Abstract
The aim of this paper is to examine the influence of foreign exchange risks on manufacturing activities (<em>monozukuri</em> in Japanese) and the function of derivatives as a countermeasure against such risk from the viewpoint of management accounting. From this perspective, we examine the Comprehensive Profit Opportunity and Lost Opportunity Control (COLC) model, discussed previously in this journal, and further its practical development and application. To this end, this paper first clarifies the actual situations of major Japanese manufacturing companies in terms of foreign exchange fluctuation earnings and derivative instruments (including hedge accounting). Then, after investigation of the prior research on the interrelation between risk management and management accounting, we theoretically analyze the relations between risks, derivatives, and hedge accounting from the synthetic viewpoint of profit opportunity, risk, and opportunity cost. As a result, this analysis can play an important role in outlining the landscape in which business strategy and enterprise risk management align, both proactively and reflectively, with contemporary management accounting.
Highlights
The function and content of management accounting has been changing since the global financial crisis of 2008
We examine the prior literature on the general interrelation between risk management and management accounting and, with reference to this issue, introduce the Comprehensive Profit Opportunity and Lost Opportunity Control (COLC) model, which was addressed in the previous issue of this journal (Vol 10 No 8: Nishimura, 2015a)
Even though it adopted countermeasures against the risk of foreign exchange fluctuation, Hitachi (2015) rightly notes the potential for ineffective hedge accounting and countermeasures adopted to mitigate the risks of foreign exchange fluctuation, because these measures only put off the negative effects of the risks or give only temporary relief from them
Summary
The function and content of management accounting has been changing since the global financial crisis of 2008. In Japan, cost design ( known as target costing in English) has contributed to innovation in manufacturing activities (monozukuri) and improvement in business results through organically integrating low cost with high quality since the 1960s In recent years, this tool is taking a new form that is more suitable for coping with financial risks and can adapt to changes in the business environment (Nishimura, 2014; Tanaka, 2015). Before and after the recent global financial crisis, many enterprises had the bitter experience of sacrificing sustainable and long-term manufacturing performance to the speculation of short-term derivatives In this sense, all manufacturing enterprises are confronted by a critical problem: how to manage the relations between manufacturing activities and external financial risk ( foreign exchange risk) by using effective management and accounting systems. This problem is related to derivatives strategy and enterprise risk management
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