The last three decades have seen a revolution in the theory and practice of management accounting. It has been forced out of a time in which it largely addressed the problems of technology of the 19th century and into a new era in which it has become increasingly conscious of the changing technological and organisational context of its operation. The view of management accounting has broadened significantly with the existence of a common recognition of the wider role of accounting today. It has gone through a significant transformation as a result of substantial criticisms regarding the lack of efficiency and capability of traditional cost and management accounting practices in the literature since the early 1980s leading to appeal for fresh innovative techniques and methods being implemented by management accountants of organisations at present. In reply to such criticism, several new techniques such as activity-based costing, target costing and the balanced scorecard have been introduced.
Such changes have been influenced by a number of interrelated factors. This re-evaluation was initially influenced by debates regarding limitations of the traditional accounting paradigm. In addition Johnson’s and Kaplan’s Relevance Lost: Rise & Fall of Management Accounting (1987) addressed areas of concern, asserting that management accounting had not changed and had failed to respond to the challenge of the rapidly changing environment.
The 1980s was a very exciting era in management accounting research. It could be said that the 1980s was a decade of re-evaluation in terms of research undertaken and in terms of techniques and practices that took place in management accounting. Before this rejuvenation of managerial accounting took place it was simply seen as a neutral tool and device that could be used to achieve organisational goals. However, it is more recognised today as a social and institutional practice which is essential in the creation of reality (Miller 1994). The way management accounting is conceptualised has changed. Initially being defined based on economic perspectives, modern definitions locate management accounting in a broad organisational context and doesn’t focus solely on the economic or financial information used for decision making (Scapens 1999). Garrison, Noreen & Seal (2003) state that management accounting “is concerned with providing information to managers – that is people inside an organisation who direct and control its operations”.
The wider roles of accounting are now taken into consideration.
The tremendous changes in the business environment that occurred throughout the 1980s accelerated in the 1990s, particularly in information and manufacturing technology which resulted in strains on the management of profit and also non-profit organisations. These changes in technology affected management accounting since they have made it possible for new accounting measures to be produced. Considerable changes also took place in the way performance is measured at both individual and organisational level. Furthermore, the decentralisation of accounting led to an increase in communication between accountants and other managers, thus facilitating the change.
Evidence exists that the role of the accountant along with other managers has been altered due to changes in the wider environment and the existence of multifunctional teams, with some work of accountants being undertaken by non-accountants. Arguments have been made for reform of accounting practices so that they can effectively serve the needs of modern organisations.
During this period of reform various new techniques were proposed by researchers and academics to replace the traditional ones that became ineffective as such with the fast changing business environment. Such techniques include; activity based accounting, target costing, balance scorecards, strategic costing, quality costing, attribute costing, etc.
One approach which became prominent throughout this period of reform of management accounting was strategic management accounting. This is defined as:
‘A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information’ - (CIMA)
This approach focused on the provision of information for the formulation of an organisation’s strategy and management implementation. This technique uses internal factors as well as external factors in order to assess the performance of a company externally as well as how the company is being run internally. The purpose is to show a company how they are performing in comparison to external competitors, so to give the company a competitive edge in growing and advancing as a whole. Many different techniques have been used to help a company achieve this and to perform at its optimum level. Some of the processes and techniques which fall within strategic management accounting are, activity based costing, life cycle costing and balanced scorecard. Although strategic management accounting has been around for quite a few years, it is still seen as an area which can develop further to contribute largely to the future of management accounting.
The increased need of an integrated system which used both financial and non-financial performance measures in conjunction led to the emergence of the balanced scorecard, which was an integrated set of performance measures which helped management gain a fast and comprehensive view of a company’s performance. This strategic management technique provided a prescription as to what should be measured in order to balance an organisations financial perspective. It built upon previous strategic management accounting techniques and brought together the difference performance measures to help organisations clarify their vision and strategy and translate them into action.
The balanced scorecard which was devised by Kaplan and Norton in 1992 has been widely recognized as an influential performance measurement tool and concept for organisations as it provides managers with a management methodology to help bridge the gap between strategic objectives and their operational execution. It provides feedback around both the internal business processes and external outcomes in order to continuously improve strategic performance and results. When fully deployed, the balanced scorecard transforms strategic planning from an academic exercise into sustainable organisational achievement.
The philosophy used by the balanced scorecard is that vision and strategy is best achieved when interlinking four perspectives, and viewing the organisation. The four perspectives are the learning and growth perspective, internal business process perspective, customer perspective and financial perspective.
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In recent years the balanced scorecard has become an essential instrument, used by management in order to fulfill the organistaion’s visions and strategies. Further benefits of the balanced scorecard include; providing managers with complex information at a glance, ensuring managers are managing all the important variables (rather than all their favourites variables, or the historic variables), balances time perspectives – current performance as well as the drivers of future performance can be integrated into the scorecard, and finally prevents information overload by limiting the number of measures used – it applies the ‘loose/tight’ principle.
Despite its well-publicised successes, some organisations that adopt a scorecard fail to reap the rewards they expect. The concept of the balanced scorecard may be simple but its implementation can be a time consuming and costly task. Originally designed as a measurement device, today the balanced scorecard has become a strategic management system that enables organisations to clarify their vision and strategy and translate them into action across the organisations.
Another major development of new accounting techniques has been activity-based costing (ABC). Although this idea has existed for several decades it gained prominence through the work of Kaplan and Cooper during the 20th century. It recognises that most manufacturing costs are determined by the amount of ‘activities’ (i.e. the number of production units per month) and that the key to effective cost control is therefore optimising the efficiency of these activities. Instead of allocating indirect costs using traditional volume-related measures of output such as direct labour hours, ABC identifies suitable cost pools for indirect costs and then uses appropriate cost drivers to relate the expenditure in the cost pools to the activities of the business. ABC allowed more accurate picture as cost are allocated according to key causes of cost especially indirect cost that can’t directly relate to product. Cost of poor quality became known and non-value-added activities are highlighted in comparative to benefits provided to customers. It also assists in exposing complexity like operations layout, long lead-time sourcing, material configuration and process instability (Bateman and Snell, 1996).
ABC was first met with enthusiasm as a better more relevant approach to costing in the mid 80s/ early 90s. However, through experience this technique has often been criticised as a result of the difficulties and failures faced by organisations in implementing the technique. The number of companies actually using the technique remains relatively modest, but expressions of interest and intent remain quite high.
Activity-based management (ABM) takes ABC one step further following the management philosophy that believes planning, execution and measurement are key factors to competitive advantage. ABM information output on costs and performance measurement on business activities is a contributory initiative towards improving decision-making at strategic and operational level like product mix and make/buy decisions.
ABC information was further extended in ABM where value analysis and performance measures are initiated for continuous improvements and excellence. ABM reviews every linkage of activity with strategy, whether the activity is value added or contributing to organization’s future direction and prosperity (Allott, 2004). However, ABM will not reduce the cost to a company, it will only help managers to understand these costs better, by measurement, to facilitate correction for control, processes and product advancement, strategies and operations management.
Generally speaking, management accounting looks at the controlling of a company and how managers of an organisation should act in order to develop their organisation further. Since the 1980s we have witnessed considerable changes to the direction of management accounting. These vast changes have sought to address the highlighted importance of effective measurement tools within an organisation in order to manage its core aims and objectives. Such management accounting techniques as briefly discussed throughout this paper accelerates the time in which management decisions can be made thus improving the management of the organisation. Once properly constructed, they can and will remove much of the guess work and surprise factor in business formerly inherent in traditional business reports. However, it is worth noting at this point that there is no guarantee that management accounting techniques will be successful but these contributions are the way forward. Indeed, the variety of research methodologies and topics is continuing to raise new issues and reinterpretations of management accounting theory and practice. The need still exists for comparing, contrasting and synthesising results across cases (Hopper 1999). As such, management accounting still remains a very interesting and topical area for research.
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