INTRODUCTION TO MANAGEMENT ACCOUNTING
Management accounting measure analyzes, and reports financial and no financial information that helps managers make decisions to fulfill the goals of an organization. Thru process of preparing management accounts, accurate and relevant information is developed to coordinate production design, as well as marketing decisions. Nevertheless, evaluate performance is reported by managers to make dad-to-day, short-term and long-term decisions.
Brief understanding major differences between financial accounting VS management accounting that is financial accounting focuses on reporting to external parties such as investors, government agencies and so on. Unlike financial accounting, management accounting focuses emphasis internal measures and repots which do not have to follow GAAP yet are based on cost-benefit analysis. By doing so, organization have broad focus on how will and accurate the information help managers in different levels example sales managers, production managers, human resources managers, etc. to do a better job and determinate what substitute products to consider in decision making.
CONCEPTS OF MODERN ACCOUNTING TECHNIQUES
Organizations are increasingly applying the key success factors from the decision-making to implement strategies regardless of promote sustainability. Main elements of the development and implementation of strategies are to achieve long-term financial, social, and environmental performance. In other words, strategies specify how organizations match their own capabilities with the opportunities in the marketplace to accomplish their objectives.
In mid 20th century, management accounting methods of performance have been mortified and have been many improvements in theories as well as modern accounting techniques are developed. As a consequence, many organizations have adopted the modern management accounting techniques to achieve and sustain competitive advantages. With the growth in field of modern management accounting techniques, strategic managements become dramatically important within the group of organizations’ activities.
Strategic management accounting also known as one of a fewer new system, is the series of modern management accounting practices to provide a direction to the strategic of an organization. Other famous modern management accounting techniques such as ABC, ABM, JIT, and FMS are so effectively implementing a new level of organizes strategic goals.
Another useful tool and method of modern management accounting are studies in the cost of products which include design, development, research and marketing costs, well known as product life-cycle cost. Under this method, costs of different areas are covered example R&D and disposal costs unlike the traditional management accounting system. By doing so, managers prevent mislead of product pricing while evaluating mix product decisions and approach a better pricing decisions.
ACTIVITY-BASE COSTING BACKGROUND AND DEVELOPMENT
ABC method is a refined cost system by identifying individual activities as the fundamental cost objects such as allocation cost using smaller cost pools known as activities. (Wegmann, 2008) Using cost drivers, the costs of these activities such as administration and production departments; these are the cost drive to assigning to other cost objects for a product or service. It was first deployed in complex, manufacturing firms, it then increasingly gained acceptance in organizations ranging from manufacturing to retailing, and from profit-oriented organization to government institution. The implementation of ABC shows unexpected good result especially for those firms with substantial overhead costs.
The development of ABC is a replacement costing method to the traditional cost accounting method. The traditional cost accounting emerged towards the end of 19 century in where industries were still labor intensive. While traditional cost is still used in small companies that produced small variety of products, and low overhead costs is consumed.
In 1980s, development of ABC is due to the dramatic changes in production method and need of improvements because of inaccurate method used in traditional cost accounting system of indirect or overhead costs. For example, some products take longer and more time compares another products. Since the same amount of direct material and direct labor being recognized as a result same broad of cost is not added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.
As a result, ABC has grown in importance to meet the production concepts on cost saving and sustain competitive advantage. A few factors to be explain why ABC has become in importance: - an increase of manufacturing overhead costs nowadays, overhead costs no longer correlate with the productive machine hours or direct labor hours, grown in customer demands, and the diversity of the products which produced in larger batches.
STRATEGIC BENEFIT
ABC has several benefits. It is a business process improvement (BPI) tool regard of flow analysis, and performance management. That is companies practice an ongoing evaluation of improvement initiatives, and the ABC management endeavors. Secondly, ABC helps assists in identifying the right contributors to and detractors from financial performance, and identifying products, channels and profitable customers. Moreover, ABC equips managers with cost intelligence to drive improvements.
ABC assigns costs to cost object like products and services based on the number of records and transactions involved, which is identifying cost pools or an activity centers.This helps to avoid products cost cross-subsidization between high-volume, low complexity outputs and low-volume, high-complexity outputs (Cooper R.a.,1988; Cohen,2005).This allows management accountant to generate accurate cost estimation and identify the profitability of various products/services, thus aiding them to work out how to maximize shareholder value and improve performance.
Other benefits on ABC which include decisions making about pricing and product mix, cost reduction, process improvement, and product and process design. The ABC system gives managers information about the costs, by so, managers then make pricing, and product mix decisions. ABC give managers guide and focus on cost reduction as well as design decisions when evaluate how its current product and process design affect activities and costs.
LIMITATION
One of the major limitations of ABC is that it requires high time and recourse commitment because of the requirement of periodically data gathering, validation and insertion into the system (Innes, 2000; Kaplan R.S., 2004: Cohen, 2005).
Another limitation of ABC arise is when performing on estimation of plans and budgets. It is next to impossible and difficult to have an accurate estimation of the costs for some critical activities such as R&D. Associated problem when in proper estimation of the costs in activities as consequences in breakdown in the whole chain of activities.
Some overhead costs are difficult to assign even happen in ABC method as an overhead costs such as the directors’ salary. These costs refined as business sustaining and do not mean to assigned to department because there is no meaningful method by doing so. If do so, the allocation might eventually result in inaccurate cost estimation and causes wrong decisions.
CONCLUSION
In general, ABC has more advantages than limitations. When implemented properly, ABC can bring about constructive changes in financial control systems of an organization.
However, there is no such thing as the best costing method in an organization. There is only the most suitable costing method. As such, the management should evaluate the pros and cons of each of the costing method to identify the most appropriate costing method for their organization
JUST-IN-TIME BACKGROUND AND DEVELOPMENT
JIT (Just-in-Time) is a production strategy that aims to reduce in-process inventory and its carrying costs. JIT production method is also well known as the Toyota Production System. For essential, Toyota manufacturing plants was first introduced and devleped by Taiichi Ohno and as a goal of meeting consumer demands with minimum delays. Taiichi Ohno is also well known as the father of JIT.
The success of Toyota during the 1973 oil crisis has attracted the interest among Japanese firms as well as Western companies (Hallihan, 1997). In late 1970s, US manufacturers have widely adopted JIT concept to improve their performance and regain their competitive edge (Ansari, 1984; Celley, 1986; Im, 1989)
The philosophy of JIT is simple: inventory is waste. Inventory is seen as incurring costs, or waste, instead of adding and storing value, contrary to traditional accounting.
Best described JIT is an approach and practice with the objective right part in the right place at the right time. The philosophy requires all resources be acquired and used only as needed. It has most profound effects on manufacturing companies, which maintain three classes of inventories i.e. raw material, work-in-process and finished goods. According to JIT, raw material are received in time for production, work in progress parts are completed just in time to be assembled into products, and products are completed just in time to be shipped to customers (Garrison, 2004-2005).
JIT should improve profits and return on investment by reducing inventory levels or by increasing the inventory turnover rate, improving product quality and delivery lead times. Under JIT system, excess capacity is used instead of buffer inventories to hedge against problems that may arise.
The success of Harley-Davidson in implementing JIT system in 1980s has successfully reduced the company’s breakeven point from 53,000 bikes per year to 35,000 bikes per year. This was one of the major causes that rescued the company from bankruptcy.
STRATEGIC BENEFIT
As JIT companies do not need keep excess inventories, this releases cash flow that was previously tied up in inventories. The excess available cash flow can be used for better investment. For instance, areas previously were tied up in inventories can be used for some other purposes. JIT Companies can even consider reducing the rental thus reducing the indirect cost. Throughput time is reduced, resulting in greater potential output and quicker response to customers.
Because goods are not over produced and the reasons of better flow of good control within the production process as workers can be able to process goods faster and result in better productivity.
In order to meet the requirements of JIT manufacturing, workers have to be trained to be flexible and to be able to undertake various duties. The company are most likely to use workers who posses multi skills in projects when they need for a particular products because whom workers are utilized more efficiently.
Better consistency of scheduling and consistency of employee work hours -if there is no demand for a product at the time, workers don’t have to be working. By practicing so, company saving money when no jobs are completed or no jobs at the period.
LIMITATION
In JIT system, the reorder level is determined by historical demand. If demand rises above historical average demand, the inventory level will be depleting faster. This will cause the company not able to meet customer’s demand. Also, JIT system relies heavily on suppliers to deliver goods just in time. A minor disruption in the supply chain could force production to cease at very short notice.
As JIT companies doesn’t stock excess inventories, the sudden increase in raw materials price may causes the fluctuation in production cost thus not able to provide the company a competitive advantage in term of pricing.
CONCLUSION
In conclusion, JIT is a business model increases the liquidity, efficiency, and profits of a company. However, JIT is not an easy and simple system to implement. It requires a company-wide commitment, proper planning, and various policy and processes in placed to be success.
Company will also have to be well aware and to eliminate the drawbacks that could potentially bring impact to the company. For example, by having multiple suppliers on a single item could avoid problems associated with a single supplier i.e. break down in supply chain.
TOTAL QUANLITY MANAGEMENT BACKGROUND AND DEVELOPMENT
Fundamental philosophy of TQM is to continuously improving the of products and processes. TQM aims to achieve a long term and short term success within the management and company through customer satisfaction. In TQM, all the employees and members of the company are participate in the effort of improving processes, service, products and the culture in where they perform their jobs.
TQM has been around since Frederick Taylor developed the Principles of Scientific Management in 1911. One of the major successes in recent decades was the implementation of TQM within the Japanese Industry after the World War II.
During the post World War II period, Japan as a defeated nation faced with very limited resources and an inability to feed a population of 90 million, by its self. The future lay in successfully exporting consumer products across the world market, yet it had a reputation for defect goods and management systems that were described as "feudal" and "despotic".
The Japanese Government realized the need to dismiss the old management and systems, replacing them with younger men capable of making the changes needed to develop their economy. As a result of that, a global known statistician Dr. W. Edwards Deming from United Stated was invited to many companies to present his ideas to among top leaders about the concepts. Similarly, TQM is widely use in other companies such as Sony, Nissan, Mitsubishi and Toyota.
Hence, Dr. W. Edwards Deming introduced the new management methods, TQM being a key one. This led to Japan being the world leader in quality and productivity. Quality control and management was then developed quickly and became a main theme of Japanese management. The idea of quality did not stop at the management level. Quality circles started in the early 60s.
STRATEGIC BENEFITS
TQM aims to Zero defect. Faults and problems are spotted and sorted quicker. Within the internal organization, TQM helps to eliminate defects, significantly reduces waste, improve management communications, improve employee morale, raise profits and drives customer focus. Externally, TQM would helps to image a better corporate reputation, improve competitive position, improve adaptability to global markets, achieve superior global image.
LIMITATION
The major drawback of TQM is the initial implementation stage may disrupt the existing production flow as all level of employees are required to take part in the implementation process, be it decision making, training and etc. TQM process aims at achieving better quality via changes. Organization may face the resistance among employees who had already got used to what had been practicing for years.
TQM is a long haul process and the result of might not been seen overnight. Also, for small-scale companies, the cost could be higher than the short and mid-term benefits.
CONCLUSION
Today, many business organizations and companies are practicing total quality management around the world. TQM has a high rate of success for implementing a quality conscious culture across all levels of the company. Although many benefits for implementing of TQM, cost should take into account while implementing TQM.
CONCLUSION
Successfully implementing modern management accounting techniques in the organizations require more than an understanding of the technical details. Managers and management accountants are expected a significant change in their traditional accounting systems and also required a major support from top management. Without gaining support, failure of implementation may become an issue and make disappoint to organizations after spending bulk of money.
Secondly, educating and training employees in new accounting systems throughout the organizations allow workers use their knowledge to make better improvements. The results are dramatic because employees are empowered and motivated to implement such as cost-saving projects, quality ensures and etc.
However, too often, managers and management accountants seek big result and major changes too quickly. In most situations, achieving a significant change overnight is difficult. Therefore, managers and management accountants should seek small short-run success as proof that the implementation is results.
In conclusion, mangers and management accountants must recognize that implementation of new accounting techniques is not perfect and it’s have their own limitations in each models. For essential, open and honest communication to all levels ensure that managers and management accountants use the new techniques thoughtfully to make good decisions and most importantly to gain and sustain competitive advantages.
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