172 ACCOUNTING FOR MANAGERS
least in part, influenced long-term strategy because of the absence of strong stock
market pressures for short-term performance, as is the case in the UK and US.
Demirag (1995) studied three Japanese multinationals with manufacturing
subsidiaries in the UK, two in consumer electronics and one in motor vehicles.
The companies had strongly decentralized divisional profit responsibilities with
autonomous plants focused on target results. A complex matrix structure resulted
in reporting to general management in the UK as well as to functional and product
management in Japan. The company’s basic philosophy was that the design team
was responsible for profit. Continuous processes were in place to monitor and
reduce production costs.
According to Demirag (1995), Japanese companies exhibited a strategic planning
style of management control rather than an emphasis on financial control. The
strategic planning systems were bureaucratic, although business units gave top
management the information necessary to formulate and implement plans. As
Japanese managers move frequently between plants and divisions, they have
a better understanding of communication and co-ordination than their British
counterparts. Japanese managers put the interest of the organization above their
own divisions. There is less attention to accounting and management control than
to smooth production and quality products. Performance targets were set in the
context of strategy but were flexible, with results expected in the longer term.
Manufacturing and sales were independent of each other, each having its
own profit responsibility, the underlying principle being that each side of the
business drives the other to be more effective and efficient. Although traditionally
manufacturing had the greatest negotiating power, this did lead to a failure of
market information reaching top decision-makers in Japan. There was a top-down
approach to capital investment decisions, with managers taking a strategic and
company-wide perspective that reduced the importance of financial decisions,
with ROI not being seen as a particularly useful measure.
Pressures to meet short-term financial targets were not allowed to detract from
long-term progress. In performance measurement, much more emphasis was
placed on design, production and marketing than on financial control, although
profit was increasing in importance. Although fixed and variable costs were used,
the main emphasis was on market-driven product costing, i.e. target costing, on the
assumption that if market share increased the cost per unit would reduce, which
would enable prices to be reduced and so prevent competition. Overhead allocation
was not important, but there was a focus on how the allocation techniques used
encouraged employees to reduce costs.
Hiromoto (1991) described Japanese management accounting practices and
the central principle that accounting policies should be subservient to corporate
strategy, not independent of it. Japanese companies use accounting systems
more to motivate employees to act in accordance with long-term manufacturing
strategies. Japanese management accounting does not stress optimizing within
existing constraints, but encourages employees to make continual improvements
by tightening operations.
Hiromoto describes the example of Hitachi, which used direct labour hours as
the overhead allocation base as this ‘creates the desired strong pro-automation