Management Accounting Practice in China by Wang Hua

Management Accounting PracticesPractice in China

By Wang Hua

Accounting Department, JinanUniversity, Guangzhou 510630, China

Management accounting①practicespractice presents one aspect of the development of Chinese economy, which is tortuous. Management accounting is integrated with the internal management of an enterprise. Since the establishment of PRC, Management accounting practicespractice in China has been closely related with the reform of economy system, as well as enterprise institutions. Without a comprehensive understanding of the process of China’s economy system reforms, it will be impossible to master the development experience of management accounting in China. With the background of Chinese economy reform, this thesis makes a summary of management accounting practicespractice in China and reveals its features since 1949.

  1. Basic Features of Chinese Economy System Reforms ------Macro –background of Management Accounting practice Changes

Chinese economy system reforms resulted from the particular system arrangement of state-run

enterprises.②A comprehensive understanding of Chinese economy system reforms should be based on the logic background of state-run enterprises emergence.

  1. Logic Background of State-Run Enterprises Emergence

The emergence of state-run enterprises in China is never a random choice. In its

early days after establishment of the People's Republic of China, the Chinese government faced anconsiderable underdeveloped economy and unbalanced economic structure. How to Improving improve the backward economic structure, and increasing increase the level of industrialization as fast as possible, especially to by increasing e the proportion of heavy industry in the industrial structure, became the fist-place task of the ruling party. Consequently, the government made the prior development of heavy industry as its economy development strategy. However, development of heavy industry required highly intensive capital investments. Lacking sound economic base and sufficient capital, investments would never be made on heavy industries just relying on the resource-allocation function of market. In order to implement the strategy, the government must control not only the direction of social resource allocation and but also the residual income resulted from production and operation process. Macro-So, economy policies had been put into effect in succession, such as macro policy of mandatory distortion on prices of products and essential production factors, high-intensive plans system on resource allocation plans and micro-operating system mechanism with no autonomy. In a word, enterprises didn’t have any decision-making power. State-run enterprises emerged particularly under these circumstances.

Although termed as state-run, it is just impossible for the government to take part in the operating management of the enterprises directly. The stewardship was than then entrusted to managers who were on behalf of the government. In order to protect its equity, the government, also the owner representative of the enterprises divested the managers of all decision-making authorities on production, supply, sales, human resources, financial capital and material resources. Thus, the limited social resources can could be invested on the development of social economy. Obviously, such a special governing systemance structure is endogeneticformed internally. According to the design at that time, Tthe state-run did not possess features of enterprise at all. They are over-economic organizations, bearing the historical mission to remedy the market defects.

The emergence of state-run enterprises and the particular related institutionsystem arrangement is resulted from the prior development of heavy industry strategy in the early days of the Chinese government when funds were insufficient. Under such condition, a highly planned management system employed in state-run enterprises to make unified collections and distributions seemed to bewas logical. Only unified collection and distribution could pool limited resources to develop Chinese economy and construct Chinese industrial system. Essentially, state-run enterprises emerged to remedy the market defects, which possessed a feature of anti-market. The Chinese government is now working for the establishment of Socialist Market-Oriented EconomySocialist Market Economy System. The anti-market features conflicted with market economy demands.

2. A Snap-Shot of China’s Economy System Reform Process

The traditional, state-run-enterprise-oriented economy system resulted in lopsided industrial structure, poor competition and incentive mechanism, and, inefficiency in resources allocation. Actually, the government was conscious of all these issues in early 1960s and made reforms intended to settle the issues. However, economy system reforms in China before 1978 did not touch the traditional economy system deeply enough. The 3rd Plenary Session of the 11th Central Committee of the communist party of China convened in December 1978 in Beijing was the prelude to China’s economy system reforms, which can be divided into three stages. The focal points of the first stage, covering the period from the end of 1978 to October 1984, were reforms on micro-operating institutionmechanism, decentralization of power and profit to state-run enterprises and profit retention in enterprises. Lacking vitality is was the most obviously disadvantage of the traditional state-run enterprises. Managers are were not enthusiastic about operations. The reforms were based on decentralizations of power and profit retention, in order to improve the micro-operating mechanism and production efficiency by setting up economic incentive mechanism and bringing out the enthusiasm of the managers. Focal points of the second stage, covering the period from October 1984 to the end of 1991, were reforms on resource allocation system, and emphasis began to be put on the structuring market-oriented economy systemmarket system construction. According to the Decision by the Central Committee of the Communist Party of China about Reforms on Economy Mechanismissued passed on October 1984 on the 3rd Plenary Session of the 12th Central Committee, the reforms were to increase vitality of the state-run enterprises. Emphases were put on conscious employment of planned systems following law of value, development of Socialist commodity economy and building of market system. In order to increase vitality of the enterprises, the government deepened reforms to resource allocation and made substantial progress in various fields including materials, foreign currency exchange and financingfinance. And Aaround the core of transferring operating institutionmechanism, contracted responsibility systems were popularized in state-run enterprises throughout the country. Focal points of the third stage, covering the period since 1992 till now, were defining the purposes of socialist market-oriented economySocialist Market Economy reforms, transferring operating mechanism and constructing micro-base of socialist market economy. Mr. Deng Xiaoping inspected Southern China in the spring of 1992 and made important speeches, which were considered as guidelines to break through ideological limitations on disputes about planned-oriented or market-oriented. In October 1992, the 14th Plenum of the Communist Party of China defined the purposes of establishing socialist market-oriented economySocialist Market Economy system and made detailed demands. The demands included improving market conditions, transferring operating system and making enterprises as resources allocation entities oriented by market. In November 1993, the Decision by the Central Committee of the Communist Party of China about Several Issues on Establishment of Socialist Market-Oriented EconomySocialist Market Economy System was passed on the 3rd Plenary Session of the 14th Central Committee. According to the Decision, modern enterprise institution became the micro-foundation of socialist market-oriented economySocialist Market Economy and the reform objective model of the state-owned enterprises, possessing the features of definite clear property rights, clear responsibilities and authoritiesexplicit rights and obligations, independent management from government and professionaseparation of administration from enterprise, scientificl management. In short, reforms of state-run/state-owned enterprises in China have been pursued around the property rights and market-orientation.

  1. Management Accounting PracticesPractice in China

Generally, in accordance with Chinese economy reforms, the implementation of the Reform-and-Opening policy is the landmark of management accounting practicespractice in China. suited with economy reforms in accordance with the Reform-and-Open policy. Before carrying out reforms, the Chinese government people intended to put search necessary management accounting practicespractice into effect in a planned economy. After that, with a significant change in the enterprise institution, western advanced management accounting theory and practicesmethod were introduced into the countryChina, based on continuously improvement of economy responsibility. institution.

  1. Management Accounting PracticesPractice Suited with State-Run Enterprise Institution under Planned Economy System

Even though the terminology of Management Accounting was not introduced in

China until the end of 1970s, the Chinese enterprises are not short of practical experience in management accounting field. Because of the particular environment in the early days of the establishment days, of PRC, management accounting practicespractice in that period surrounded the key of cost management.

Cost is considered as a comprehensive reflection of operating efficiency. Low cost level means to provide more product or service by consuming fewer materials or labor resources and make efficient employment of resources. Low cost level means efficiency. Under the system arrangement of state-run enterprise institution, the government naturally attached importance to cost control in order to ensure the scare resources can be invested on national economy development, with the expectation to minimize cost and increase the efficiency of resource employment. The feature of internal responsibility accounting system around the core of cost control is presented by various cost management rules issued by the government. Cost management, thus, is always an important integrated component of Chinese accounting system. ③

In spite of ups and downs during the process of Chinese accounting system development, cost management always gained attention from the government.. During the Cultural Revolution, politics was considered above everything, cost management rules had not been implemented effectively in enterprise. However, the importance of cost management is was regarded again as the focus has wasbeen moved to economy development because of the particular system arrangement of state-run enterprises institution. It can also explains the fact that the government took the responsibility to set unified cost management rules, even though cost control in is one of the important components of micro-operating management. Under the planned-economy system, the country is like a huge-sized enterprise, while state-run enterprises are administerial attachments, or workshops of this huge-sized enterprise. The only task of these workshops is to complete the unified production plans set down by the government. From the point of view of management accounting, state-run enterprises are just cost centers, or at most factitious revenue profit centers. Cost is in a efficiency index. Cost plans and its complement is one of the major measures to evaluate performance of state-run enterprise by the government. Especially when social resources are scarce, the government encouraged activities to increase production and practise strict economy, to build socialism efficiently and effectively. Evaluation on complement of cost plans became more important. And it is was also the only field for managers’ abilities at that time.

Additionally, government set prices for all products. Based on the cost of the enterprises, the prices were set as

Product Prices = Cost of Productionproduct costs (1+ Cost/Revenue Rateprofit to costs ratio)

This practicespractice means the government must attach sufficient attention on the building of cost management system in enterprises, determine the cost items and cost level according to the cost management system. Otherwise, loss control on cost will result in loss of control in prices.

From 1984 on is the second stage of China’s economy reforms. The government began to pay attention to the building of market economy system. The cost management institution should have been suited with operations of enterprises and market. But why did the government issue Rules of Cost Management in State-Run Enterprises in 1984 andCost Accounting Measures of Cost Management infor State-Run Industrial Enterprises in 1986 respectively? The answer located in the fact that the government was pursuing profit retention, contract for profit,and the first stage and the second stage of substitution of tax payment for profit deliveryretaining profits and paying taxes during that period. and Contracted contracted responsibilities systems which were popularized all over the country during that period. Regulations fromAll those seemed that it was necessaryfor the government were necessary to regulate cost management in enterprises. So Tthe two documentations may be considered as the cost management system established by the government to meet the needs of reforms on enterprise and taxation.

Under the planned-economy system, state-run enterprises are administerial attachments to government with no autonomy, producing products instead of commodities according to the plans set down by the government. The products were purchased and sold by the government in a unified way. Foe For the state-run enterprises, there was were no marketing issues at all. As a matter of fact, it was unnecessary for the enterprises to take the marketing issues into account. As the index of operating efficiency, cost was regarded important naturally. As far as the particular historical condition and system arrangement of state-run enterprise are concerned, The the Chinese management accounting practicespractice in that period possessed some vivid features in the particular environment and state-run enterprise institution, , such as:

(1) Subunit Shift-group Accounting.

Some industrial enterprises in Northeast China began to implement subunit workshop costingaccounting since the second half of 1951, as pursuing cost management to workshops was a notable indicator for progress in cost management. This practicespractice drew the great attention of the vast financial staff . The practicesand abstracted attracted the mass of staff to take part in the work of accounting and management, and was well received by the people. Combing subunit shift-group accounting with labor competition is was an important measure to regularize the increase production and practise economy. An increase production and practise economy trend is was popularized rapidly. Subunit Shift-group accounting could induce the enthusiasm of the people and encourage labor competitions. The practicespractice was extended all through the country and became the vivid feature of management accounting practicespractice in 1950s. Subunit Shift-group accounting is an accounting system to record, measure, control, analyze and evaluate the production activity in the lowest level unit of an enterprise---shift and group. It is was considered as the soundest foundation to extend economic responsibility system. Cost might be minimized and efficiency might be increased through subunit shift-group accounting. As an a responsibility accounting system with Chinese-style characteristics, subunit shift-group accounting solved the hard problems unsolved faced by the western responsibility accounting.

(2) Economic Activities Analysis

Analysis on eEconomic activities analysis had been extended since 1953 in China. The

analysis is an evaluation on the operating activities by systemically comparing and analyzing figures and indicators and finding the inter-relationship among the indicators. By means of the process, identify the disadvantages, disclose the conflicts, determine the directions, suggest effective measures and induce potentials, in order to ensure the efficiency of operating activities following the increase production route. Subunit Shift-group accounting disclosed discloses problems, while economic activity analysis helped helps to find the cause of the problems. Only Bby combing the two together, problems can be found and settled. These two practicespracticess arewere considered as two trumps of the Chinese management accounting practicespractice for the periodat that time. Internationally, the American accounting master, Robert S. Kaplan established the theory of Balanced Scorecard in 1990s, exerted significant influence in developed countries. The Balanced Scorecard system evaluated performance of an enterprise from the perspectives of the financingfinancial, customer, internal business process and the learning and growth and development.. Actually, Economic Activities Analysis actualized in China in 1950s had already broken the limitation of financial measures, and evaluated performance of an enterprise based on multi-measures including financial, non-financial, currency and non-currency. Basically, the analysis was is quite similar to the Balanced Scorecard. Owing to the limitations of the times and environment, it wais not all-around as Balanced Scorecard, but it does be a genuine try to evaluate performance by multi-measures. Anyway, we could draw the conclusion that,before Robert S. Kaplan., the Economic Activities Analysis represented the marrow of the Balanced Scorecard..

(3) Mass Line

Management Accounting is an internal system of an enterprise. On the other hand,

cost information involves business secrets. But following the mass line is just one of the key features of management accounting practicespractice in state-run enterprises under the planned economy system. Following the mass line means pooling the wisdom of the masses to find the approaches for reducing cost. The mass line played an important role in subunit shift-group accounting and economic activities analysis. Management accounting practice is a comprehensive systemic engineering project. It should be implemented in the lowest units of an enterprise, and covered the fields of production, technologytechnique, and operating management. Management accounting practicespractice should be closely united with productive technologyon technique and following the mass line. Nowadays, enterprises in developed countries put stress on humanized management and are pursuing systems like employee participation and decentralized management, quite similar to the mass line projects in China. However, exercise of the management systems in the developed countries is limited in one enterprise. Following the mass line is practical only under the system arrangement of state-run enterprise system of in China. While in the developed countries, it would be impossible for enterprises to following the mass line as separate entities. , Thusthus, the effects of the management practicespractice will be limited in one enterprise. The mass line practicespractice in China stressed the comparing, learning, pursuing, mutual aiding and surpassing among subunits, and also the comparison with advanced level of the industry, its fundamental thought is as same as which is similar to the benchmarking practices popular in America for in recent years.