Assignment on Journal of Management Accounting Research

JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH American Accounting Association
Vol. 24 DOI: 10.2308/jmar-50203
2012
pp. 103–133
A Field Study on the Acceptance and Use of a
New Accounting System
Ranjani Krishnan
Michigan State University
Jamshed J. Mistry
Suffolk University
V. G. Narayanan
Harvard University
ABSTRACT: This study examines the attitudes, use, and acceptance of a new
accounting system in a pharmaceutical corporation that switched from an activity-based
costing system to the Theory of Constraints System (TOC). Using structuration theory
as a framework to understand the dynamics of the change process, we posit that user
responses and attitudes toward TOC are influenced not only by the technical features of
the system and the potential economic benefits, but also by the fit between TOC and
existing structures, modes of mediation, and agency of the users’ environment. When
users interact with TOC on an ongoing basis, they form interpretations of the new
system, and, based on such interpretations, they exhibit actions with respect to the use
of TOC ranging from championship to rejection of the system. We explore cross-
sectional variations in the use of the system and link such variations to the practical
features of the new system, as well as the social structures of the users’ environments.
Keywords: theory of constraints; structuration; field study.
INTRODUCTION
T his study examines the adoption, acceptance, and use of a new accounting system in a firm.
It uses structuration theory as a framework to understand the change process and posits that
organizational users’ responses, attitudes, and use of a new accounting system are driven by
the fit between the system, the existing structure, and the agency of the users’ environment, as well
as the interactions between the users and the system on an ongoing basis. Such interactions, in turn,
are influenced by the users’ existing knowledge set, prior training, professional norms,
expectations, and beliefs related to the new system. Based on such interactions, users form
We thank our research partners for their participation. We appreciate the comments of Ramji Balakrishnan, Chris
Chapman, two anonymous reviewers, workshop participants at Michigan State University, the 2011 Canadian
Accounting Association Annual Conference, and the 2011 American Accounting Association Annual Meeting.
Published Online: May 2012
103

interpretations of the new system and exhibit a set of actions with respect to the system. These
actions range from championship of the new system to active rejection of the system.
Structuration theory as conceived by Giddens (1976, 1979, 1984) is a process-oriented theory
that posits social structures (such as institutions) are not only constituted by human agency, but also
simultaneously are the medium of this constitution. Giddens’ theory attempts to bridge the gap
between the deterministic, objective, and static notion of enterprise perceived by functional
structuralists, and the random, subjective, and dynamic notion of enterprise perceived by
interpretive humanists (Barley and Tolbert 1997; Macintosh and Scapens 1990). Structuration is
concerned with the relationship between the activities of human actors and the structuration of
social systems. Giddens (1979, 69) especially emphasizes the duality of structure where ‘‘the
structural properties of social systems are both the medium and the outcome of practices that
constitute those systems.’’ The process of structuring refers to the interplay between ongoing
actions and institutionalized traditions that constrain action. The result of structuration is that
institutional practices shape human actions, and, in turn, these actions cause changes to the
institutional structure (Barley 1986).
Structuration recognizes that although organizational systems (such as accounting) influence
agents’ actions, these systems do not exist independently of the agents’ actions (Yates 1997).
Structures are the result of enactments of actors and occur when forms of social conduct are
produced and reproduced in some order across time and space. Giddens’ (1984, 25) terms this the
‘‘duality of structure’’ whereby ‘‘structural properties of social systems are both medium and
outcome of the practices they recursively organize.’’ Structuration recognizes that institutional
norms and structures can drive human action; at the same time, individuals can act in ways contrary
to the institutional structures. In doing so, over time individuals can modify structures and create
new structures. Acceptance or resistance to a change, for example, need not be overt—it can
manifest in the manner in which the change is enacted. In our study, we attempt to obtain field
evidence of acceptance or resistance by exploring the extent of alignment between a new
accounting system with the structures, systems, and agency, and the consequences of such
alignment on individuals’ responses to the system.
The setting for our study is a leading pharmaceutical company headquartered in Asia. This
company (BPharm) instituted a Theory of Constraints (TOC) system based on the principles of
Goldratt (1989). The TOC system supplanted a standard costing and activity-based costing (ABC)
accounting system and was met with mixed response from the managers. The new system changed
the focus of the organization from cost minimization to a focus on maximizing throughput and
inventory turns. In addition, at the recommendation of the consultants who marketed the new
system, the firm also changed its performance measurement and incentive compensation system for
sales personnel from individual, ABC-based targets to divisional, TOC-based targets.
Our field interviews revealed a variation in the responses of managers to the new system as
well as in their use of the system. While some managers enthusiastically embraced the new system,
others were resistant. Each manager’s acceptance and use of the system were based not only on the
system’s economic benefits but also on the structures and agency of the social systems of the
individual departments. As people engaged in interactions with the TOC system and as the TOC
system interacted with the existing structure and agency of the user departments, cross-sectional
variations occurred in the use of the TOC system as well as attitudes toward the system.
Responses to the TOC system ranged from active resistance to championship; we identify the
drivers of the type of response and their implications for the acceptance of the TOC system. The
primary drivers of a positive or negative response to the system were the match of the new system
to the structure and agency of each department. Differences in the manner in which the TOC system
was enacted in various departments arose from the interactions of the TOC system, and the structure
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and the agency of the department including the social systems, the models of mediations, and
agency.
Our study adds to a considerable body of accounting literature that explores the reactions to a
new accounting or control system. For example, Bhimani (2003) studies how the perceived success
of a process-based target costing system is associated with the extent to which the organizational
culture elements embedded within the new system are in alignment with the organizational outlook
of the user group. He conducts a field study at Siemens and finds that a large number of diverse
organizational factors, including economics, technical, and cultural elements, drives the design and
adoption of the new system. Mouritsen (1999) explores the notion of ‘‘flexibility’’ and how it is
converted into specific corporate strategies with the assistance of the management control system.
This study makes a two-fold contribution. First, it adds to the accounting literature by
providing a detailed characterization of the factors that drive the acceptance, adoption, and attitudes
to a new accounting system using the lens of structuration. Thus, we consider not only the social
properties of the system, but also the material aspects and the extent to which these aspects interplay
to shape user attitudes and use. Use of structuration in the context of an accounting system enhances
understanding of the duality of the structure and agency in driving accounting system adoption and
use. Our employment of a qualitative research methodology enables us to obtain rich and
interesting accounts of management accounting in the field and enhances our understanding of
management accounting practice (Lillis 2008).
Second, our study examines TOC, a concept that, although has enjoyed popularity among
practitioners and academicians in operations research (Watson et al. 2007), has been relatively
understudied in accounting. TOC is a marked departure from other cost accounting practices such
as standard costing, absorption costing, or ABC. TOC only considers the rate at which a company
generates money through sales and ignores overhead costs except to state that they have to be
covered via sales revenue. Not only does TOC consider refined overhead costing systems such as
ABC to be a waste, but it also maintains that such systems with their narrow focus on local
performance measures hamper the organization from reaching its ultimate goal of throughput
maximization. Thus, TOC considers other systems such as ABC to be ‘‘enemy number one of
productivity’’ (Goldratt and Cox 1992). By exploring organizational reactions to TOC, our study
adds to our understanding of user responses to systems that are markedly different from cost
accounting systems that incorporate overhead into the calculation of performance metrics.
The next section discusses structuration theory, followed by our research setting and process of
study, insights from our field interviews, and conclusions.
ACCOUNTING AND STRUCTURATION
Considerable evidence demonstrates that accounting and control systems have not only
technical, economic, and behavioral implications, but also social implications. Therefore,
accounting cannot be studied merely with reference to its functional properties because of its
embeddedness within the organization’s social system. Organizational actors constitute,
reconstitute, and reinterpret accounting systems based on other structures and processes in the
organization and in the course of their interactions with the system (Macintosh and Scapens 1990;
Ahrens and Chapman 2007a, 2007b; Chua 1988).
With a view to obtaining a greater understanding of the shared influences of the material,
social, and organizational factors, research has emerged that uses a structuration perspective (e.g.,
Ahrens and Chapman 2002; Coad and Herbert 2009; Moore 2011). Initially conceptualized by
Giddens (1979), structuration considers the basic domain of the study of social science as ‘‘neither
the experience of the individual actor, nor the existence of any form of societal totality, but social
practices ordered across time and space’’ (Giddens 1984, 2). Structuration considers structures as
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the products of human agency, but at the same time, these structures are reproduced conditions of
human agency (Giddens 1984). Human action or agency is an essential element of this theory, and
focus is placed on human actions that embed structures within a system during the development
phase, as well as the actions involved in appropriating the structures at the time of the use of the
system. The primary focus of structuration is to gain a better understanding of the sociopolitical
process by which structures are embedded within a system (Giddens 1979, 1984).
Structuration identifies three key structural dimensions of social systems, including
signification, domination, and legitimization. Signification structures are organized webs of
semantic codes and denote the cognitive and abstract dimension that provides meaning to a social
system. Agents draw on these cognitive structures using interpretive schemes, which are stocks of
knowledge, skills, and rules, and communicate with each other. The domination structure generates
and allocates power to agents, using allocative processes and authoritative resources as the modes
of mediation. Allocative resources refer to the property rights of individuals, including command
over material (e.g., manufacturing plants, computers, and farms) as well as the knowledge of how to
operate these resources. On the other hand, authoritative resources refer to the rights of some
individuals to command others or to have dominion over other individuals in the social system.
Both influence the coordination and control of resources, including people within social systems.
Legitimization is the moral dimension of structure and operates via normative rules and moral
obligations, and sanctions inappropriate behaviors. From an accounting perspective, the outcome of
signification is dialogues and reports that facilitate as well as provide meaning to communication.
The outcomes of domination are reflected in reward patterns that reinforce as well as change the
power structures. Legitimization results in patterns of accountability for actions that allow for the
agents to assess the moral justification of their outcomes.
Macintosh (1994) argues that because the structuration framework relies on social theories that
describe, explain, and analyze the social world and practices involved in complex management
accounting and control systems, it enables a better understanding of the social context of
management accounting. A comprehensive understanding of managerial accounting and control
systems requires a more detailed analysis of such social practices. Structuration facilitates such
analyses via its incorporation of the social theories of signification and communication, domination
and power, and legitimacy and morality (Macintosh 1994).
The structuration perspective is especially useful to analyze change in management accounting
and control systems as it expands our focus from the conventional view that change is linear and
organizations are homogeneous entities to a view that includes both structures and agency.
Macintosh (1994) posits that by including these two concepts, structuration combines the
structuralist position (the abstract codes that guide our behavior) and the existentialist humanist
position (the actions of individuals as they interact with each other in organizational settings). The
result of this combination is a process where social systems sometimes function to almost
automatically reproduce the status quo, while at other times, they undergo radical change. This
focus gives credence to the dynamics of history and change, and their ability to influence social
interaction in organizations. Thus, the framework provides a more comprehensive analysis of
management accounting and control systems, and helps explain intricacies that are beyond the
scope of most other frameworks. The value of structuration goes beyond the financials of a
company as it enables organizations to not only communicate financial numbers, but also reveal the
social codes related to power and morality (Macintosh and Scapens 1990).
In his review of structuration theory and its implications for management accounting research,
Busco (2009) suggests that the theory conceptualizes a way of making sense of social life in an
organization. He argues that structuration is useful in exploring how management accounting
systems can be implicated in processes of learning and culture change in an organization.
Structuration shares some common features with other social theories including Adaptive
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Structuration Theory (AST), practice theory, and Actor Network Theory (ANT). AST distinguishes
between structural features, i.e., rules, resources, and capabilities, and spirit, which refer to the
users’ interpretations about the values and goals of the new system (DeSanctis and Poole 1994).
The practice lens considers human actors’ involvement with a structure not as appropriation but
rather as enactment (Orlikowski 2000, 2002). ANT explores how accounting solutions are
recognized and used, and how such uses can modify the accounting system for use by other actors
in the organization (Ahrens and Chapman 2007b).
We use a structuration framework similar to Macintosh (1994) for understanding cross-sec-
tional variations in the social processes and their influence on the use and response to the
introduction of a new TOC-based accounting system. Like prior field studies (e.g., Anderson 1995;
Lillis 2002), our study uses semi-structured interviews to capture managerial attitudes and
reflections related to the TOC system. The next section describes our field research setting.
RESEARCH SETTING
The setting for our study is a publicly-traded pharmaceutical company (BPharm) located in
Asia. BPharm (disguised name) produces and distributes generics, branded generics, and
proprietary drugs, with 80 percent of sales generating from outside its home country. It employs
over 10,000 staff, of whom about 20 percent are scientific staff and hold advanced degrees. In 2007,
after a number of years of anemic growth in margins, BPharm employed a consulting group (CG) to
assist in improving performance.
After preliminary meetings with the top management, CG recommended two new initiatives,
one for operations and the other for product development. Both initiatives were based on the
philosophy of TOC. The next sub-section describes the basic principles of TOC, followed by the
process of implementing TOC at BPharm.
Theory of Constraints
The Theory of Constraints is based on the principle that the strength of any chain, process, or
system is dependent upon its ‘‘weakest link’’ (Goldratt 1989). TOC can be applied in many different
ways, some of which may be unique to the organization. In addition, research has identified
mechanisms by which TOC and ABC can be integrated for important decisions such as product mix
(Kee 1995; Hall et al. 1997; Kee and Schmidt 2000).
However, TOC differs from absorption costing and ABC in two fundamental ways. First, TOC
emphasizes the rate at which the firm generates income through sales, rather than through production.
Therefore, TOC defines inventory as the money invested in goods that the firm intends to sell, or
material that the firm intends to convert into salable products, as opposed to absorption costing that
tracks the cost of all types of inventory until they are sold or scrapped. Second, TOC does not
recognize the concept of overhead and defines operating expense as all funds that the firm expends on
converting inventory into throughput, including labor and manufacturing overheads. Thus, only
material costs are deemed variable. Indeed, Goldratt (1989) explicitly states that the allocation of
operating expenses to products is not a worthwhile endeavor. TOC argues that to optimize, a
company needs to decrease inventory or operating expenses and increase throughput. Anything that
may hinder a company from accomplishing this goal should be considered a constraint.
A constraint may be external or internal. An internal constraint exists when the market is
demanding more from the system than it can provide. An external constraint is evident when the
system’s supply is more than the market can accommodate. TOC recommends that the firm
identifies the root causes of the constraints and investigates ways to remove the constraint. A strict
operationalization of TOC without integrating it into existing accounting systems such as
absorption or ABC can represent a paradigmatic shift.
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Theory of Constraints at BPharm
In Spring 2008, BPharm started implementing the TOC system based on CG’s
recommendations. The first program, i.e., Project Management, focused on the process of
developing a drug and bringing it to market (R&D and new product development). Senior
management divided this process into three stages: the development stage, the integration stage, and
the filing stage. The development stage included the development of the drug in the lab, the bench
scale, and the pilot test of the product. The integration stage involved executing the exhibit batches
in the manufacturing facility for conducting bio-studies. In this stage, the drug was tested further on
humans before it moved on to the third stage—filing. The filing stage comprised of three parts:
pivotal studies (final bio-studies on humans), stability studies (in the lab), and the preparation of the
registration documents. Once complete, this stage culminated in sending the drug to the proper
authority for approval (such as the Food and Drug Administration in the United States).
Initially, the management team determined that the weakest link in the chain (i.e., the
constraint) was the integration stage because they had several projects in queue for integration.
They determined that their capacity was four projects per month or 48 each year, since this was the
maximum that the manufacturing team could handle in the integration phase. As one product
moved out of integration, another one could be put into the integration stage (termed the ‘‘virtual
drum’’). However, they subsequently found that the primary uncertainty was in the development
stage because this stage involved developing the drug prototype, and it was difficult to predict
accurately the amount of time (cycle time) needed to develop a new product. The development
phase involved multiple loops of the bench scale, lab scale, and a pilot bio-study. Each loop was
termed an ‘‘iteration’’ and management determined that each process involved, on average, two and
one-half iterations or seven and one-half months (as each iteration took an average of three months).
Thus, management determined that the release of projects should be controlled based on work-in-
process in the development phase as this was the weakest link in the chain. Finally, it was also
determined that the number of iterations that could be completed would determine the number of
projects that could be worked on in a given year.
In the area of new product development, CG placed higher emphasis on execution as opposed
to planning. CG advised BPharm that an emphasis on execution would enable the company to finish
the project on time, assure a smooth flow of projects, reduce multitasking, and enable early
identification of problems so as to be able to take the necessary corrective actions. Multitasking was
especially problematic at BPharm; too many projects were being executed simultaneously, which
placed pressure on people and resources. CG recommended BPharm reduce the number of projects
to lead to better flow and throughput.
To manage the project portfolio, three metrics were tracked: due-date performance (i.e., the
project was finished on a pre-determined due date), the cycle time of projects from start to finish,
and throughput (i.e., the number of projects completed per unit of time). A new system was
introduced to manage the product development process. This system (the Critical Chain Project
Management or CCPM) managed the distribution of workload and set priorities for tasks. No other
changes were made to the strategy or the structure of the organization.
Another focus of the TOC was inventory management. Based on CG’s recommendations, the
following actions were implemented: First, inventory turns were identified as the critical metric to be
tracked on a daily basis. Second, the company moved from a system of forecast-based planning to
consumption-based planning. Thus, inventory was not stocked based on forecasting, but rather
based on replenishment, with buffers built at various stages of the supply chain. The inventory levels
in the buffers were tracked by colors to facilitate replenishment. Black indicated zero inventory, red
indicated that replenishment was immediately required, yellow indicated that replacement would be
required soon, and green indicated that inventory was at a comfortable level. The inventory status
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was required to be updated on a daily basis. The metrics tracked included Stockout Percent, Quality
of Data Upload, Primary Sales, Secondary Sales, Inventory Turns, and Manual Orders. In order to
implement this initially, a number of distributors in the domestic country were asked to computerize
the inventory replenishment cycle by joining the company’s MYSAP system.
To obtain an understanding of how a product cost sheet would look under TOC versus ABC,
Table 1 provides an example of product cost for five representative products at BPharm under the
two systems. It can be observed from Panel A that under TOC, the ‘‘Throughput Margin’’ includes
only variable costs, including freight. There are no overheads allocated to the products. Panel B
provides the product cost sheet calculations as per ABC, which includes variable costs such as
materials and packing as well as overhead costs such as manufacturing overhead. Other than
Product Group PG1, which has no significant overhead cost assigned to it, the throughput margins
are not the same as the ABC margins. To provide an assessment of the impact of the costing system
to decision making, consider a case where a company decides that a minimum of 12 percent margin
is required, otherwise the product will be dropped from the system. Under ABC, Product Group
PG10 will be dropped from the system because its gross margin is only 11 percent, which is below
the required margin. However, under TOC, Product Group PG10 would be retained because its
Throughput Margin at 15 percent is higher than the required rate of 12 percent. Note that the value
of ending inventory will be lower under TOC compared to ABC for all product groups except PG1.
TOC proponents state this lower assessment of inventory value as another benefit of TOC because it
discourages excess production in order to hide costs in inventory (Goldratt 1989).
Field Data Collection
The author team conducted a series of in-depth interviews with senior BPharm executives and
managers during the summer and fall of 2008. An additional set of interviews were conducted in the
summer of 2009 and fall of 2010, primarily for clarification and collecting additional data regarding
TABLE 1
Product Cost Sheet Using TOC and ABC
Panel A: Product Cost Sheet—TOC
Product Group Sales Material Cost Packing Cost Freight Variable Cost Throughput Margin
PG1 100% 7% 0% 0% 7% 93%
PG4 100% 18% 2% 10% 30% 70%
PG7 100% 44% 5% 12% 61% 39%
PG8 100% 50% 0% 0% 50% 50%
PG10 100% 55% 6% 24% 85% 15%
Panel B: Product Cost Sheet—ABC
Product Group Sales Material Cost Packing Cost Overheads Cost Of Goods Sold Gross Margin
PG1 100% 7% 0% 0% 7% 93%
PG4 100% 18% 2% 21% 40% 60%
PG7 100% 44% 5% 30% 79% 21%
PG8 100% 50% 0% 6% 55% 45%
PG10 100% 55% 6% 27% 89% 11%
Source: Company Records.
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the TOC program. The objective of the interviews was to obtain information about the dynamics of
the TOC implementation in each department. We sought to obtain managers’ involvement in the
TOC process and their perceptions regarding the implications of the system for the firm as well as
their individual departments. The interviews, which lasted between 25 minutes and one hour per
interviewee, were recorded and transcribed by a professional transcribing firm. Table 2 provides a
summary of the field visits, persons interviewed, and the duration of each interview.
EVIDENCE AND ANALYSES
TOC Implementation in BPharm
Senior management of BPharm had exploratory meetings with CG in early 2008. CG
conducted a ten-day workshop the next month with the senior management group. After an analysis
of the existing processes via preliminary group interviews with managers, CG identified inventory
turns as the critical corporate-wide performance metric to be tracked. Implementation began in early
summer 2008. TOC implementation was piloted in the domestic market in one region of the country
with 19 distributors (BPharm had over 8,000 distributors). Over the next few months, the TOC was
implemented for 1,100 distributors.
Examination of pre- and post-TOC operational and financial data provided the following
insights: (1) number of projects completed increased significantly, (2) number of days sales
outstanding decreased from about 200 to about 21, (3) market share and revenues remained
relatively constant at about 2.5 percent, and (4) profit before extraordinary items remained
relatively constant at about 20 percent. Interestingly however, managers had widely varying views
about the extent to which TOC was being used, the success of TOC, and the future of TOC. Some
managers indicated that TOC had been a success and brought a huge improvement to important
operational metrics, while other managers had opposite views. Through our field interviews, we
were able to glean information about the drivers of the users’ attitudes toward the system and link
these attitudes to the fit between the structural properties of the user departments and the TOC.
CEO Reactions: TOC as a Means to Achieve Economic Leadership
Interviews with the CEO revealed that he viewed TOC as a vehicle for achieving a high level
of growth for the firm and, thereby, attain economic leadership. The CEO, who had been appointed
in 2001, was dynamic and goal-oriented, with engineering and MBA degrees from premier
institutions in the United States. The CEO’s signification structure focused on economic leadership
of BPharm in the Asian markets; growth, market share, and elimination of bottlenecks to growth
formed the primary interpretive schemes and mediation modes that were communicated. The CEO
alluded to the concept of system efficiency, financial performance, and shareholder value several
times during the interviews. He also expressed annoyance that managers exhibited a narrow
perspective, which in his opinion would stifle growth.
When you say, [departmental] efficiency is important, machine utilization is important,
etc., you will [expletive deleted] up the whole system. But if you see the system as a
whole, you will focus only on what is constraining your flow, which is your bottleneck.
The whole theory of what I am saying is—identify the constraint, whether it is internal or
external and let everything else be subordinate to that.
Looking at global system as a whole, not subcomponents, is very important. Ensuring that
the whole delivers more value to the shareholders is fundamental.
The perspective of the CEO was that TOC was a means of achieving economic leadership and
growth and would enable BPharm to see the system as a whole and attain global maximization
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