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The old individually focused control concepts inherent in standard costing and responsibility
accounting may be counterproductive in today's world.
Certificate of Merit, 1994-95
What will the field of management accounting look like in the 21st century? To find out, let's consider four paradigms that cover its recent history. These paradigms provide us with an intriguing review of the current scene from a historical perspective (see Table 1) and an opportunity to focus on unresolved issues. Ultimately, we can consider adjusting and even combining paradigms in anticipation of a new one for the 21st century.
For continuity and simplicity, we'll consider each paradigm in the context of both product costing and the determination of selling price. This context is useful especially because the current vogue of activity-based cost analysis emphasizes improved product costing in order to arrive at better pricing decisions.
Paradigm A: Turn of the century until the 1940s--the era of the Industrial Revolution plus. Paradigm A conjures up the image of an early-day industrial engineering type such as Frederick Taylor who was interested in what costs should be, that is, standard costs. These engineering-driven standards were typically a function of product specifications, time and motion studies, and the like. The costs involved were direct materials, direct labor, manufacturing overhead, and even marketing and administrative costs, all of which were tied together in a total cost per unit of output.
Added to the total cost per unit was a desired profit or markup, and the sum of total cost and desired profit yielded a target selling price per unit. In many instances, the total cost per unit excluded marketing and/or administrative costs, which were included as a factor in the desired profit. The ultimate result was still the target selling price per unit-the price that would yield desired profitability if projected costs per unit could be achieved.
Two issues of contention surface immediately with Paradigm A:
1. What volume of activity should be used to determine unit costs?
2. How should desired profit be determined?
The variety of answers typically offered is amazing even if both questions are put to an audience of practitioners representing various departments of the same company, as I have done over many years.
Table 2 shows possible answers...