the accountant’s contribution to product development teams — a case study

J. Eng. Technol. Manage. 18 (2001) 73–90

The accountant’s contribution to productdevelopment teams — a case study

Samuel Rabino∗Northeastern University, Sally Wright-University of Massachusetts, 360 Huntington Ave., 202 Hayden Hall,

Boston, MA 02115, USA

Abstract

The new product development (NPD) literature offers mechanisms and processes that will con-tribute to the successful launch of new products. It is recognized that ultimately new products faildue to their lack of appeal which may manifest itself in terms of functionality, quality, cost, timing, orother factors. The organization model for NPD appears to attract particular attention in recent yearsis the project team. Within the project team the contributions of accountancy have not been evaluatedin a very detailed way. To assess the utilization of emerging cost accounting practices as well as theirperceived desirability, an empirical study was conducted with the collaboration of New Englandfirms affiliated with the technology sector. This case study suggests that accounting and marketingcollaboration could substantially contribute toward a focused and effective product developmenteffort. This can be achieved by setting parameters for price, quality, and functionality. It is, there-fore, advocated that the inclusion of accountants, who draw from recent trends in cost accounting,can significantly enhance development projects. © 2001 Elsevier Science B.V. All rights reserved.

Keywords:New product development; Organization model; Cost accounting

1. Introduction

The last few years have witnessed tremendous innovations in marketing organizations.The brand management system has shown itself unable to cope with today’s complex mar-keting issues. Brand managers are usually too junior, inexperienced and narrowly centeredon marketing to provide the cross functional leadership and strategic thinking requiredto navigate through today’s complex marketing landscape. They are also too focused onimplementing quick-fix solutions that will result in early promotion.

There is no consensus about one solution that will address the complexity of issues such ascross-functional leadership, anticipating consumer needs, responding quickly to changingmarket trends, and targeting effectively. It is recognized, however, that more integration

∗ Tel.: +1-617-373-3260; fax:+1-617-373-8366.E-mail address:[email protected] (S. Rabino).

0923-4748/01/$ – see front matter © 2001 Elsevier Science B.V. All rights reserved.PII: S0923-4748(00)00034-5

74 S. Rabino / J. Eng. Technol. Manage. 18 (2001) 73–90

along consumer lines using a project team approach is needed. It is also understood thathow to organize integrators will be a difficult challenge facing tomorrow’s marketers. Theappropriate structure will vary by company, and there may even be several right answersfor each company.

Various articles and books address aspects of the project team that is involved in productdevelopment and launch. The responsibility for product development and/or line extensionsthat traditionally has been within the bailiwick of the product manager is transferred on anincreased frequency to the project team. The team typically consists of individuals drawn outof manufacturing, R and D, design, finance, marketing, logistics or other functional areas.The evolving organizational form of a development team is not perfect. It is not always clearto the development team members what the new product or process means to the users orhow their development project fits with the strategy and capabilities of their company. Themain argument for development teams is that the synergy among functional areas contributeto the efficacy of the development process. It is also evident that teams can be dysfunctionaldue to personal and territorial issues, weak leadership, lack of appropriate feedback and thelike. It is our contention that an appropriate application of some accounting procedures canprovide constant monitoring, timely evaluation and feedback that can help to cancel outsome of the negatives of the less successful development teams (Robbins and Finley, 1998).

No one functional model of a project team is advocated for each and every project ororganization though some combinations of the areas mentioned earlier appears common.Furthermore, our review of the literature has not revealed a role for accountants in thedevelopment team other than in an ancillary position. Given recent trends in the accountingfield, it is felt that important sources of information that can aid the team in its articulationof a competitive strategy are underutilized or neglected. The object of this empirical study isto present to project leaders, team members, top managers and other integrators the notionthat as team members, accountants can contribute to enhancing the following areas.

1. Cost discipline.2. Information for more balanced product decisions (i.e. cost versus features).3. Competitive capabilities and market position.

The following sections will review recent trends in the accounting field, implementation ofsome of these new perspectives and their limitations. Elements of these recent thoughts andperspectives, will then be incorporated into a framework where contributions of accountantsto project teams can become more formal, explicit, and proactive.

2. Product planning and the flow of information

Project teams must continually balance the need to exploit new product opportunitieswithout incurring the cost of unnecessary product line extensions. The decision as to whento introduce a new product or offer a product line extension should be based on the potentialfor revenue less the cost to produce among other considerations. Without relevant revenueand cost data, product and marketing managers may introduce unprofitable line extensions todeal with excess capacity or for short term gains. However, the failure to add a critical productline extension or identify an emerging market may also result in lost profit particularly

S. Rabino / J. Eng. Technol. Manage. 18 (2001) 73–90 75

when competition is intense. Project teams, therefore, need an information system whichcan provide relevant product cost and revenue data.

2.1. Team-based decisions and its contribution to successful product launch

In their evaluation of the NPD process Wind and Mahajan (1988) observe: “too much ofthe focus of new product development (NPD) is on product features. The scope of NPD effortis often too parochial. Effective NPD should employ an interdisciplinary perspective andshould incorporate marketing, R and D, manufacturing, information technology, finance,legal and other relevant disciplines”. Integration of accountants into the project team canfulfill that need by acquainting other team members with recent trends in the accounting field,thus forging an even more competitive team. Accountants can specifically track the financialimplications of each phase of the development and relate it to alternative price configurationsmanagement would be more aware of the financial risks undertaken during the developmentprocess. The inclusion of accountants ensures wider focus and perspective and assures thatall costs are explicitly included when making sales and market share forecasts.

Various studies attend to the more general issue of the role of information with respectto the decision-making ability of group discussions. One study in particular (Stasser, 1992)suggests that passing information to decision-makers does not imply that the information,even if it salient to the decision at hand, will be adequately considered — or even broughtup — during a group discussion. Since most group members tend to argue the position theybring with them to the discussion, if no group number is well versed in accounting procedureit is unlikely that advance costing approaches will be adequately represented. Similar pointswere made by Katzenback and Smith (1993) in their seminal review of teams and theireffectiveness. The recurrent theme is that successful teams possess complementary skillsthat are required to pursue high performance challenges.

The American and the Japanese cost accounting systems each provide relevant infor-mation for new product decisions. Just as no one functional model of a project team isadvocated for each and every project or organization, no one cost accounting system isadvocated for the development and launch of all products. The Japanese system allows acompany to compete on price by controlling cost through the top–down methods of valueengineering and Kaizen costing. The American cost system allows a company to competebased on rapid response to segmented customer demand.

Both the American and Japanese cost accounting systems are proactive. By controllingcost and product line extensions, the Japanese system allows the company to competeon price. Customer demand for new product options are addressed through new productintroduction, limiting the potential for unprofitable line extensions. The market trade-off inthe Japanese system is between price and availability of multiple product options.

Using an alternate approach, the American system places greater emphasis on respondingto customer demand. The flow of detailed product information across lower and upper levelsof management through activity-based costing (ABC) allows pricing to reflect customerneeds. NPD may be enhanced by either upper or lower level managers.

Evaluations of American and Japanese approaches to cost accounting information shouldbe framed in an historical context. Traditional cost accounting information methods avail-able to new product teams reflected the financial accounting system. Generally accepted


accounting principles (GAAPs) and SEC regulations dating back to the 1930s require com-panies to value inventory for financial statement presentation. To determine inventory, com-panies maintain the following details by product line: sales in units, sales in dollars, andtotal product cost. Traditionally, this was the only accounting information available to newproduct teams. The rapid growth of computer-based information systems, however, hasdramatically increased accounting’s ability to provide additional information, propellinggrowth in both American and Japanese cost accounting systems.

By including accountants as integrated members, the project team can capitalize fromapplications of the most recent cost accounting techniques in the process of product cre-ation. The accountant can facilitate evaluation of opportunities while avoiding unprofitableextensions that can dilute brand and corporate images. The next section provides examplesfrom industry as to advantages to be gained from knowledge of the American and Japanesecost accounting systems.

3. Why cost accounting is important — some industry examples

The following example illustrates the potential value of Japanese cost accounting ap-proaches. In the late 1980s, Chrysler offered over one million configurations of its carsthrough optional extras, even though 70% of consumers bought their cars straight off dealerlots (Quelch and Kenny, 1994). Unrestrained product line extensions, prompted by the per-ceived need to meet consumer preferences, led to hidden cost increases due to the needto categorize and produce multiple options. The Chrysler brand image was potentiallyweakened due to a diluted unfocused product identity, and relations with distributors werestrained by pressures placed on vendors to add on an ever increasing list of options. Japaneseapproaches to cost accounting can help restrain product line extensions that only marginallyaffect buying behavior.

The Japanese approach stresses control. Costs are managed in three distinct ways (Cooper,1994a). First, the mix of products that are manufactured and sold is strictly controlled byupper level management through the efforts of a multi-disciplinary team. Second, the costsof new products are reduced through the techniques of target costing and value engineering.Finally, the costs of existing products are reduced through the Kaizen system.

Without strong control over product design and manufacturing, middle and lower market-ing managers may add product features in response to sub-segment requests without givingproper consideration to production factors. It has been shown elsewhere that an evaluationof product life cycle cost indicates that 85% of costs are committed upon the completionof product planning, concept design and preliminary design (Raffish, 1991). Competitionfor the same customer base places extra pressures on middle managers, excess capacity canbe filled by producing special orders, but potentially at a loss of manufacturing proficiencyand higher cost.

Juxtaposing Chrysler’s and Nissan’s new product offerings strategy highlights thesepoints: some of the features offered by Chrysler in the late 1980s might have made sense froma profit perspective, others did not. The inclusion of features representing product attributes,such as cruise control and five speed manual transmissions was defensible but only for somemodels. In contrast cruise control and leather seating were standard features in Nissan’s 1995


luxury sedans, five speed manual transmissions were standard in sports models. However,cruise control and leather seating were not available in Nissan’s economy models. By iden-tifying the most appropriate product attributes by model prior to introduction, the Japaneseapproach to cost accounting employed at Nissan prevents unprofitable product line exten-sions allowing Nissan to better compete on price, cost and raising quality. Loading a productwith an unrestricted list of features requires production to identify, track and provide selectedfeatures, such as cruise control, to any and all automobiles. By limiting the number or prod-ucts receiving cruise control, manufacturing can concentrate its resources on lowering costand raising quality allowing Nissan to better compete on price. Resources spent on optionswith limited appeal can be redirected toward developing more clearly defined markets.

Nissan’s strategy specifies engine size by model. The 1995 Nissan Maxima is availableonly with a V6 engine, while the Nissan Altima comes with only a four cylinder engine.Furthermore, other features such as interior and exterior colors and material types are alsoseverely limited. The Nissan Maxima is available only in seven exterior and three interiorcolors. The specification of interior/exterior color and engine by model is representativeof the Japanese cost management approach. Nissan effectively controls costly attributesby limiting cruise control to luxury models at the design phase. Cruise control is availableon the 1995 Nissan Maxima but not available on the 1995 Altima. Cruise control couldbe added to the Altima, however, when a new model is introduced if justified through ananalysis by a multi-disciplinary team and a target costing process. Although, Nissan wasnot the first Japanese auto maker to successfully utilize target costing, their experience canbe viewed both as a successful application of the Japanese approach and as a successfuladaptation of a cost management approach developed outside the company (Howell andSakurai, 1992). The credit for the recent trend in Japanese cost accounting is widely at-tributed to Toyota, which introduced aspects of target costing as part of their successfuljust-in-time manufacturing process (Mishina, 1994).

The Japanese approach stresses control. Companies such as Nissan are able to competeon price, cost and raising quality because the introduction of multiple features and newproducts is controlled from the top. Sometimes, however, failing to respond to customerdemand on a lower level can lead to missed product opportunities. For example, in the1980s the Japanese automobile companies missed the emergence of the mini-van and lighttruck market (Cooper, 1994b). Because their headquarters are in Tokyo and Nagoya, andthe demand for mini-vans and light trucks first appeared in the American market, Japaneseauto makers failed to realize how important it was to develop products in those categories.Similarly, in the race to develop high-definition TV (HDTV) the Japanese appear to remainan analog island while the rest of the world including a consortia led by AT and T, Zenith,General Instrument and MIT, France’s Thomson, and Holland’s Philips is embracing digitaltechnology (Kupfer, 1994).

In the Japanese approach, new products and new product features are introduced solelythrough the efforts of a top level multi-disciplinary team representing design, engineering,marketing, and production. In contrast, the American approaches to cost accounting canimprove a firm’s ability to recognize new product opportunities by expanding the flow ofinformation across upper and lower levels of management. Allowing middle and lowermanagement to react to customer requests provides a broader network in which to capturechanging customer trends. Japanese cost management approaches limit market research


to top management. If the top level interdisciplinary team responsible for new productintroduction is not aware of an emerging customer trend such as the mini-van and lighttruck market, the company could miss a valuable product opportunity.

Recent American cost management approaches stress information. ABC (described later)strives to give managers a better understanding of what it costs to make a product (Raffish,1991). Accurate product costs enable management at various levels to take action on pricingand product mix to increase overall profitability. ABC, which leads to modifications of themarketing strategy of the firm, is most appropriate when customer demand for product lineextensions is high, and customers are willing to pay for expanded product versions.

At Hewlett-Packard’s Boise Surface Mount Center (BSMC) in Idaho, for example, elec-tronic circuit boards are manufactured to customer specifications (Merz and Hardy, 1993).To remain competitive, circuit board manufacturers must react to changing customer demandwithout sacrificing quality. Hewlett-Packard’s BSMC utilizes activity-based cost manage-ment (ABM) (described later) to maximize the dependency between changing customerneeds, production capability, and cost. Circuit boards are made of many component partssome which are standard and some which are unique to a particular customer.

Due to customer needs, the ability to provide fully standardized circuit boards is limited.Customers are not able to adjust their products to fit a standard circuit board. To remaincompetitive, BSMC must adapt to customer need and to remain profitable, BSMC mustminimize the number of unique parts. ABM provides the communication link between alllevels of the company. This is achieved by tracking market trends in combination with theproduction of standard components through the structure of the accounting systems (cost).Through ABM, Hewlett-Packard’s BSMC is able to react to the customer, retain qualityand price their product effectively. Due to the need for specifically adapted circuit boards,customers are willing to pay more for their circuit board, but only within a competitive range.

4. Japanese product costing methods

The Japanese approach to product costing maintains strict upper level control over themix of products manufactured and sold, and over product cost through the techniques oftarget costing, value engineering and Kaizen costing.

New products are identified through market research. Product cost is determined bysubtracting the desired profit margin from the market price. This process, known as targetcosting, is completed prior to introduction of a product. The product target cost is then usedas the basis for determining the purchase price of components and raw materials acquiredexternally, hence, the tie to just-in-time inventory control methods. The target cost cannotbe exceeded if profit margins are to be maintained.

At Toshiba’s computer factory in Ome (30 miles from downtown Tokyo) workers as-semble nine different word processors on the same line by referring to posted displays anddrawings. (Thornton and Erdman, 1992). The displays and drawings reflect the target costand product design introduced when the products were new. They do not change. Designchanges are made only with the introduction of a new product or model.

The critical feature of target costing is its focus on getting costs out of the product duringthe planning and design stages. That is the point at which virtually all subsequent costs


are determined from manufacturing to what customers will have to spend on maintenance.Specifically, the team in charge of bringing a new product idea to market determines the priceat which the product is most likely to appeal to potential buyers. After deducting the desiredprofit margin from the forecasted sales price, the planners develop estimates for each of theelements that makes up a product’s costs: design and engineering, quality manufacturing,sales and marketing. Each of these is further subdivided to identify and estimate the costsof each component that goes into the finished product. Each component is assigned a targetcost. An intense negotiation than starts between the company and its outside suppliers, andamong departments that are responsible for different aspects of the product. Typically, theresult is a projected cost that is within close range of the original target.

The companies most skilled at target costing set their sights on tomorrow’s marketplace.NEC sets target costs not only relative to current retail price and competitors’ costs but inanticipation of what they may become in 6 months or 1 year (Worthy, 1991). When a targetcost approach dovetails with marketing, the result is the development of a product or servicegeared toward specific requirements of the buyer at prices that are attractive to customers.

The initial step is to develop ideas for new products or services. This is best achieved bymeeting with customers and understanding their unmet needs and forming a developmentteam (Hale and Staley, 1995).

The ability to maintain product target cost is supported by value engineering. Value en-gineering is a systematic, cross-functional examination of factors that affect the cost of aproduct in order to find ways to achieve the specified product purpose, at required standardsof quality and reliability, at the target cost. Value engineering is done during the designphase of product development through the team efforts of design engineers, manufacturingand purchasing.

Value engineering produces an optimal product based on identification of primary andsecondary functions. Once set, the product will remain unchanged until replaced by a newmodel with a separately determined target cost and design specifications. At Nissan, targetcosting begins with consumer analysis (Cooper, 1994c). The target price is determinedbased on the strategic position of the new model in the market, expected quality level,and functionality within its competitive market niche. Value engineering is then used todetermine if the model as specified can be manufactured within the allowed target cost.Manufacturing specifications are developed during the value engineering process. Specificoptions such as anti-lock versus disc brakes are identified and specified. Once determined,these options cannot be changed. This process strictly controls the number of product lineextensions. In Nissan’s case, there are no options allowed for brake choice, engine type,number of doors and number of body variations.

In collaboration with marketing and through value-engineering, analysis is undertaken toidentify and confirm innovative and cost effective features. This analysis provides insightinto the features that are important to the buyer and helps to place a value on their presence.As part of the marketing research, the product development team determines the target pricethat the customer is willing to pay and estimates the volume expected to be sold over theoffering’s scheduled life.

One of the most important Japanese management practices is “price down/cost down”(Howell and Sakurai, 1992). It is the Japanese view that prices are more likely to fall thanincrease over time. Kaizen costing, which follows target costing, focuses on reducing the


target cost by a pre-specified amount. Kaizen stands for continuous improvement and thefocus of a Kaizen system is on making the production process more efficient. Manufacturingis given the responsibility of achieving the targeted cost savings without violating designand reliability standards. The savings may be achieved through operations and/or sourcingdecisions. The strength of Kaizen costing comes from its close link with the profit planningprocess of the whole company. Continuous improvement (Kaizen) is implemented duringthe year to attain target profit or to reduce the gap between target profit and estimated profit(Monden and Lee, 1993). The application of Kaizen techniques at Citizens Watch resultedin a shift away from labor to a highly automated plant (Cooper, 1994a,b,c).

Although, Kaizen focuses on continuous improvement in operational efficiency, productdesign is the key to Japanese methods of product costing. New products are developedbased on market analysis. However, this approach, which allows for tight cost control, ishighly dependent on the timeliness and accuracy of the market research. Although, Japaneseapproaches limit the uncontrolled extension of product lines, they do not preclude a misseddiagnosis of emerging market trends. Lower level managers, such as Nissan America mighthave known about the emerging mini-van market, but the Japanese cost accounting systemdid not provide a systematic flow of information including data about emerging marketsacross the levels of management. The result was that top management in Japan missed theinitial opportunity.

5. American product costing

The American approach to product costing places emphasis on responding to customerdemand while maintaining profitability. ABC can help managers identify the products whereimprovement is likely to have the greatest financial impact. Different products, brands, cus-tomers, and distribution channels place widely different demands on a company’s resources(Cooper and Kaplan, 1991). Activity-based systems emerged in firms facing increased com-petition, where management decided that the fastest way to become more profitable was togain an understanding of what it cost to make their products.

Firms moved toward ABC in an effort to provide product information to functional man-agers who wanted to drop seemingly profitable product lines, when hard to make productsshowed big profits, or when a competitor’s prices were unrealistically low (Raffish, 1991).ABC is a historical analysis of how cost ties to individual products.

ABM is a natural evolution of ABC from historical analysis to a more future oriented costallocation system. ABM segregates projected costs into identifiable resources which canbe traced by activity through the use of cost drivers. For example, the Roseville NetworkDivision (RND) of Hewlett-Packard used ABM to identify products it needed to sell toremain competitive (Cooper and Turney, 1989). RND’s initial cost system had only twocost drivers: direct labor and number of insertions. All manufacturing costs were allocated toproducts based on these two cost drivers limiting RND’s ability to identify which productswere profitable and which should be eliminated or thin development curtailed. Through theapplication of ABM techniques, RND added new cost drivers to the system. The system grewfrom two to nine drivers. Six of the nine drivers were surrogates for direct labor or machinehours. The expansion of product specific information allowed designers and managers to


react with knowledge to customer demands for new and/or modified products. Number ofparts, number of manual insertions and number of test hours identified by product allowedfor more informed decision making.

An ABC accounting system traces historical cost through identification of activities toproducts. Number of manual insertions, for example, may vary significantly by product.Products with a large number of manual insertions may be significantly more costly. Theinformation provided by an ABC system allows management to either charge more for theseproduct extensions, delete these products from the line, or direct engineering and manufac-turing to search for an alternative approach to lower cost. Similarly, when customers makedemands for a new or modified product requiring a significant number of manual insertions,an ABM system allows management to react to the demand with knowledge. Pricing deci-sions can be make which will more closely reflect actual true cost of producing the product.

Divisional and product line managers can use ABC to compare the profitability of variouscustomer segments, brands, or regions and match their demands to specific product exten-sions. ABM leads to continuous evaluation of product development opportunities. NeitherABC nor ABM may, however, protect against inefficient product extensions because costcontrol as such is not a corner stone of the approach.

It should be recognized, however, that in the late 1980s and into the1990s more and moreAmerican and Japanese companies attempt to break-out of their more traditional accounting“cultures”. In fact, the assertion is made the companies become “product juggernauts”because they move beyond the traditional quality/cost model and find ways to keep costlow while increasing quality (Deschamps and Nayak, 1995). It is suggested that successfulJapanese companies are eager to collect and assess customer feedback after the launch ofthe product. Customer demand drives product changes (usually minor) which in turn yieldfaster introduction cycles at lower costs.

Reviewing models focusing on NPD and applications of managerial accounting systems,suggesting an increased need for financial information in NPD teams, two propositions arestated and tested with the survey data.

Proposition 1. The NPD team’s desire for American and Japanese cost Accounting infor-mation is increasing, while the teams desire for traditional cost accounting information isdeclining.

Proposition 2. The role of accounting within the cross-functional NPD team is growing.

6. Research methodology and survey method

A questionnaire was developed based on an examination of the NPD literature and currenttheory and practice in the evaluation of cost accounting information. Five experiencedresearchers from the accounting and marketing fields reviewed the questionnaire refining itto make it more germane for study participants.

A total of 243 managers were surveyed using a convenient sample approach. The initiallist of participants was generated from executive education data bases of two large urbanuniversities. Only managers affiliated with NPD teams were approached. All individuals


Table 1New product development teams characteristics of the respondentsa

Functional area All Core business

Manufacturing Services Utilities

Engineer 16 5 2 8Manager/director coordinator 25 3 8 12Research/R and D 6 1 4 1Product manager development 21 4 7 10Manufacturing 2 1 1Project manager 8 3 2 2Planning 3 2MIS/data analysis systems 7 3 3Marketing/sales 9 3 3 2Materials 1 1Support services 3 2 1Financial services 5 3 2Consumer affairs 5 2 1Technical 2 2Other 13 2 3 3

126 22 41 49

a The 14 respondents did not specify core business.

selected for participation received a letter from the universities detailing the importance ofthe project and the need for complete and reliable information. The survey was provided ina separate sealed envelop. A self-addressed return envelope accompanied the survey.

The confidentiality of all responses was assured in a letter attached to the survey whichintroduced the researchers, discussed the purpose of the project and provided a name andnumber to contact should there be any problem or issue.

Two sets of questionnaires were sent. Ultimately, 134 responses (or 58.3%) were received.Of the 134 responses, eight were returned by managers no longer involved in NPD bringingthe total of usable responses to 126. An examination of non-responses has not revealedany differences (corporate or personal characteristics and affiliations) compared to studyparticipants.

All 126 respondents were managers and members of NPD teams. Of the 126 respondents,22 represented manufacturing (e.g. industrial, defense, adhesive, plastic), 49 representedutilities (e.g. power, telecommunications), and 41 represented other services (e.g. healthcare, food, financial services.

A more detailed participant characteristics’ profile is presented in Table 1.

6.1. Survey components

The questionnaire contained three parts.

1. Corporate characteristics including respondent’s title and job description, sales in dollars,core business, and the list of functional areas that could be represented in a project team.


2. The 11 questions pertaining to costs, profits, sales revenues budget for support services,etc. that might be employed by the NPD team(s). Respondents were asked to indicatetheir beliefs with respect to the utilization of any given financial measurement on a9-point scale where “1” implies never elicited and “9” always elicited.

3. The 11 questions pertaining to same financial measures and a 9-point scale. The focuswas placed on the desired role for the accountants and the accounting information sys-tem when the financial measurements when eliciting or analyzing financial data by theproject team.

The 11 financial measures included seven management accounting data items. Two items,“projected sales” and “projected sales in dollars”, are representative of traditional account-ing. Three items, “projected per unit profit”, “target cost per unit”, and “breakdown ofestimated cost by major cost item(s) such as material(s) labor, delivery”, are representativeof new management accounting techniques. Two items, “estimated total cost per unit” and“estimated costs” while representative of traditional accounting may also be considered asnew information to be analyzed. Total cost per unit as traditionally determined (i.e. underfull-absorption costing) has recently been criticized as imprecise in the literature dealingwith new techniques in managerial accounting (Cooper and Kaplan, 1988; Young and Selto1991; Argyris and Kaplan, 1994). Estimated price is also in integral part of new manage-ment accounting techniques, specifically target costing (Howell and Sakurai, 1992; Tanaka1995).

7. Demand for American and Japanese cost accounting information

Research Proposition 1 examines the “desirability” of American and Japanese cost ac-counting information for the NPD team.

Accordingly, three dependent variable (traditional, American, and Japanese) approachesto cost accounting information and two independent variables (desired, and actual use ofaccounting information) were utilized in the analysis. Definitions of the dependent andindependent variables are presented in Appendix A.

The means, and ranges for the three cost accounting information methods extracted appearin Table 2.

The table indicated that NPD team members surveyed (n = 114) reported significant(P < 0.0001) demand for more American and Japanese accounting information (wheredemand is interpreted as “desired” versus “elicited”). Respondents did not report an in-creased desire for traditional cost accounting formation. Regression analysis revealed no

Table 2Test of significance (all respondentsn = 114)

Elicited (mean) Desired (mean) Difference

Traditional 6.04 6.31 −0.27American 6.17 7.21 −1.04a

Japanese 5.58 6.66 −1.08a

a Thet-test results: elicited vs. desired, significantly different at 0.001 level.


Table 3Orientation of the new product development team member (i.e. job description)

Elicited Desired Difference

Operations (means)Traditional 5.67 5.72 −0.05American 5.94 6.96 −1.02Japanese 5.30 6.57 −1.27a

Management/finance (means)Traditional 6.31 6.56 −0.25American 6.58 7.16 −0.58Japanese 5.91 6.58 −0.67a

Planning and development (means)Traditional 6.03 6.38 −0.35American 6.17 7.45 −1.28b

Japanese 5.50 6.78 −1.28b

a Thet-test results: elicited vs. desired, significantly different at 0.05 level.b Thet-test results: elicited vs. desired, significantly different at 0.01 level.

significant interactions between the functional orientation of the NPD team member (i.e.job description) and number of annual NPD teams.

Demand for cost accounting by job title and the number of annual NPD teams has alsobeen examined. As shown in Tables 3 and 4, respondents reporting less than four NPD teamsannually consistently elicited and desired more cost accounting information than respon-dents reporting more than four teams. This could be due to either time pressure or otherinformation sources available to companies working simultaneously on several projects.In general, respondents indicates a desire to utilize more American and cost accounting

Table 4Number of annual new product development teams

Number of annual teams

Mean (1–4) (1);n = 51a Mean (>4) (2);n = 42a

TraditionalElicited 6.20 5.46Desired 6.40 5.85

AmericanElicited 6.16 6.00Desired 7.19b 7.06c

JapaneseElicited 5.58 5.45Desired 6.73d 6.20c

a The 21 respondents failed to identify the number of new product development teams (in their division) ineither 1995 or a typical year.

b Thet-test results: elicited vs. desired, significantly different at 0.01 level.c Thet-test results: elicited vs. desired, significantly different at 0.05 level.d Thet-test results: elicited vs. desired, significantly different at 0.001 level.


information. Again, regression analysis revealed no significant interactions between orien-tation of the NPD team member (i.e. job description) and number of annual NPD teams.

Respondents from planning and product development demand significantly more (P <

0.01) American and cost accounting information. All respondents (operationsP < 0.05,management and financeP < 0.05, and planning and cost developmentP < 0.01) de-manded more Japanese cost accounting information. Team members from operations con-sistently elicited and desired less cost accounting information, perhaps because they haveaccess to other kinds of information available in production.

Respondents reporting less than four NPD teams annually, consistently elicited and de-sired more cost accounting information than respondents reporting more than four teams.One possible interpretation is that with less teams the organization is prepared to dedicatemore time and resources to information collection.

The second research proposition asserted that the role of accounting within the cross-functional NPD team is growing.

It was found that accounting was consistently ranked as the least important functionalteam member. This finding did not vary by “job title” or “number of annual NPD teams”.R and D, manufacturing, marketing and finance were found to be the most representedfunctional areas in project teams. Accountants were also the most likely team member tobe overlooked — 66% of respondents did not included accountants as team members. Infact, the “other” category ranked higher than accounting.

8. Implications for product management

The role of product management within business organizations has been evolving overthe years. As a result we can identify a whole range of brand management entities rang-ing from an individual who is solely responsible for her product line performance, to amarketing manager in charge of several product lines, to a cross-functional team that isresponsible for the development and launch of products within a category. At this point intime there is enough evidence (including anecdotal) to suggest that emerging Japanese andAmerican cost accounting approaches have been successfully implemented in a variety ofsituations but also that they each have their limitations. Thus, for example, after a companybegins pursuing methods for adding value to a product its ability to sustain this advantagewill depend on a coherent business system involving suppliers, distributors, and customers(Deschamps and Nayak, 1995).

The advantages of the new approaches in terms of the more realistic treatment of costshave been extensively cited elsewhere as well as in this paper. Dealing with the limitationsof each approach however, is not an issue that has been adequately addressed. It appears thatthe key issues are the flow and direction of cost and market intelligence related informationas well as the timing and decision making authority regarding two crucial decisions: whichnew products to launch including costing and pricing policies and how many extensionsshould be added.

Under the top–down Japanese system, information related to valuable market trends mayget lost due to the incessant pressures by top management to reduce costs and meet targetprofits. One possible solution is to increase the authority of middle managers (marketing


and production) to facilitate product launches that are more in line with shifts in consumerpreferences.

Likewise, an important flaw of the American approach is the temptation of quick returnsand the perceived low risk of product extensions. Unwarranted extensions might result inthe launch of marginal products. In this situation it is recommended that the performanceevaluation of brand managers should be based on a longer run time horizon where thefinancial contribution of extensions can be carefully evaluated using measures such asoverall category benchmarks, sustained demand, opportunity costs and the like.

An important contribution of this case study is that a wide array of companies fromvarious sectors of the economy have indicated interest and desire to obtain the kind ofinformation that American and Japanese accounting techniques can provide. We considerthis finding to be particularly significant since all respondents were active members of aNPD team. Respondents did not, however, support the notion of including all accountantsas members in project teams. We can only speculate as to the whys. More importantly webelieve that in the current competitive environment where organization can only dedicatethan resources to alternative project the addition of an accountant to a team can enhancethe collection and interpretation of cost data. This in turn should help to identify the mostappropriate product projects for the company.

Integrating the accountant into the project team would allow the organization to maximizethe information provided by the cost accounting system. The Japanese cost accounting tech-niques, for example, are very advantageous when the product life is reasonably known, andunexpected demand for new or innovative product features is minimal. In a stable productsituation, Japanese methods add valuable control and allow the organization to maximizeproduct quality at lower cost leading to significant pricing advantages and profitability.When the product life cycle is subject to change due to unstable consumer preferences,however, the American cost accounting techniques may provide a competitive edge andlead to greater profitability due to the open communication channels. ABC allows all levelsof management to learn from historical data. ABM allows all levels of management to learnfrom current data, thereby increasing the likelihood that new product opportunities andunique product niches will be recognized and properly exploited.

These considerations could be incorporated into the following framework where theobject is to be competitively responsive to market trends while also identifying designparameters based on what they cost.

The framework depicted in Fig. 1 focuses on the types of information that could be elicitedby the marketing and accounting functions throughout the product creation process.

The combination of information inputs in each development phase and the delineation offunctional information collection responsibilities should contribute to the achievement of thebusiness objectives as effectively and efficiently as possible. In addition, as indicated in Fig. 2the decision making domain of product/marketing managers is redefined to include cost ac-counting information inputs to enhance resource utilization while developing new products.

9. Summary

Cost accounting systems are proactive and can contribute to the improvement of theNPD process, as shown by the recent trends in American and Japanese cost accounting

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techniques. Factors such as marketing and technological synergies have been discussedelsewhere when evaluating determinants of new product performance. In the same vein weconsider the fit between the development process and aspects of recent trends in managerialaccounting as an equally important determinant. Total innovation management must includethose elements from the Japanese cost accounting system that facilitates cost containmentwhile staying attuned to changing market trends which is enhanced by the American system.As such, strict cost control is not the only goal. Rather, cost containment especially withrespect to line extension in combination with the use of integrated information systems thatplace decision making at lower levels and facilitate rapid response to consumer demand isthe approach advocated here.

In this context a premium is placed on the market intelligence gathering process includingassessment of price/performance of competitive products and the likelihood of purchase foralternative configurations. Lining cost containment discipline, customer orientation, com-munication flows and intelligence gathering mechanism aids in identifying areas of pro-duction or design where costs can be reduced without compromising customer satisfaction.The integration of accountants into the project teams by corporate decision-makers cancontribute toward the achievement of these goals.

Appendix A

Dependent variablesa

Traditional cost accounting informationProjected new product sales in unitsProjected new product sales in dollarsEstimated product cost (i.e. total cost per unit)

American cost accounting informationEstimated product cost (i.e. total cost per unit)Break-down of estimated product cost by major cost item such as major material(s),

labor and delivery

Japanese cost account informationProjected per unit profit for new productsEstimated product price per unitEstimated product cost (i.e. total cost per unit)Determination of allowable (i.e. target) product cost per unit for trial production:

comparison of production targets to actual trial cost by unit

Independent variablesActual use of accounting information (elicited)Desired accounting information (desired)

a Note: product cost is a significant factor in each of the three cost methods (traditional,American and Japanese). The analyses, however, were done both with and without product


cost as part of the American and Japanese cost systems. Only those results significantunder both approaches (i.e. with and without product cost for American and Japanese) arereported.

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the accountant’s contribution to product development teams — a case study

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