
new product development activities so that important
tradeoffs that must be managed to achieve sustainable profits for the life of a product become visible.
They motivate their arguments by pointing out that
the cost of product development can easily exceed the

cost of production over the lifecycle of the product,
that delayed development activities may both increase the cost of development and decrease the price
that the product commands (if competitors’ offerings
are introduced earlier), and that if products are
pushed to market to meet deadlines before they meet
quality requirements, the savings in development
costs can easily be swamped by high costs of remediation (e.g., rework and warranty costs) and price
erosion (Crawford, 1992).
The literature on managing the effectiveness of new
product development activities is too extensive to
review here; however, it is important to note that it
includes approaches to organizational governance (e.g.,
heavy weight product managers, interdisciplinary platform design teams) and decision-making processes
(e.g., overlapping activities, delaying decisions) that are
indirectly associated with the cost of developing a
portfolio of related products (Clark & Fujimoto, 1991;
Davila & Wouters, 2004; Krishnan et al., 1995a, 1995b;
Nixon, 1998; Robertson & Ulrich, 1998; Sanderson &
Uzumeri, 1997; Song et al., 1998; Ward et al., 1995).
These strategies have implications for both structural
and executional cost management. Davila & Wouters
(2006) review research on measuring the performance
of new product development activities and approaches
to managing new product development that have been
linked to higher performance.
In summary, research in new product development
and process development provide a strong complement
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Shannon W. Anderson

Volume 2

3.2. Strategic Cost Management in Production/
Assembly and Service Delivery
As others have noted, modern cost management research has focused extensively on the ‘‘production’’
portion of the value chain. Although studies are predominately conducted in manufacturing settings,
even studies of service firms tend to focus on the
physical aspects of the delivery of service (e.g., health
care management and passenger air travel).9 The
cost management literature developed in parallel with
advances in modern manufacturing, including technological advances (e.g., flexible manufacturing systems) as well as advances in the organization and
management of operations (e.g., quality management, inventory management, cell manufacturing,
and team production). As in the case of product development and design, many of the latter advances
accompanied the emergence of lean manufacturing in
Japanese firms (e.g., Womack et al., 1990; Womack &
Jones, 2003). However, even before Japanese methods revolutionized manufacturing management, researchers were troubled about the ‘‘relevance’’ of
traditional cost accounting practices in a modern
technological setting (Kaplan, 1984, 1986; Kaplan &
Johnson, 1987). Advanced manufacturing technologies increased the speed of production and lowered
the cost of changing between dissimilar products;
thereby lowering the marginal cost of producing a
mix of heterogeneous products and allowing firms to
compete on economics of scope rather than on economics of scale (Marschak & Nelson, 1962; Panzar &
Willig, 1977, 1981). New capabilities brought a new
‘‘hidden factory’’ of staff (i.e., overhead costs) who
were responsible for managing the complexity of
processes and products within the manufacturing facility (Miller & Vollmann, 1985).
New approaches for meeting demands for management accounting information were developed to

address concerns that new technology investments
obviate the assumptions of traditional product costing, variance analysis, and investment evaluation

(Cooper, 1990; Cooper & Kaplan, 1992).10 The most
popular of these approaches, activity-based costing
(ABC) sought to better match costs of resources to
the activities that consume them, and in so doing, to
provide visibility for the new structure of costs that
accompany high-technology investments and new
modes of organizing. The premise of ABC is that
costs are not strictly variable or fixed with respect to
unit volume, but vary in a hierarchical fashion (e.g.,
batch-related costs and product-sustaining costs)
with activities. Accordingly, accounting studies examined whether costs are primarily fixed and variable
with unit volume (Noreen, 1991; Noreen & Soderstrom, 1994, 1997), whether cost changes are symmetric
for proportional increases and decreases in activity
(Anderson et al., 2003; Balakrishnan et al., 2004), and
whether measures of activity other than unit volume
have incremental explanatory power for the level and
structure of costs (e.g., Anderson, 1995; Banker &
Johnston, 1993; Banker et al., 1995; Cooper et al.,
1995; Datar et al., 1993; Fisher & Ittner, 1999; Foster
& Gupta, 1990; Ittner & MacDuffie, 1995; Ittner
et al., 1997; Karmarkar & Kekre, 1987; MacArthur &
Stranahan, 1998; MacDuffie et al., 1996; Raffi &
Swamidass, 1987). ABC is intended to facilitate both
structural and executional cost management. For example, after the cost per unit of cost driver (e.g., cost
per machine setup) is determined, managers are expected to engage in ‘‘activity based management’’
(ABM)—taking action to either reduce consumption
of the activity or to become more efficient in executing the activity.

The above studies focus on whether cost accounting
accurately reflects the new economics of the firm. Another research stream focuses on examining how specific features of the new manufacturing management
approach are related to cost and to other performance
measures. Thus for example, a central premise of Japanese manufacturing methods is to reduce variability
and waste of resources throughout the value chain
(Womack & Jones, 2003). In manufacturing, this
translates into intense pressure to improve quality
(conformance to specifications) and eliminate inventory (wasted movement and storage time), often facilitated by the use of self-managed, multiskilled work
teams (Kaynak, 2003; Womack et al., 1990). In the
cost management literature, interest in quality management resulted in research on the relation between
cost, quality performance, and the use of alternative
work practices (Foster & Sjoblom, 1996; Ittner, 1996;

9
See Eldenburg & Krishnan (2006) for a review of economics-based studies in the hospital setting.

10
Davila & Wouters (2006) review the literature on technology investments for modern manufacturing.

to the relatively small management accounting literature on cost management in new product development.
At present, much of the cost management literature
focuses on target costing and its affect on product
costs. The literature on new product development
offers more alternatives for enhancing the new product
development organization to achieve better cost performance.

488