1.3.1 Concept definition
The concept definitions in this research are as follows:
Activities are concrete tasks or working phases that are performed in firms. (Ax &
Ask, 1995, p. 55)
Cost 1 (a): the amount or equivalent paid or charged for something. 1 (b): the outlay or expenditure (as of effort or sacrifice) made to achieve an object. 2: loss or penalty incurred especially in gaining something. 3 (plural): expenses incurred in litigation; especially those given by the law or the court to the prevailing party against the losing party (Merriam – Webster, 2002)
Cost information refers to measured industrial/commercial input (time, material, resources etc.) of any object (raw material, labor, cost center, unit of a firm, firm, product, customer, etc.) valued in monetary units.
Cost accounting refers to principles, calculation rules, and information systems that are used to produce cost information.
Cost management refers to utilizing cost information in planning, controlling, and coordinating the occurrence of cost. Cost management is an area in which development in accounting for cost–objects and in economic management of a firm meet in the face of new demands and challenges (Ax & Ask, 1995, p. 14).
Inter–organizational refers to activities in which two or more firms take part.
Lean is understood as a model of a multi–tier supply system managed mainly by the main contractor (Gumbleton, 1999; Womack & Jones, 1994).
Network is 1) a system of lines or channels, 2) an interconnected or interrelated chain, group, or system, and 3) a system of firms connected by organized communications (Merriam – Webster, 2002), 4) a fundamental stuff of which new organizations are and will be made (Castells, 1996, p. 168), 5) an organized group of firms specialized in different phases of the production process and thereby completing the work of each other (Hallikas et al., 2001,
p. 10), 6) a set of organizations that have developed recurring ties when serving a particular market (Ebers & Jarillo, 1998, p. 3).
Network enterprise is a specific form of enterprise whose system of means is constituted by the intersection of segments of autonomous systems of goals (Castells, 1996, p. 171).
Price 1 (archaic): value, worth. 2 (a): the quantity of one thing that is exchanged or demanded in barter or sale for another. 2 (b): the amount of money given or set as consideration for the sale of a specified thing. 3: the terms for the sake of which something is done or undertaken: as (a): an amount sufficient to bribe one <every man had his price>. (Merriam – Webster, 2002)
Resources are economic elements directed to the performance of activities.
(Karjalainen, 1997, p. 5)
Supply chain refers to firms that consecutively take part in delivering an end product consisting of many components to the market by adding something to, changing something in, or removing something from the product delivered by the previous firm.
Supply chain management is the integration of key business processes from end user through original suppliers that provide products, services, and information that add value for customers and other stakeholders (Lambert & Cooper, 2000, p.
66). Christopher (1998, p. 18) mentions that the concept ”supply chain management” could be replaced by concept ”supply network management”.
This view is also adopted in this research. The reason for this is that from the point of view of the end product there are many participant firms in each of the upstream supplier tiers.
1.3.2 Research questions and objectives
This research is designed to diminish the gap between the evident need of utilizing cost information in networked firms more efficiently and the scarce reports on the applications of modern cost management practices in networks. How the gap is diminished depends in part on the research questions. The primary research question (PQ) in this research is as follows:
What kind of challenges does the networked way of doing business set for cost accounting and cost management in networked firms?
As the PQ is rather complex to be approached as such, it is divided into five subquestions. The field of research concerning networks and that concerning cost management are widely studied, but although their intersection, in the academic literature, has been noticed as an important research area in theory, it is mostly forgotten in practice. The secondary research questions (Q1 – Q5) of this research are:
1. How do networks of manufacturing firms account and manage costs?
2. What are the needs of network firms’ cost accounting?
3. How are cost accounting and cost management developed in business relationships of a network in the sense of cost information accuracy, cost information sharing, and cost–based win–win solutions?
4. How do manufacturing networks utilize modern cost accounting and cost management tools such as inter–organizational cost management, target costing, and open–book management?
5. How do the differences in customer–supplier relationships explain the actions of network members?
The secondary questions are posed in order to support the primary question.
The objective of the research is to provide managers and academics with increased understanding of the effect of the networking phenomenon on management accounting, the focus being on cost accounting and cost management. As the research area, i.e. cost accounting, accounting systems, and cost management in networks, is limitedly analyzed in the literature still in the 2000’s (Baiman & Rajan, 2002, p. 232) although the need for the analysis was expressed many years ago (Hopwood, 1996, p.
589), this research offers recent information on topical issues.
The theoretical objective of this research is to provide the literature with an analysis of cost accounting and cost management in networks. The aim is to present a framework that illustrates the problems of cost management in networks and links the problems to critical success factors of networks. The empirical objective of this research is to describe the present state, needs, and development of cost accounting and cost management and to present ways to improve the utilization of cost information in firm networks. The illustrations are based on empirical cases and lessons learned from implementations of management accounting innovations. The intention is to provide more detailed and more versatile descriptions than reported before.
This research concerns management accounting in business relationships. The focus of the research is in cost management in firm networks. The areas covered include cost accounting and cost management practices, techniques, needs, and development.
Literature on cost management can de divided into primarily theoretically or empirically oriented research. Table 1 illustrates the positioning of this research (empirical network box) in the field of recent cost management literature. The classification in the table represents the author’s opinion. However, in order to take its place in the described box, this research consists of five independent studies (see Chapter 1.4.1) that are not all located in the same box.
Focus Theoretical Empirical Firm Ax & Ask, 1995
Bromwich, 1990
Berliner & Brimson, 1988
Cooper & Slagmulder, 1999a, 1997 Karjalainen, 1997 Dekker & van Goor, 2000 Lazar, 2000 Network Järvenpää et al., 2001
Tomkins, 2001
Table 1. Underlying typology of cost management literature
Most of the empirical research has concentrated on cost management in dyadic partnerships. However, overlapping of the perspectives of dyadic partnership and supply chain is evident to such a degree that it is difficult to see only one perspective without the other. Furthermore, many purchasing and logistics authors analyze cost reductions as such. They are excluded from Table 1 in order to keep the focus of this research on management accounting.
The underlying assumption in the research is as follows:
A networked business environment poses challenges for the cost accounting of participating firms and cost management in networks.
These challenges should be noted in the development of network members’ cost accounting and in the active management of the costs of the network’s end products.
As a result of the research, the research questions are answered and the rationality of the assumption is evaluated. From the perspective of the research questions, the research is descriptive and explorative.