management accounting research: trends, perspectives, and

1Dr. Niklas Lampenius

Management Accounting Research:

Trends, Perspectives, and Future

Dr. Niklas Lampenius

University Hohenheim

2

Planning and

control functions

Disclose inventories

and cost of goods sold

Assessing the efficiency and

effectiveness of operations

Unit manufacturing costs

Management Accounting

Management accounting

Manage activities that

Consume resources

Evaluate and reward

employee performance


• The existence of an objective or standard that is desired.(otherwise control has no meaning)

• The measurement of process outputs along the dimension specified by the objective. (the output of the process must be measurable)

• The ability to predict the effect of potential control actions.(a predictive model of the system is required)

• The ability to act in a way that will reduce deviations from the objective. (a selected action requires to be implemented)

3

Conditions for effective management accounting systems


Goal convergence

Employee motivation

Formal control mechanismsRisk sharing.

Informal control mechanisms





4



Goal convergence

Employee motivation



5

Objective: From improving value drivers to maximizing

shareholder value

Value of the firm

• Firm value: Present

value of cash flows

• Firm value –

invested Capital =

NPV

Value drivers

• Production

(scrap, capacity

utilization, ...)

• Procurement

(price, process cost, ...)

• Other efficiency

indicators

Periodic performance

measures

• Actual return vs.

benchmark

• Residual

income/value

added

(e.g. EVA, CVA..)

• Cash flow


6

( )31

1 Ur⋅

+( )21

1 Ur⋅

+( )11

1 Ur⋅

+

DCF-Valuation for an equity financed firm (APV)

( )( )

5

5

1 1

1U U

CF g

r g r

+= ⋅

− +

detailed planning (e.g. 5 years) perpetuity

CF1 CF2 CF5CF4CF3

( )51

1 Ur⋅

+VU

rU = cost of equity of an unleveraged firm

g = annual growth rate of CF for perpetuity

CF = Cash Flow assuming 100% equity financing

VU = Value of the company for equity financing

( )41

1 Ur⋅

+

…


7

Value of the firm

Cash Flow Cost of capital

• Value analysis to identify

relevant key indicators

• Benchmarking using relevant

references from the industry to

determine the economic

situation of the firm

Dependent on:

• Risk

• Capital structure

Value based management


8

Value based management: Value driver analysis


9

Methods for firm valuation

• Problematic methods for value based management :

• Multiples e.g.:

- Earnings-Multiple: P/E-ratio

- Enterprise Value: Enterprise Value / EBIT

• Substance value

• Risk neutral valuation

• Useful methods for value based management:

Discounted Cash Flow (DCF) methods:

• Adjusted Present Value (APV)

• WACC-approach

• Flow-to-Equity






10



Goal convergence

Employee motivation



11

Measurement: Overview on return and performance measures

Accounting

measures RI

Profit marginReturn

measures

Profit margin

before taxesProfit

margin

after taxesReturn on

Assets

Return on

Equity

b.t. a.t.

IRR

PM a.t.ROA

CFROI

Cash Flow Return

on Investment

Residual income

Return on

Invested Capital

Return /performance measures

b.t. a.t.

ROIC

b.t. a.t.

ROEPM b.t.


12

ROIC-tree

Sales

Personnel cost

-

Material cost

Depreciation

Other expenses

-

-

-

Fixed Assets

Intangible Assets

Current Assets

Accounts payable

Accruals for pensions

-

-

+

+

:

:

Sales

Invested

capital

(IC)

Sales

ROICb.t. *

PMb.t.

Capital

turnover


13

Performance evaluation

• Performance evaluation solely based on accounting return is not sufficient:

• Value based orientation is missing:

- Incomplete adjustment for opportunity costs (no cost of equity)

- Incomplete adjustment for risk besides the accounting based inclusion of risks

- Not cash flow based

• Performance could be manipulated utilizing window-dressing techniques.

• Performance measurement in the interest of the owners:

Periodic signal that indicates a change in the value of the company

• without using the concept of the IRR

• as independent as possible of the unknown results of future periods

• considering the risk of the project/firm

• considering the financing of the project/firm

• utilizing the data used for traditional performance measurement (Income statement,

Balance sheet, etc.)

• Solution: Residual income (RI), which has a clear relation to the NPV of the project/firm value (V) in t0.


14

Operational

risk

Financial

risk

Accounting profit

Profit

t1

Accounting loss

Revenues

t1… t n

PV Free Cash FlowEconomic loss

=

Value destroyed

Risk adequate

Cost of capital

Economic profit =

Value generated

Necessary transformations for value based management

Expenses


15

Necessary transformations for value based management

Cost accounting:

Total cost of period

Labor cost

Material cost

Machine related

etc.

Variable cost Fix cost

Cost product 1

Cost product 2

Total cost of period

Cost-center A

Cost-center B

Cost-center M

Cost-center N...

Cost-

center A

Cost-

center X

Main cost-

center A

Main cost-

center B...

Allocation of cost to cost-centers:

c1 c2 c3Cost product 3

Cost product ...






16



Goal convergence

Employee motivation



17

Disaggregation of the performance measure and sensitivity analysis

Identification of critical value drivers

using sensitivity analysis

∆ RI

Production

R&D

A&S

Etc.

IC

RI

Revenues

Production

Etc.

r

R&D

Identification and linking of value

drivers

Simulation analysesCrystal Ball Academic Edit ionNot for Commercial Use

Frequency Chart

Certainty is 75,33% from 0,0 to +Inf inity

,000

,008

,016

,024

,032

0

161,2

322,5

483,7

645

-170,6 -35,7 99,1 233,9 368,8

20.000 Trials 20.000 Displayed

Forecast: CF 96

Operating

result

Expenses

Capital charge

A&S

Effect of a x% improvement on

RI


18

Value driver analysis: R&D

R&D costs

Infrastructure

(e.g. IT, rent)

Purchases

services

Overhead

allocation

headquarters

Depreciation

Material cost

Personal cost

Overhead

Percentage Process Savings

potential

Responsible cost

driver

Short-term

Interm

ediate-

term

Area rep.

Product

manager

Project team

17%Product A

development

4%Product B

development

1%Asset

management

37%Product C

development

33%Choice of

suppliers

5%Product D

development

3%Management

infrastructure


19

Quantitative risk management

Simulation of RI using the value driver

analysis data integrating assumed

distributions:

Simulation analysis: Evaluation of the Value at Risk

0,00%

0,02%

0,04%

0,06%

0,08%

0,10%

0,12%

0,14%

0,16%

0,18%0500

10001500

2000

0,00%

0,02%

0,04%

0,06%

0,08%

0,10%

0,12%

0,14%

0,16%

0,18%

0500

10001500

2000

IC

RI

Revenues

Production

Etc.

r

R&D

Operating

result

Expenses

Capital charge

A&S

Identification and linking of value

drivers

0,16%

0,18%

RIVaR RI

p






20



Goal convergence

Employee motivation



Unbiased Accounting considering Profitability


University Hohenheim

with

Martin Staehle

Introduction

• Unbiased Accounting:

• Theoretically: Which accounting regime results in ‘correct’ accounting data?

• Practically: Implied biases when implementing accepted accounting standards.

• Objective:

• Improving the understanding of various accounting regimes.

• Improving the understanding of the economics implied by accounting data and ratios

(ROCE, ROE, P/E, M/B) considering leverage and taxes.

• Improving accounting standards and the measurement of biases resulting from these

accepted accounting standards.

• Evaluation of regulatory implications and regulatory efficiency.

• Agency theoretical implications of accounting regimes, i.e. under-/over-investment

incentives.


Model

• Steady state-model:

• Company undertaking overlapping joint capacity investments in a representative

project.

• Growth: Changes in the invested capital each period.

• Profitability:

- IRR exceeding the cost of capital

- NPV-criterion

• Accruals:

• Depreciation of the representative project.

• Criterion of Unconditional Conservatism (and –liberalism) measured using book values.

• Market Values:

• Multi-phase valuation concept (Residual income, certainty equivalent, APV-approach,

WACC-approach, FTE-approach).

• Constant growth residual income valuation model (Gordon-growth-model).

• Accruals are value-neutral in steady state via Conservation Property of residual income.


Steady state-model

• Individual project:

• Steady state model with varying growth rates:


CF1I0 CF3CF2 CF4

t1t0 t3t2 t4

I1 I3I2 I4 I6I5 I7 I9I8 I10 I12I11 I13 I14 …

Ramp-up

phase

Steady-State

phase

Ramp-down

phase

Perpetuity

phase

g1 g2 g3 g4 g5 g6 g7 g8 g9 g10 g11 g12 g13 g14…

t

Economic benchmark for the measurement of biases

• Neutral Accounting: RoIt = IRR

• Gordon, L. A., & Stark, A. W. (1989). Accounting and economic rates of return: A note

on depreciation and other accruals. Journal of Business Finance & Accounting, 16(3), 425-

432

• Rajan, M. V., Reichelstein, S., & Soliman, M. T. (2007). Conservatism, growth, and

return on investment. Review of Accounting Studies, 12, 325-370

• Unbiased Cost Accounting: AHCt = mct• Rogerson, W. P. (2008). Intertemporal cost allocation and investment decisions. Journal

of Political Economy, 116(5), 931-950

• Rajan, M. V., & Reichelstein, S. (2009). Depreciation rules and the relation between

marginal and historical cost. Journal of Accounting Research, 47(3), 823-865

• Value Accounting: BVt = MVt• Hotelling, H. (1925). A general mathematical theory of depreciation. Journal of the

American Statistical Association, 340-353

• Feltham, G. A., & Ohlson, J. A. (1995). Valuation and clean surplus accounting for

operating and financial activities. Contemporary Accounting Research, 11(2), 689-731


Model and various results

• Economic accounting process:

• Allocations of NPV to single periods as the only accrual:

• Allocation is determined via sequence of weights: NPV allocation-weights:

• “Traditional-accruals” follow implicitly:


( ) ( )1 11 1t t t t t t tIC IC r CF BV BV r npv CF− −= + − → = + + −

[ ]1 1 1 0t t t t t t t tw NPV CF BV BV r BV BV BV d IC− − −⋅ = − − − ⋅ → − = ⋅

0 0

1T T

i i

i t t i

i i

NPV npv npv w NPV wγ γ= =

= ⋅ → = ⋅ → = ⋅∑ ∑

Unbiased accounting

• Neutral accounting: Sequence of weights:

• Economic profit: Constant RoIT.

• IRR-accruals: Upfront knowledge of IRR necessary.

• Unbiased Cost-Accounting: Sequence of weights:

• “Economic Cost”: Constant AHCT.

• RBD-rule, RRC-rule, RPC-rule, etc.

• Value Accounting: Sequence of weights:

• “Economic Depreciation” / “Fair Value”.

• Knowledge of market values is required.


1

11

1

;N t Tt T TT

i Ti

i

BV Incw RoI IRR RoI

BVBV γ

−

−−

=

= → = =⋅∑

1

;C t Tt T TT

i Ti

i

CF Hw AHC mc AHC

KCF γ

=

= → = =⋅∑

1, for 0; 1

0, for 0V

t T T T

tw BV MV MB

t

== → = = >

Synthesis and results

• Conservatism Ranking:

• “Value Accounting is less conservative than Neutral Accounting which is

less conservative than Unbiased Cost Accounting”

• Remarks:

• Profitability results in strict inequalities.

• Conditions under which this result is derived are linear or geometric decay of cash

flows.

• Deviating from linear or geometric cash sequences requires huge “kinks” in the cash

flow sequence to destroy the conservatism ranking.


0 0 0

t t tV i N i C i

i i ii i iw w wγ γ γ

= = =⋅ ≥ ⋅ ≥ ⋅∑ ∑ ∑

Results – Steady state

• Quadrant Results1)

1) Example is derived for constant project cash flows


Residual IncomeT

growthT

Return on InvestmentT

growthT

Market-to-BookT

growthT

Synthesis and conclusion

• Results:

• For Single Projects: Conservatism Ranking (most likely)

• In Steady State: Quadrant Results (most likely)

• “Defining any of the accounting regimes to be the proper one implies that the other regimes generate systematically biased accounting data”

• Why is that interesting?

• Standard Setting: What information should be delivered by accounting data?

• Regulation: How do we measure (excess) profitability?

• Financial Analysis: How do we infer economic performance from accounting data?

• …



Thank you for your attention.

management accounting research: trends, perspectives, and

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