Please review the below essays for completion 21 July 2011 midnigh.docx

Please review the below essays for completion 21 July 2011
midnight. Price 200 dollars for 15 pages minimum double space
courier new 12 font. Kindly accept and separate each
acc501cs1, cs2, cs3, cs4, and cs5.
ACC501CS1 (3 to 5 pages double spaced courier new 12 pt
font)
Case assignment expectations:
This case will give you experience in the format of our case
method.
You will begin by learning about financial accounting standards
and current trends. Further, you are introduced to the annual
report, which typically includes the audited financial
statements. The submission should be 3-5 pages typed and
double-spaced.
The following items will be assessed in particular:
There are two parts to this case.
Part I. Search the Internet. Discuss each of the following terms
or concepts and their significance for the preparation of
financial statements. In addition, comment on how the five
terms or concepts below relate to each other.
1. Generally Accepted Accounting Principles (US GAAP)
2. International Financial Reporting Standards (IFRS)
3. Norwalk Agreement (October 2002)
4. Generally Accepted Auditing Standards
5. International Auditing and Assurance Standards
Part II. Refer to the following three sets of annual reports which
contain the financial statements. Use the latest financial
statements -- for the year 2010, if available. First read an
overview of the company so you are familiar with the company,
its products/services and markets and then review the annual
report and supplemental financial statements.

1. Apple, Inc. http://investor.apple.com/financials.cfm
2. Swatch Group
http://www.swatchgroup.com/en/investor_relations/annual_and_
half_year_reports
3. Nikon http://www.nikon.com/about/ir/ir_library/ar/index.htm
Required:
1. Briefly comment on the companies, the appearance and
presentation of the annual reports.
2. How the terms and concepts defined in Part I affect the
information reported the financial statements listed above?
3. Make three comparisons and reach three conclusions about
each company from the financial information you find in the
annual report. Prepare a table to summarize your findings.
4. Briefly comment on the ability to compare and contrast the
information in your table.
ACC501CS2 – (3-5 pages typed and double-spaced courier new
12 font)
Case assignment expectations:
Cost Volume Profit Analysis and Costing for the 21st Century
Read all the required readings in the background materials
about Cost Volume Profit Analysis. Make sure you understand
this method and the breakeven analysis which goes with these
concepts.
(n.a.) Calculating the Break-Even Point and the Contribution
Margin, Tripod.com. Retrieved from:
http://members.tripod.com/devryproject/BreakEven.htm
These site have detailed slide presentations of cost-volume-
profit analysis.
Cost-Volume-Profit-Analysis, Retrieved from:
http://www.slideshare.net/brianna1405/cost-volumeprofit-
relationship
http://www.slideserve.com/presentation/24847/Cost-Volume-
Profit-Analysis

Review this site for a discussion on the preparation of a
contribution form of income statement.
(n.a.) (2011)Contribution Margins, Small Business Owners
Toolkit. Retrieved from:
http://www.toolkit.cch.com/text/P06_7520.asp
Here is an excellent resource on CVP. Be sure to study all the
links and samples.
(n.a.) (2011) Cost Volume Profit Relationship, Accounting for
Management Retrieved from:
http://www.accountingformanagement.com/cost_volume_profit.
htm
Now carefully read the following article:
Costing in new enterprise environment: A challenge for
managerial accounting researchers and practitioners
Krishan M Gupta, A Gunasekaran. Managerial Auditing Journal.
Bradford: 2005. Vol. 20, Iss. 4; pg. 337, 17 pgs
Abstract (Summary)
Faced with new wealth creation paradigm, triggered by
technology and relentless globalization of markets, increasing
number of companies are becoming knowledge-based
enterprises. This paper aims to discuss the change in enterprise
environment; evolution of performance and cost measures; and
the challenges for managerial accounting researchers and
practitioners in developing value-based costing and performance
measurement systems (PMS). A conceptual discussion and
approach are taken. Internet and e-commerce have changed
forever the way companies conduct their businesses. Virtual
enterprise and efficient supply chain management systems will
shape the future of these enterprises. Organizations are trying to
become agile enterprises with the help of strategic alliances of
firms and integration using information technologies.
Traditional performance and cost measures are no longer

suitable for developing and managing enterprises in the so-
called new environment. In order to remain relevant and to add
value, cost and performance measures must be designed and
systematically evaluated to reduce the often-unnoticed
mismatch between strategic goals and operational tactics.
Suggestions are presented for future research directions in
managerial accounting areas that would address the
requirements of new economy enterprises.
»Jump to indexing (document details)Full Text
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Copyright MCB UP Limited (MCB) 2005
[Headnote]
Abstract
Purpose - Faced with new wealth creation paradigm, triggered
by technology and relentless globalization of markets,
increasing number of companies are becoming knowledge-based
measurement systems (PMS).
Design/methodology/approach - A conceptual discussion and
approach are taken.
Findings - Internet and e-commerce have changed forever the
way companies conduct their businesses. Virtual enterprise and
efficient supply chain management systems will shape the future
of these enterprises. Organizations are trying to become agile
enterprises with the help of strategic alliances of firms and
integration using information technologies. Traditional
performance and cost measures are no longer suitable for
developing and managing enterprises in the so-called new
environment. In order to remain relevant and to add value, cost
and performance measures must be designed and systematically
evaluated to reduce the often-unnoticed mismatch between

strategic goals and operational tactics.
Research limitations/implications - Suggestions are presented
for future research directions in managerial accounting areas
that would address the requirements of new economy
enterprises.
Originality/value - Alerts managerial accounting researchers
and practitioners to develop new costing and PMS taking into
account the new enterprise environment.
Keywords Accounting, Business environment, Accounting
research
Paper type Research paper
1. Introduction
Accounting has become the most intellectually challenging area
in the field of management, and the most turbulent one. All
these new accounting theories aim at turning the accounting
data into information for management decision-making.
Peter Drucker
Accounting has always been used for decision-making, resource
allocation, and operational control (Johnson and Kaplan, 1987).
From the times of the Egyptian Pharaohs, to the European sea
voyages to the East Indies, and the rapid industrialization of the
late 19th century, accounting information was the managerial
tool of choice for operational control. However, the external
financial reporting aspects of accounting information systems
became dominant and overshadowed its managerial role in the
early 20th century. The accounting profession blossomed in
size, scope, and stature along with its role as the state
sanctioned sole purveyors of attested (reliable) financial
information so necessary for the smooth functioning of our
capital markets. However, during the last 20 years, the value
and profitability of this attest function declined due to the
evolution of alternate sources of relevant information,

globalization, technology, and competitive forces (Elliott,
1992). At the same time, driven by the pressing need to provide
relevant and timely information for strategic and operational
control, there has been a systemic shift and greater emphasis in
the role of accounting information as an increasingly important
tool for management control (Drucker, 1992; Johnson and
Kaplan, 1987).
There is relentless pressure to make accounting information
more meaningful for operational decisions and retain its
relevance in the present day economy. The current era of
intense global competition is compelling all enterprises to aim
for a renewed commitment toward excellence and creating value
for clients. Increased attention to the business processes, quality
of products and services, level of inventories, management of
value chain, and improvement of workforce policies, is
providing the much-required edge to these enterprises to help
them become world-class companies. In advanced
manufacturing or service environments, these functions become
even more critical and sometimes take a life of their own since
it is difficult to directly observe all the value creating activities
under one roof or single management control as they are mostly
outsourced as well as distributed.
While there are many areas in managerial accounting being
redefined due to the paradigm shift in manufacturing and
service enterprises, performance measurement and costing
require utmost and immediate attention. Accordingly, this paper
is focused on these two critical issues in new enterprises. While
singular cost-based performance measures are not sufficient to
efficiently manage today's complex enterprises operating in
even more complex environments, even the current fad to adapt
multiple non-financial measures may not be appropriate unless
they are aligned with the organization's strategic mission. On
the other hand, such "misaligned" performance measures are
dysfunctional and cause greater strain on the organization's

managerial resources.
One of the critical roles of managerial accounting is to identify
and eliminate (or at least try to minimize) non-value adding
activities throughout the value-chain. The ultimate goal is to
promote value-adding activities. The mismatch between
strategies and tactics, largely unintentional, with the overall
goals and objectives of the organization trigger most of the non-
value adding activities in operations. Non-value adding
activities lead to higher production costs, inefficiencies, and
hence the loss of profitability. Therefore, to remain relevant and
to create value, performance measurement systems (PMS) must
attempt to minimize this mismatch. Any misalignment at
strategic levels gets amplified into a much larger mismatch of
the goals at tactical operational levels. Neely et al. (1995)
present a comprehensive literature survey and research agenda
for PMS design. Sriram (1995) discusses the accounting
information system for flexible manufacturing systems. These
reviews provide a strong basis for the change in performance
measures and costing system with the objective of meeting the
requirements of modern organizations. However, they did not
address some of the specifie issues related to costing and
performance measures in virtual enterprise, electronic
enterprise, and supply chain environments.
Traditional management control systems like budgetary
controls, pricing, and make or buy decisions, are embedded in
financial accounting and costing. However, purely cost-based
operational control measures or other similar measures are no
longer relevant, especially in the environment surrounding the
enterprises in the new economy, since such measures are
reactive and lagging indicators. While the performance
measures that are linked to the strategic business process may
be more difficult to establish and measure, they are much more
relevant. Operational measures and controls that are focused on
identifying and solving problems in aligning the tactics with

strategy are far more meaningful than the traditional
performance measures. However, we are not suggesting that the
historical cost-based measures are not needed. We still need
these lagging indicators for other reasons. For example,
historical cost-based measures may still be needed to validate
contracts (debt) and to provide a benchmark for long term as
well as cross-sectional comparisons.
Successful enterprises must remain competitive and create value
for their stakeholders; otherwise they risk the danger of
becoming extinct. The wealth creating and wealth accumulating
prescriptions of the industrial era of the last 200 years do not
hold good anymore (Elliott, 1986, 1992). Not withstanding the
well-deserved natural evaporation of "irrational exuberance"
bubble, and the current downturn in the economy, the business
model of the 21st century remains to be drastically different
from the business model of the past and is still very much valid
and viable. For example, we have moved from mass-production
of goods and services ("one-size-fits-all") to mass-
customization aimed at serving the needs of the smallest niche
expeditiously and in a cost-efficient manner. Technology gives
us the tools to analyze and deliver client satisfaction at the
micro-level in the most cost-effective manner. Technology is
both the driver and facilitator of this trend. Despite the
dot.com-bust, the technological and global competitive forces
are here to stay. In short, there is no looking back or turning
back of the clock on the technological frontiers. The pressures
of increasingly globalized competition dictate that the
individual customer receives the most value-added service in
the shortest possible time frame. Doing "more with less" and
"24/7" are not mere popular phrases or passing fads, but they
are here to stay with us as the business models of 21st century
and beyond. The recent economic data on the US economy
clearly confirms the secular trend of increasing productivity and
the effects of continued pressures to ratchet up the efficiency
(US Bureau of Labor Statistics, 2002). In short, the current

economic downturn has to do more with the burning up of the
overcapacity built during the dot.com rush of 1990s rather than
the negation of the underlying technology itself.
Combined pressures of rising competition, globalization, and
advances in technology have coalesced together to force the
enterprises all over the world to invest in more effective and
extensive managerial accounting systems. Successful fusion and
management of accounting and information systems is a major
challenge for the managers of the 21st century (Drucker, 1992).
For example, Lockamy and Smith (2000) propose target costing
as a means to management of supply chains.
Managerial accounting, while not formally named as
managerial, has always been charged with the responsibility to
provide more accurate and relevant cost and other information
to the managers for making decisions. Accounting information
has been used for making strategic, tactical, and operational
decisions in large organizations much before the mandatory
financial accounting became synonymous with accounting
during the last century (Johnson and Kaplan, 1987). The major
drawback of traditional financial accounting-based information
has been its rear-view approach to performance measurement.
Therefore, a more proactive approach toward performance
measurement is required. It has to be forward looking and guide
the internal business processes for achieving the goals of the
enterprise. The current approach is passive and reactive which
is more concerned with the causes of past performance rather
than looking forward to control and guide the internal business
processes in the right direction. We envision a proactive
management control tool - Measurement Alignment Matrix, for
aligning the operations with the goals and objectives by
identifying and emphasizing performance measures that bring in
line the strategies and tactics with the goals and objectives of
the organization. In short, performance measures will add

significant value if they are aligned with the strategic, tactical,
and operational goals of the enterprise. Value is created when
strategy is successfully translated into organization-wide
actions that are aligned with the strategy. Effective and value
adding PMS become the crucial link between strategy and
execution.
In this paper, we discuss the research on performance measures
and cost management in organizations in new economy that
include virtual enterprise, supply chain management (SCM), and
e-commerce environments to successfully compete in a global
market. For instance, investing in knowledge capital and
information technology plays an important role in developing
organizational competitiveness in the 21st century. Therefore,
understanding the importance of managing and controlling
costs, and performance in new enterprise to compete in the
global market has become a primary challenge. This paper sets a
new direction for research in cost accounting for providing
accurate information to make right decisions in the new
enterprise environment of the 21st century.
The organization of the paper is: section 1 introduces the scope
for new costing system and performance measures in the 21st
century operations environment. section 2 deals with the
background for the research. Suggestions for new costing
systems and performance measures in virtual and e-commerce
environments are discussed in section 3. The challenges for
managerial accounting researchers and practitioners are
presented in section 4. The conclusions and future research
directions are presented in section 5.
2. Background for the research
According to Johnson and Kaplan (1987), and various other
researchers, the managerial accounting systems in the
nineteenth century were well developed for the needs of the

times as early as the 185Os. It is only the excessive focus on
(state) mandated financial reporting of the last 70 years that
distracted the accountants from channeling their efforts to
develop suitable managerial accounting systems for the
evolving business models. For example, Fleischman and Tyson
(1997), revisit the accounting systems prevailing in the Lowell
Textile Mills and the Springfield Armory before the 185Os.
Their archival investigation reveals that the operations of these
large enterprises "necessitated the use of detailed and
comprehensive accounting systems". These management control
systems were more than adequate for their times and provided
the much needed coordination, control, and "discipline" for
large enterprises. The role of accountant and accounting
information was pivotal to operational control and decision-
making.
However, along with the rise in preeminence of external
financial reporting, the managerial role of accounting started to
take a backseat. Drickhamer (2002) analyzes a recent KPMG
survey of 143 upper executives from industry and government.
Most of these, users of the information, report that the current
PMS, while still somewhat effective, are not satisfactory. The
existing performance measures based on financial, operational,
and functional efficiency are inadequate for the new business
models. These measures are lagging and reactive and lack
predictive value. The study finds that successful measures are
balanced and have strong links between strategic and
operational measures. Measurement systems fail when they
measure what is easy to measure rather than what is relevant,
having too many measures, and they are not linked to company
goals. Strategic performance indicators must track the
marketplace, monitor resource management, and look to the
future.
While there were no significant improvements in managerial
accounting practice from 1930s to 1980s (Johnson and Kaplan,

1987), the last two decades have seen a renewed interest to push
the frontiers of knowledge in this area. "The old accounting
system, which tells us the cost of material and labor, is not
applicable. Even in manufacturing, perhaps three-fourth of the
value added derives from knowledge". The emphasis has been to
include non-financial measures in the valuation and
performance measurement models and to find control
mechanisms for the new economy enterprises and how to make
them more responsive to the global and fleeting opportunities.
Notable examples of these innovations in this area include,
activity-based costing (ABC), activity-based management
(ABM), agile manufacturing (AM), balanced score card (BSC),
just in time inventory (JIT), SCM, total quality management
(TQM), and theory of constraints (TOC).
However, most of these recent managerial accounting practice
developments were for the traditional manufacturing
organizations and may have to be significantly modified or even
replaced with new techniques to take into consideration the
realities of business models for new enterprise environments of
the 21st century.
A brief review of evolution of performance measures during the
last 100 years clearly highlights the move toward a more
holistic approach toward performance measurement. Singular
financial cost-based performance measures were more than
adequate for the needs of the management of pre-industrial and
early industrial stable production systems. The evolution of
larger and more complex organizations driven by the necessity
to take advantage of economies of scale increased the role of
management control systems. The control systems of this era,
e.g. the DuPont system, were solely based on financial cost and
reporting models. The last 25 years have witnessed a crying
need for a more holistic approach for performance
measurements covering all aspects and functions of the
organization. Financial and non-financial performance measures

covering different functional areas have been discussed in the
literature. However, most of these measures are still grounded
in traditional enterprises. Further, it is quite difficult to relate
these measures to the business goals and objectives of the
enterprise. Most of the field studies report that there is over-
measurement with a tendency to measure what can be readily
measured rather than what is relevant (Birchfield, 2002).
Measurements should be able to influence the business process
and add value by relating to the goals of the enterprise.
A summary of the evolution of performance measures over the
last 100 years is presented in Table I.
Pre-20th century industrial era performance measures were
solely driven by cost as measured by the accounting systems.
Historical cost has always been and will always remain an
important measurement of enterprise performance.
Traditionally, costing has served several useful purposes, as
follows:
(1) control of activities, products and services, and the
economic units;
(2) financial reporting of assets (inventory) to the outside
world;
(3) marketing decisions such as product-mix and pricing;
(4) benchmarking the performance; and
(5) motivation and rewards for the employees and managers.
Fredrick Taylor and his colleagues Frank and Lillian Gilbreath
pioneered early 190Os performance measures. They focused on
analyzing the core processes and aimed at developing optimal
algorithms for activities by using time and motion studies. The

French process engineers at the same time evolved the concept
of "dashboard" to provide an easy read on the state of affairs of
the organization in different functional areas.
Pre-war period of 1930s-1940s witnessed the ideas of W.
Edward Deming and Walter Shewhart that focused on
operational processes. It was quite a while before Deming's
ideas crystallized into TQM and gained acceptance in Japan
before United States.
Financial accounting models dominated the post-war period of
1960s. The global competitive forces of 1990s forced companies
to look inwards to improve quality and add value to the
customer in a short order. Kaplan and Norton championed the
BSC approach for performance measurement. The model
emphasized the need to balance the financial perspective with
the customer, internal business process, and learning and
growth issues.
Table I.
Evolution of performance measures
The last decade witnessed a frantic search for valuation models
that would include long-term considerations (EVA) as opposed
to the short-term (ROI) measures. At the same time, researchers
and practitioners have been trying to incorporate the human
capital in valuation models.
2.1 Evolution of cost measures
As already discussed in preceding pages, historical cost has
always served as a very useful measure of performance, control,
and critical managerial decisions viz., make or buy, sales mix,
etc. Starting with very simple concept of average cost (total
cost/output), various complex cost models have been used.
Table II provides a summary of evolution of different cost

measures over time.
Table II.
Evolution of cost measures
Costing exercise is an exercise in approximation. It is both a
science as well art. While it is fairly easy to isolate, track, and
trace "direct costs" it is very difficult to determine the precise
amount of "indirect costs" attributable to a cost object (product,
service, department, etc.). Therefore, all cost models involve
some degree of approximation. Trying to find the "true" and
"objective" cost of a particular cost object (product, service,
customer, transaction, process, responsibility center, etc.) is the
"holy grail" of managerial accounting.
Average cost (Pre-industrial and early period). Total cost
divided by the total output. This model was very effective and
efficient in determining the cost in single product and stable
environments of early and pre-industrial era. For example,
(average) cost of transporting one ton of material over one mile.
Such measures were also effective for various managerial
decisions as well as financial reporting due to the nature of the
business - single stable product.
Total manufacturing cost (Until 1940s). Also known as the
absorption or full costing approach. The total manufacturing
cost is broken down into direct (material and labor) costs and
indirect (manufacturing overheads). The model approximates
the indirect costs by estimating beforehand and averaging them
over single or multiple cost pools. The cost pools could be
department based or company wide. The predetermined
overhead costs are applied uniformly based on some cost driver
(usually direct labor, material, or labor or machine hours). This
traditional volume-based approach is quite robust for stable
production environments.

This traditional volume-based approach is quite valid for
facilities producing products with less diversity and with stable
production runs - a model hardly suitable for advanced new
economy enterprises. Application of such models leads to
serious cost distortions and quite often results in serious
dysfunctional or counterproductive behavior within the
enterprise.
The absorption (full) cost model is used for reporting the
inventory and cost of goods sold in financial statements,
prepared under the Generally Accepted Accounting Principles
(GAAP).
Direct costing (1940s-1980s). Also known as the variable or
marginal costing approach. This approach attempts to isolate
only the direct or marginal costs. This model is extremely
useful for various "contribution-margin" based managerial
decisions with in the organization. This model based on
classification of costs as fixed or variable, ties well with the
cost volume profit (CVP) analysis for decision-making.
However, this approach has severe limitations, especially when
applied for long-run decisions.
Opportunity costing (1940s-). It focuses on the often-omitted
cost of the second best alternative that must be considered for
managerial decisions, especially for transfers within the
organization and make or buy decisions. The opportunity cost
model helps managers in specifically identifying the cost of
missed opportunities. The approach highlights certain
behavioral aspects of cost decisions. For example, we tend to
ignore the opportunity costs and on the other hand remain
fixated on sunk costs, which have no bearing on the future costs
or remain constant amongst different alternatives.
Transfer pricing (1940s-). Transfer price models assist in
rational allocation of shared costs when goods and services are

exchanged between independent segments within a
decentralized organization. The approach draws upon the direct
cost and opportunity cost models. Transfer pricing mechanism
can also be abused by shifting profits in case of organizations
operating under differing tax jurisdictions.
Activity-based costing (1980s-). ABC focuses on identifying the
cost of major activities and allocating them to the cost object
based on their usage of a particular activity. ABC is considered
a major innovation in managerial accounting during the last 20
years. Essentially, it attempts to convert most overhead
(indirect) costs into direct costs - directly traceable to the cost
object. However, the ABC model while a definite improvement
over the traditional volume-based approach still retains the
approximate and subjective nature of cost measurement. ABC
focuses on developing different cost pools for different
activities. It attempts to reduce cost measurement distortions
caused by the traditional single cost driver volume based
approach when costing products/services that use the enterprise
resources in differing proportions. The approach tries to reduce
the weight of "indirect overheads" that cannot be allocated to
smaller sized cost pools. Application of ABC is, however, is not
that easy; it requires significant resources of the enterprise,
commitment from the top management, and sound judgment by
the ABC team. ABM grew out of ABC to guide the strategic
management of an enterprise based on the insights achieved
during the implementation of ABC. However, over-emphasis of
cost aspects of operations can distract the enterprise from its
primary goals and objectives and neglect of customer focus
Oohnson, 1992).
Market based (Target) costing (1990s-). This approach is a
direct reflection of the relentless forces of competition driven
by the globalization of capital and economies facilitated by
technology. Market economics sets the price and a target for the
cost is set beforehand and the engineers and designers strive to

fit the product within the target (budgeted) cost.
Product life cycle costing (1990s-). This approach takes into
consideration the short product life and fleeting opportunities in
the global economy. This approach is in direct contrast with the
absorption (full) cost-based standard costs developed for the
stable production environments of yester years. The total life
cycle costs (relatively high costs in the initial phase) have to be
recouped over the short product life.
Throughput (JIT) costing (1990s-). JIT aims to reduce the
inventory costs by minimizing the inventory levels. In such an
environment, the traditional inventory classifications of raw
materials, work-in-process, and finished goods inventories are
no longer of much significance. Thus, it would be more
efficient to merge some inventory classifications and respective
accounts without foregoing the accuracy of the cost models.
These recent developments in the area of cost management
(market driven costs, life cycle cost, JIT costs, etc.) have been
primarily driven by the global market competition, which tends
to dictate the output prices and compels the enterprises to focus
on costs and reduce them continuously (Kaizen Costing).
However, all these approaches of cost-based performance
measurement do not adequately focus on the value adding
aspect of a product or service. Barker (1995), Johnson (1992),
and others have highlighted the pitfall of relying too heavily on
cost-based financial performance measures and decision-
making. Similar modeling for projects and investment appraisal
can be very shortsighted.
The traditional cost models have mostly been driven by
financial reporting considerations or have been fixated on a
specific product or service or function within the organization.
This approach is shortsighted and misses the whole point for the

existence of an enterprise - to create value for its stakeholders.
The authors of this paper suggest a very different approach for
costing and performance measurement that tries to focus on the
value being created by the product or the service. We strongly
advocate using performance measures that would reduce
mismatch of alignment between goals, strategy, and operational
tactics. The performance measures should help streamline the
tactical and operational implementation of the strategy and not
be fixated on financial costs alone. The cost and performance
measures in "New Enterprises" have to focus on delivering
value rather than merely trying to establish the historical cost.
The value chain for such enterprises (procurement to
distribution to charge-backs) and may be changing all the time -
thus the necessity to take a more holistic approach. In the next
section, we examine some distinguishing features of such
enterprises and their implications on cost and performance
measures.
3. Cost accounting and performance measures in new enterprise
In this section, we discuss the differences between traditional
enterprise and virtual enterprise environments of the 21st
century. The main objective of this summary comparison is to
analyze the evolution of manufacturing or service enterprises
over the years and in turn identify the necessary characteristics
for new performance and cost measurement systems. Moreover,
this short analysis would also assist in identifying the
challenges for managerial accounting researchers and
practitioners in developing new costing and PMS. We consider
that the following changes define the environment for the new
enterprises:
(1) distributed operations environment;
(2) global outsourcing;

(3) strategic alliances based on core competencies;
(4) information technology for an integrated SCM;
(5) implications of enterprise resource planning systems on
supply chain integration; and
(6) e-commerce and logistics value chain.
3.1 Comparison of charactersitics between traditional and
virtual enterprises
Table III compares some of the characteristics of traditional and
virtual enterprise environments.
Virtual enterprises seek to harness the opportunities offered by
the ever-improving technology, access to certain niches in
input-output markets, and their expertise in certain areas. They
tend to remain focused on their area of competitive advantage
and outsource or distribute the remaining (upstream or
downstream) value creating activities required to fulfill the
customer needs. A satirical abstract model of a 21st century
enterprise envisages only two employees, a person and his/her
dog. "The man will be there to feed the dog. The dog will be
there to keep the man from touching the equipment (hotler,
2002)". While this is an exaggeration, nonetheless it drives the
point home. In such an environment, management of knowledge
becomes critical. Accounting and information technologies are
at the forefront of this drive for knowledge management.
Table II.
Comparison of characteristics between traditional and virtual
enterprises
Virtual enterprises have been at the forefront of some of the

following innovations that have evolved in the last 15 years and
epitomize the business model for the 21st century. The primary
goal of these enterprises is to remain focused on their core
competency and to deliver value to the end-users in an
expeditiously and efficiently.
(1) Mass customization. It increases the complexity of business
processes and in turn the performance measures and metrics.
(2) Integrated supply chain. It focuses on successful partnership
development and application of information technology for
achieving an integrated value chain.
(3) Outsourcing and lean production. To achieve market
advantages by having proximity to markets, supply channels,
and resources, and focusing on their individual areas of
competitive advantage.
(4) Globalization of input and out markets. Marketing of
products and resources requires a framework for expeditious
evaluation of global potential opportunities and resources.
(5) IT for knowledge management and value creation.
Increasing dependence on; information technologies are an
integral part of modern organizations to take advantage of open
communication and increased alternatives for resources and
markets.
(6) Holistic approach at managing the organization. Since
virtual enterprise and SCM rely extensively on managing
partners and technologies, a holistic approach is essential to
achieve success in these areas.
(7) Emphasis on technology that spans the entire value chain. It
suggests a need for justifying and controlling the
implementation of ERP for virtual enterprise and supply chain

with suitable performance measures and metrics.
(8) Cross-functional approach. These enterprises require a
cross-functional approach toward managing the organizations as
opposed to a silos approach. It again emphasizes need to revamp
the performance and cost measurement systems.
(9) Customer relationship management (CRM). Many companies
attempt to create and increase markets for their products by
learning form their existing customers. Therefore, a need for
monitoring the performance of CRM is essential.
(10) Facilitating B2C, B2B, C2C, C2B, and B2A. These e-
commerce systems are essential for achieving lean production
with the help of reengineering business process and by
eliminating non-value added activities along the supply chain
activities. Suitable performance measures and metrics are
required for evaluating the effectiveness of these e-commerce
environments.
Effective managerial control systems have always been
important but they have become even more critical in virtual
enterprises due to the nature of their business model that
necessitates distributed/outsourced value creating activities and
increased dependence on organizations outside their direct
control. Coordination and control of the complete value creating
process ("value-chain") is the primary managerial challenge in
any organization and much more so for the virtual enterprises.
Fragmentation of the business processes makes it even more
challenging.
In virtual enterprises of 21st century, the costing exercise
becomes more of the cost of buying products/services.
Information sharing and open communication including mutual
trust plays a major role in improving the performance of an
enterprise in virtual or e-commerce environment. However,

most enterprises still use the same traditional costing and
management control systems that were developed decades ago
for environments drastically (competition, technology,
globalization) different from today. The major reasons for
adopting a new cost system are discussed here under:
(1) traditional costing system does not provide adequate value
relevant non-financial information;
(2) inaccurate product costing systems;
(3) costing system should encourage improvements; and
(4) overhead cost is predominant.
For example, in virtual enterprises it is important to adopt a
costing system based on performance and identifying critical
success factors and tracing the measures and metrics to those
factors that would ultimately lead to an improved organizational
performance and competitiveness and value.
Proactive management of accounting and information systems
has been identified as the primary managerial challenge of our
times (Drucker, 1992; Johnson and Kaplan, 1987). The role of
managerial accounting is to provide timely and value relevant
information to the managers for decision-making, both long-
term as well short-term. In short, effective managerial
accounting system should be able to assist managers in
planning, coordination, control, performance measurement, and
motivation by providing information that would change the
decision on hand and add overall value to the enterprise. A tall
order indeed!
Today's enterprises are generally overloaded with numerous
measures. These measures get acquired over the life of the
enterprise and it is difficult to remove protocols that take a life

of their own. Some of these measures loose relevance over time
and might even encourage dysfunctional behavior. Along with
the efficient and value creating systems (agile/flexible) required
by the advanced enterprises, the managerial accounting systems
also have to become lean and strategy oriented. Measurement
for the sake of measurement is counter-productive by adding
noise and friction to the system. We suggest a Measurement
Alignment Matrix, a new framework, to assess the efficacy of
different measures (current and proposed) to ensure that the
performance measurement matrix is fully aligned with the
strategy of the enterprise. Just like any living system, the
measurement matrix of an enterprise needs to be fine-tuned
regularly.
3.2 Costing and performance measures in virtual enterprises
In this section, we discuss the implications of characteristics of
a virtual enterprise on the related performance measures and
costing (Table IV). Virtual enterprises (the new enterprises) of
the 21st century have several defining characteristics. The
successful business models for such enterprises come in
different flavors. For example, virtual integration of
infrastructure and functional areas, domination of indirect costs
and capital costs over direct costs and operating costs,
knowledge-based operations, informal and flat organizational
structure, and flexible management controls. The critical
success factors and the related performance and cost measures
for these enterprises are listed in the Table III. Needless to say,
it is difficult to establish an apnori one to one mapping of the
business model for new enterprises to the performance and cost
measures. An enterprise may strategically decide to adopt more
than one type of models and the related success factors and
performance and cost measures will have to be tailor made.
4. Challenges for managerial accounting researchers and
practitioners

The accounting professionals in advanced enterprises of 21st
century will have to acquire a different kind of mind-set and
skills-set than those in the traditional enterprises, unless they
want to become redundant (Elliott, 1986). Johnson and Kaplan
(1987), while discussing the growing irrelevance of existing
measures, wonder why the researchers did not bother to develop
new systems and think outside the box. "One might wonder why
the university researchers failed to note the growing
obsolescence of organizations' management systems and did not
play a more active or stimulate role to improve the art of
management system design. We believe the academics were led
astray by a simplified model of firm behavior". Neely et al.
(2000) describes the development and testing of a structured
methodology for the design of PMS using balanced scorecard
approach and process-based method. The fundamental paradigm
shifts in the value creation process necessitate appropriate
changes in the management control systems. The performance
measures and the conceptual framework to implement them have
to change. The managerial accounting discipline and its
practices must evolve, if it wants to retain its relevance in the
changed world. It has to become more proactive in responding
to the rapidly changing market and business environment.
During the last 20 years, the role of accounting function has
changed significantly to align itself with the new business
models. Essentially, it requires a different mindset. This is even
truer of virtual enterprises where speed, agility, and alacrity are
of essence.
(1) Staff to line. The accounting has moved from a being a mere
support function for managerial decision-making to being an
active partner in the decision-making process. Accounting
professionals find themselves as active members of project
teams. The role expands even further in virtual enterprises
where functional boundaries are disappearing fast.

Table IV.
Costing and performance measures in virtual enterprises
(2) Improved communication skills. Since the information has
to be put to use immediately and keeps changing constantly the
accounting professionals have to do a better job of
communicating their findings. They have to be able to
communicate directly and clearly with other managers within
the enterprise who may not have the same level of
sophistication in understanding the technicalities.
(3) Willingness to benchmark. In order to retain their
competitive edge the enterprises have to continuously improve
themselves through benchmarking within and outside the
enterprise. The accounting professionals within such an
enterprise also have to be willing to learn and improve
continuously.
(4) Data to knowledge. The technology has mechanized and
routinized mundane and mechanical tasks like bookkeeping and
record keeping. The accounting professional of a 21st century
virtual enterprise will have to have the ability to convert data
into relevant information and knowledge that will contribute
value.
(5) Reactive to proactive. Being grounded in historical data,
accounting information tends to be mostly reactive and lagging
indicator. This is not enough for virtual enterprises. The
accounting professional will have to make a conscious effort to
go beyond the lagging mindset to a leading and proactive
mindset.
(6) Total performance management (TPM). Performance
management is the responsibility of everyone in an organization
and not just confined to accounting department. It is a new

workplace culture that requires all people in the organization
are accountable for their performance either individually or
collectively. An interdisciplinary team consists of people from
different functional areas should be formed for managing the
performance at various levels of an organization
Following are some of the challenging tasks for managerial
accounting researchers and professionals:
* Develop a value-based costing system by identifying the
critical areas of an organization that would influence the overall
outcome of the business
* Develop performance measures and metrics to evaluate the
alignment between strategies at different levels such as
strategic, tactical, and operational.
* Measurements for evaluating the return on knowledge capital
(Roslender and Fincham, 2001).
* Evaluating the risks involved by not making right decisions at
strategic, tactical, and operational levels.
* How to measure information system productivity (strategic
impact and operational benefits)?
* How to apply the concept of international transfer pricing for
making decisions regarding the cost of products obtained from
suppliers?
* Application of financial and non-financial performance
measures and tangibles and intangibles in virtual enterprise and
SCM.
* How to optimize the knowledge required in new enterprise
environment?

* Develop new costing framework for measuring various costs
for product-mix decisions and pricing decisions
* Measurement of performance e-logistics.
5. Summary and conclusions
In this paper, an attempt has been made to study the evolution
of manufacturing enterprises together with performance and
cost measures. Also, this study aims to identify the challenges
before the practitioners and researchers in managerial
accounting in terms of developing new cost and PMS taking into
account the virtual enterprise and supply-chain environments.
The real challenge is to recognize the need for new cost and
PMS in new economy. Change the mindset and approach of
practitioners in such a way that would make them more
proactive and participant in the decision-making process rather
than just a data recorder and provider. Moreover, measurement
of alignment between different levels of strategies is important
to eliminate any errors at the higher-level decisions and hence
supports a proactive management approach for improving
organizational productivity. Since most of the activities are
under the control of partners, an international transfer pricing
can be used for estimating the cost of products traded through
global outsourcing.
The knowledge productivity plays a major role in influencing
the productivity of virtual enterprise and supply chain. This
requires measuring the knowledge capital productivity and their
implications on the overall performance of an organization. In
e-commerce and virtual environments, logistics effectiveness
contributes to the timely delivery of products to customers and
markets; this area needs a set of new performance measures and
metrics for measuring the productivity of logistics value chain.
The main objective of this paper is to alert the managerial

accounting researchers and practitioners for developing new
costing and PMS taking into account the new enterprise
environment. We have provided some directions and
suggestions on the type of accounting systems required for
managing the resources judiciously for producing high quality
products and services in new economy.
[Sidebar]
Revised April 2004
[Sidebar]
A preliminary version of this paper was presented at the Tenth
Annual Conference of the American Society of Business and
Behavioral Sciences, Las Vegas, 20-24 February 2003. The
authors wish to thank the conference participants for their
constructive and valuable suggestions.
Krishan M Gupta, A Gunasekaran. Managerial Auditing Journal.
Bradford: 2005. Vol. 20, Iss. 4; p. 337 (17 pages).
Abstract (Summary)
Faced with new wealth creation paradigm, triggered by
technology and relentless globalization of markets, increasing
number of companies are becoming knowledge-based
measurement systems (PMS). A conceptual discussion and
approach are taken. Internet and e-commerce have changed
forever the way companies conduct their businesses. Virtual
enterprise and efficient supply chain management systems will
shape the future of these enterprises. Organizations are trying to
become agile enterprises with the help of strategic alliances of
firms and integration using information technologies.
Traditional performance and cost measures are no longer

French process engineers at the same time evolved the concept
of "dashboard" to provide an easy read on the state of affairs of
the organization in different functional areas.
Pre-war period of 1930s-1940s witnessed the ideas of W.
Edward Deming and Walter Shewhart that focused on
operational processes. It was quite a while before Deming's
ideas crystallized into TQM and gained acceptance in Japan
before United States.
Financial accounting models dominated the post-war period of
1960s. The global competitive forces of 1990s forced companies
to look inwards to improve quality and add value to the
customer in a short order. Kaplan and Norton championed the
BSC approach for performance measurement. The model
emphasized the need to balance the financial perspective with
the customer, internal business process, and learning and
growth issues.
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Table I.
Evolution of performance measures
The last decade witnessed a frantic search for valuation models
that would include long-term considerations (EVA) as opposed
to the short-term (ROI) measures. At the same time, researchers
and practitioners have been trying to incorporate the human
capital in valuation models.
2.1 Evolution of cost measures
As already discussed in preceding pages, historical cost has
always served as a very useful measure of performance, control,

and critical managerial decisions viz., make or buy, sales mix,
etc. Starting with very simple concept of average cost (total
cost/output), various complex cost models have been used.
Table II provides a summary of evolution of different cost
measures over time.
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Table II.
Evolution of cost measures
Costing exercise is an exercise in approximation. It is both a
science as well art. While it is fairly easy to isolate, track, and
trace "direct costs" it is very difficult to determine the precise
amount of "indirect costs" attributable to a cost object (product,
service, department, etc.). Therefore, all cost models involve
some degree of approximation. Trying to find the "true" and
"objective" cost of a particular cost object (product, service,
customer, transaction, process, responsibility center, etc.) is the
"holy grail" of managerial accounting.
Average cost (Pre-industrial and early period). Total cost
divided by the total output. This model was very effective and
efficient in determining the cost in single product and stable
environments of early and pre-industrial era. For example,
(average) cost of transporting one ton of material over one mile.
Such measures were also effective for various managerial
decisions as well as financial reporting due to the nature of the
business - single stable product.
Total manufacturing cost (Until 1940s). Also known as the
absorption or full costing approach. The total manufacturing
cost is broken down into direct (material and labor) costs and
indirect (manufacturing overheads). The model approximates

the indirect costs by estimating beforehand and averaging them
over single or multiple cost pools. The cost pools could be
department based or company wide. The predetermined
overhead costs are applied uniformly based on some cost driver
(usually direct labor, material, or labor or machine hours). This
traditional volume-based approach is quite robust for stable
production environments.
This traditional volume-based approach is quite valid for
facilities producing products with less diversity and with stable
production runs - a model hardly suitable for advanced new
economy enterprises. Application of such models leads to
serious cost distortions and quite often results in serious
dysfunctional or counterproductive behavior within the
enterprise.
The absorption (full) cost model is used for reporting the
inventory and cost of goods sold in financial statements,
prepared under the Generally Accepted Accounting Principles
(GAAP).
Direct costing (1940s-1980s). Also known as the variable or
marginal costing approach. This approach attempts to isolate
only the direct or marginal costs. This model is extremely
useful for various "contribution-margin" based managerial
decisions with in the organization. This model based on
classification of costs as fixed or variable, ties well with the
cost volume profit (CVP) analysis for decision-making.
However, this approach has severe limitations, especially when
applied for long-run decisions.
Opportunity costing (1940s-). It focuses on the often-omitted
cost of the second best alternative that must be considered for
managerial decisions, especially for transfers within the
organization and make or buy decisions. The opportunity cost
model helps managers in specifically identifying the cost of

missed opportunities. The approach highlights certain
behavioral aspects of cost decisions. For example, we tend to
ignore the opportunity costs and on the other hand remain
fixated on sunk costs, which have no bearing on the future costs
or remain constant amongst different alternatives.
Transfer pricing (1940s-). Transfer price models assist in
rational allocation of shared costs when goods and services are
exchanged between independent segments within a
decentralized organization. The approach draws upon the direct
cost and opportunity cost models. Transfer pricing mechanism
can also be abused by shifting profits in case of organizations
operating under differing tax jurisdictions.
Activity-based costing (1980s-). ABC focuses on identifying the
cost of major activities and allocating them to the cost object
based on their usage of a particular activity. ABC is considered
a major innovation in managerial accounting during the last 20
years. Essentially, it attempts to convert most overhead
(indirect) costs into direct costs - directly traceable to the cost
object. However, the ABC model while a definite improvement
over the traditional volume-based approach still retains the
approximate and subjective nature of cost measurement. ABC
focuses on developing different cost pools for different
activities. It attempts to reduce cost measurement distortions
caused by the traditional single cost driver volume based
approach when costing products/services that use the enterprise
resources in differing proportions. The approach tries to reduce
the weight of "indirect overheads" that cannot be allocated to
smaller sized cost pools. Application of ABC is, however, is not
that easy; it requires significant resources of the enterprise,
commitment from the top management, and sound judgment by
the ABC team. ABM grew out of ABC to guide the strategic
management of an enterprise based on the insights achieved
during the implementation of ABC. However, over-emphasis of
cost aspects of operations can distract the enterprise from its

primary goals and objectives and neglect of customer focus
Oohnson, 1992).
Market based (Target) costing (1990s-). This approach is a
direct reflection of the relentless forces of competition driven
by the globalization of capital and economies facilitated by
technology. Market economics sets the price and a target for the
cost is set beforehand and the engineers and designers strive to
fit the product within the target (budgeted) cost.
Product life cycle costing (1990s-). This approach takes into
consideration the short product life and fleeting opportunities in
the global economy. This approach is in direct contrast with the
absorption (full) cost-based standard costs developed for the
stable production environments of yester years. The total life
cycle costs (relatively high costs in the initial phase) have to be
recouped over the short product life.
Throughput (JIT) costing (1990s-). JIT aims to reduce the
inventory costs by minimizing the inventory levels. In such an
environment, the traditional inventory classifications of raw
materials, work-in-process, and finished goods inventories are
no longer of much significance. Thus, it would be more
efficient to merge some inventory classifications and respective
accounts without foregoing the accuracy of the cost models.
These recent developments in the area of cost management
(market driven costs, life cycle cost, JIT costs, etc.) have been
primarily driven by the global market competition, which tends
to dictate the output prices and compels the enterprises to focus
on costs and reduce them continuously (Kaizen Costing).
However, all these approaches of cost-based performance
measurement do not adequately focus on the value adding
aspect of a product or service. Barker (1995), Johnson (1992),
and others have highlighted the pitfall of relying too heavily on

cost-based financial performance measures and decision-
making. Similar modeling for projects and investment appraisal
can be very shortsighted.
The traditional cost models have mostly been driven by
financial reporting considerations or have been fixated on a
specific product or service or function within the organization.
This approach is shortsighted and misses the whole point for the
existence of an enterprise - to create value for its stakeholders.
The authors of this paper suggest a very different approach for
costing and performance measurement that tries to focus on the
value being created by the product or the service. We strongly
advocate using performance measures that would reduce
mismatch of alignment between goals, strategy, and operational
tactics. The performance measures should help streamline the
tactical and operational implementation of the strategy and not
be fixated on financial costs alone. The cost and performance
measures in "New Enterprises" have to focus on delivering
value rather than merely trying to establish the historical cost.
The value chain for such enterprises (procurement to
distribution to charge-backs) and may be changing all the time -
thus the necessity to take a more holistic approach. In the next
section, we examine some distinguishing features of such
enterprises and their implications on cost and performance
measures.
3. Cost accounting and performance measures in new enterprise
In this section, we discuss the differences between traditional
enterprise and virtual enterprise environments of the 21st
century. The main objective of this summary comparison is to
analyze the evolution of manufacturing or service enterprises
over the years and in turn identify the necessary characteristics
for new performance and cost measurement systems. Moreover,
this short analysis would also assist in identifying the

challenges for managerial accounting researchers and
practitioners in developing new costing and PMS. We consider
that the following changes define the environment for the new
enterprises:
(1) distributed operations environment;
(2) global outsourcing;
(3) strategic alliances based on core competencies;
(4) information technology for an integrated SCM;
(5) implications of enterprise resource planning systems on
supply chain integration; and
(6) e-commerce and logistics value chain.
3.1 Comparison of charactersitics between traditional and
virtual enterprises
Table III compares some of the characteristics of traditional and
virtual enterprise environments.
Virtual enterprises seek to harness the opportunities offered by
the ever-improving technology, access to certain niches in
input-output markets, and their expertise in certain areas. They
tend to remain focused on their area of competitive advantage
and outsource or distribute the remaining (upstream or
downstream) value creating activities required to fulfill the
customer needs. A satirical abstract model of a 21st century
enterprise envisages only two employees, a person and his/her
dog. "The man will be there to feed the dog. The dog will be
there to keep the man from touching the equipment (hotler,
2002)". While this is an exaggeration, nonetheless it drives the
point home. In such an environment, management of knowledge

becomes critical. Accounting and information technologies are
at the forefront of this drive for knowledge management.
Enlarge 200%
Enlarge 400%
Table II.
Comparison of characteristics between traditional and virtual
enterprises
Virtual enterprises have been at the forefront of some of the
following innovations that have evolved in the last 15 years and
epitomize the business model for the 21st century. The primary
goal of these enterprises is to remain focused on their core
competency and to deliver value to the end-users in an
expeditiously and efficiently.
(1) Mass customization. It increases the complexity of business
processes and in turn the performance measures and metrics.
(2) Integrated supply chain. It focuses on successful partnership
development and application of information technology for
achieving an integrated value chain.
(3) Outsourcing and lean production. To achieve market
advantages by having proximity to markets, supply channels,
and resources, and focusing on their individual areas of
competitive advantage.
(4) Globalization of input and out markets. Marketing of
products and resources requires a framework for expeditious
evaluation of global potential opportunities and resources.
(5) IT for knowledge management and value creation.
Increasing dependence on; information technologies are an

integral part of modern organizations to take advantage of open
communication and increased alternatives for resources and
markets.
(6) Holistic approach at managing the organization. Since
virtual enterprise and SCM rely extensively on managing
partners and technologies, a holistic approach is essential to
achieve success in these areas.
(7) Emphasis on technology that spans the entire value chain. It
suggests a need for justifying and controlling the
implementation of ERP for virtual enterprise and supply chain
with suitable performance measures and metrics.
(8) Cross-functional approach. These enterprises require a
cross-functional approach toward managing the organizations as
opposed to a silos approach. It again emphasizes need to revamp
the performance and cost measurement systems.
(9) Customer relationship management (CRM). Many companies
attempt to create and increase markets for their products by
learning form their existing customers. Therefore, a need for
monitoring the performance of CRM is essential.
(10) Facilitating B2C, B2B, C2C, C2B, and B2A. These e-
commerce systems are essential for achieving lean production
with the help of reengineering business process and by
eliminating non-value added activities along the supply chain
activities. Suitable performance measures and metrics are
required for evaluating the effectiveness of these e-commerce
environments.
Effective managerial control systems have always been
important but they have become even more critical in virtual
enterprises due to the nature of their business model that
necessitates distributed/outsourced value creating activities and

increased dependence on organizations outside their direct
control. Coordination and control of the complete value creating
process ("value-chain") is the primary managerial challenge in
any organization and much more so for the virtual enterprises.
Fragmentation of the business processes makes it even more
challenging.
In virtual enterprises of 21st century, the costing exercise
becomes more of the cost of buying products/services.
Information sharing and open communication including mutual
trust plays a major role in improving the performance of an
enterprise in virtual or e-commerce environment. However,
most enterprises still use the same traditional costing and
management control systems that were developed decades ago
for environments drastically (competition, technology,
globalization) different from today. The major reasons for
adopting a new cost system are discussed here under:
(1) traditional costing system does not provide adequate value
relevant non-financial information;
(2) inaccurate product costing systems;
(3) costing system should encourage improvements; and
(4) overhead cost is predominant.
For example, in virtual enterprises it is important to adopt a
costing system based on performance and identifying critical
success factors and tracing the measures and metrics to those
factors that would ultimately lead to an improved organizational
performance and competitiveness and value.
Proactive management of accounting and information systems
has been identified as the primary managerial challenge of our
times (Drucker, 1992; Johnson and Kaplan, 1987). The role of

managerial accounting is to provide timely and value relevant
information to the managers for decision-making, both long-
term as well short-term. In short, effective managerial
accounting system should be able to assist managers in
planning, coordination, control, performance measurement, and
motivation by providing information that would change the
decision on hand and add overall value to the enterprise. A tall
order indeed!
Today's enterprises are generally overloaded with numerous
measures. These measures get acquired over the life of the
enterprise and it is difficult to remove protocols that take a life
of their own. Some of these measures loose relevance over time
and might even encourage dysfunctional behavior. Along with
the efficient and value creating systems (agile/flexible) required
by the advanced enterprises, the managerial accounting systems
also have to become lean and strategy oriented. Measurement
for the sake of measurement is counter-productive by adding
noise and friction to the system. We suggest a Measurement
Alignment Matrix, a new framework, to assess the efficacy of
different measures (current and proposed) to ensure that the
performance measurement matrix is fully aligned with the
strategy of the enterprise. Just like any living system, the
measurement matrix of an enterprise needs to be fine-tuned
regularly.
3.2 Costing and performance measures in virtual enterprises
In this section, we discuss the implications of characteristics of
a virtual enterprise on the related performance measures and
costing (Table IV). Virtual enterprises (the new enterprises) of
the 21st century have several defining characteristics. The
successful business models for such enterprises come in
different flavors. For example, virtual integration of
infrastructure and functional areas, domination of indirect costs
and capital costs over direct costs and operating costs,

knowledge-based operations, informal and flat organizational
structure, and flexible management controls. The critical
success factors and the related performance and cost measures
for these enterprises are listed in the Table III. Needless to say,
it is difficult to establish an apnori one to one mapping of the
business model for new enterprises to the performance and cost
measures. An enterprise may strategically decide to adopt more
than one type of models and the related success factors and
performance and cost measures will have to be tailor made.
4. Challenges for managerial accounting researchers and
practitioners
The accounting professionals in advanced enterprises of 21st
century will have to acquire a different kind of mind-set and
skills-set than those in the traditional enterprises, unless they
want to become redundant (Elliott, 1986). Johnson and Kaplan
(1987), while discussing the growing irrelevance of existing
measures, wonder why the researchers did not bother to develop
new systems and think outside the box. "One might wonder why
the university researchers failed to note the growing
obsolescence of organizations' management systems and did not
play a more active or stimulate role to improve the art of
management system design. We believe the academics were led
astray by a simplified model of firm behavior". Neely et al.
(2000) describes the development and testing of a structured
methodology for the design of PMS using balanced scorecard
approach and process-based method. The fundamental paradigm
shifts in the value creation process necessitate appropriate
changes in the management control systems. The performance
measures and the conceptual framework to implement them have
to change. The managerial accounting discipline and its
practices must evolve, if it wants to retain its relevance in the
changed world. It has to become more proactive in responding
to the rapidly changing market and business environment.

During the last 20 years, the role of accounting function has
changed significantly to align itself with the new business
models. Essentially, it requires a different mindset. This is even
truer of virtual enterprises where speed, agility, and alacrity are
of essence.
(1) Staff to line. The accounting has moved from a being a mere
support function for managerial decision-making to being an
active partner in the decision-making process. Accounting
professionals find themselves as active members of project
teams. The role expands even further in virtual enterprises
where functional boundaries are disappearing fast.
Enlarge 200%
Enlarge 400%
Table IV.
Costing and performance measures in virtual enterprises
(2) Improved communication skills. Since the information has
to be put to use immediately and keeps changing constantly the
accounting professionals have to do a better job of
communicating their findings. They have to be able to
communicate directly and clearly with other managers within
the enterprise who may not have the same level of
sophistication in understanding the technicalities.
(3) Willingness to benchmark. In order to retain their
competitive edge the enterprises have to continuously improve
themselves through benchmarking within and outside the
enterprise. The accounting professionals within such an
enterprise also have to be willing to learn and improve
continuously.
(4) Data to knowledge. The technology has mechanized and

routinized mundane and mechanical tasks like bookkeeping and
record keeping. The accounting professional of a 21st century
virtual enterprise will have to have the ability to convert data
into relevant information and knowledge that will contribute
value.
(5) Reactive to proactive. Being grounded in historical data,
accounting information tends to be mostly reactive and lagging
indicator. This is not enough for virtual enterprises. The
accounting professional will have to make a conscious effort to
go beyond the lagging mindset to a leading and proactive
mindset.
(6) Total performance management (TPM). Performance
management is the responsibility of everyone in an organization
and not just confined to accounting department. It is a new
workplace culture that requires all people in the organization
are accountable for their performance either individually or
collectively. An interdisciplinary team consists of people from
different functional areas should be formed for managing the
performance at various levels of an organization
Following are some of the challenging tasks for managerial
accounting researchers and professionals:
* Develop a value-based costing system by identifying the
critical areas of an organization that would influence the overall
outcome of the business
* Develop performance measures and metrics to evaluate the
alignment between strategies at different levels such as
strategic, tactical, and operational.
* Measurements for evaluating the return on knowledge capital
(Roslender and Fincham, 2001).

* Evaluating the risks involved by not making right decisions at
strategic, tactical, and operational levels.
* How to measure information system productivity (strategic
impact and operational benefits)?
* How to apply the concept of international transfer pricing for
making decisions regarding the cost of products obtained from
suppliers?
* Application of financial and non-financial performance
measures and tangibles and intangibles in virtual enterprise and
SCM.
* How to optimize the knowledge required in new enterprise
environment?
* Develop new costing framework for measuring various costs
for product-mix decisions and pricing decisions
* Measurement of performance e-logistics.
5. Summary and conclusions
In this paper, an attempt has been made to study the evolution
of manufacturing enterprises together with performance and
cost measures. Also, this study aims to identify the challenges
before the practitioners and researchers in managerial
accounting in terms of developing new cost and PMS taking into
account the virtual enterprise and supply-chain environments.
The real challenge is to recognize the need for new cost and
PMS in new economy. Change the mindset and approach of
practitioners in such a way that would make them more
proactive and participant in the decision-making process rather
than just a data recorder and provider. Moreover, measurement
of alignment between different levels of strategies is important

to eliminate any errors at the higher-level decisions and hence
supports a proactive management approach for improving
organizational productivity. Since most of the activities are
under the control of partners, an international transfer pricing
can be used for estimating the cost of products traded through
global outsourcing.
The knowledge productivity plays a major role in influencing
the productivity of virtual enterprise and supply chain. This
requires measuring the knowledge capital productivity and their
implications on the overall performance of an organization. In
e-commerce and virtual environments, logistics effectiveness
contributes to the timely delivery of products to customers and
markets; this area needs a set of new performance measures and
metrics for measuring the productivity of logistics value chain.
The main objective of this paper is to alert the managerial
accounting researchers and practitioners for developing new
costing and PMS taking into account the new enterprise
environment. We have provided some directions and
suggestions on the type of accounting systems required for
managing the resources judiciously for producing high quality
products and services in new economy.
[Sidebar]
Revised April 2004
[Sidebar]
A preliminary version of this paper was presented at the Tenth
Annual Conference of the American Society of Business and
Behavioral Sciences, Las Vegas, 20-24 February 2003. The
authors wish to thank the conference participants for their
constructive and valuable suggestions.
LENGTH: 3-5 pages typed and double-spaced

1. Based on the above article and your prior readings, do you
agree with the notion of value costing for the 21st Century
organizations. Why or Why Not?
2. Also based on the above article and other readings, why types
of situations may be more appropriate for application of the
some of the "tried and true" costing methods of the 20th
Century? Are these industry or firm specific?
3. Is Cost-Volume-Profit Analysis still relevant in the 21st
Century business organization? Support your answer with
reasoned arguments and references as appropriate.
ACC501CS3 – (3-5 pages typed and double-spaced courier new
12 font)
Main Line vs. Basinger
In 1991, Main Line Pictures, Inc. sued actress Kim Basinger
(and others) for breach of contract. Basinger had been in
negotiation with Main Line to star in the film, "Boxing Helena"
but had withdrawn from the project. The suit was heard in early
1993 in the Superior Court of the State of California, for the
County of Los Angeles.
LENGTH 3-5 pages typed and double-spaced
Be certain to incorporate concepts of sunk costs, historical
costs, opportunity costs, and make-or-buy decisions as well as
answer below questions of concern.
An analysis of plaintiff and defendants arguments as indicated
below. Support your answers with financial computations where
appropriate. Module 3 is an expansion on the contribution
margin. So you can use CM income statement supporting your
answers.
1.1) Should Main Line's maximum and minimum lost profit

amounts be revised downward for the following? Why?
1. a. The domestic distribution revenues of $3 million because
the deal had not been finalized.
2. b. The $800,000 of foreign pre-sales because they were
"probable" not actual.
3. c. The loss of $2.1 million on the "Without Basinger" film.
2.
1.2) Are the following relevant to the determination of lost
profits to Main Line? Why?
1. a. Basinger's $3 million salary for "Final Analysis."
2. b. The comparison of revenues for Basinger films with
revenues for Fenn films.
1.3) Is plaintiff's expert correct in not attempting to estimate
revenues for "Boxing Helena" beyond pre-sale amounts? Why?
1.4) Should Main Line's lost profits be adjusted downward to
include an estimate of domestic revenues for the "Without
Basinger" film? Would it have been valid to use the $1.7
million advance against domestic revenues as the estimate?
Explain.
1.5) Suppose Basinger had remained with the film and assume
the $3 million profit shown in the plaintiff expert's minimum
damage calculation was correct. Is it reasonable to assume that
Main Line's pretax cash position would have increased by $3
million or would some part of this have been paid to others?
Why?

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