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ACCO1095: Management Accounting

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EA Warren

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This essay will consider in detail what important developments have occurred in management accounting and also why they have occurred. We will consider what a management accounting system is and what the determinants of a good management accounting system are. Secondly, we will review the transition of the business environment over the last ten years. From this we turn to the actual trends in management accounting practice in the last ten years. Set in the context of the previous discussion, these trends can then be assessed both for their theoretical importance and most importantly for their impact in providing solutions to problems in the evolving business environment. Ultimately some conclusions will be drawn about whether these new management accounting systems are a good thing.

Management accounting can be defined as a branch of accounting with the provision of the use of accounting information to the manager with a view to allow the organisation to make informed business decisions that would allow the organisation to be better equipped for the future.  For example management accounting provides valuable information in product costing in a “buy or made” decision making and also in statistical information like key performance indicator (KPI) that provides additional tools to managers in decision making (Upchurch, 1998).

Management accounting is a branch of accounting that gives broader information to aspect of cost and cost treatments. Management accounting in other sense provide valuable information to all senior managers in directing the position and growth of the business.

The objective of a financial statement is to provide information on the financial position of an organisation to interested parties like shareholders, tax authorities, employees and social groups.  It does also include provision of financial performance and changes in financial position to stock market and all stakeholders. But in management accounting, the emphasis is much broader to include additional internal information to manager to make an informed decision to give better figure for the financial statement. Such techniques used are budget and budgetary control, cash flow statement, inventory control and investment analysis to name but few.

Its right to say that the extend of rapid increase in every aspect of information technology has brought about a faster change in management accounting. For example, budgeting and budgetary control has not only changed by monitoring plan with actual but also forecasting the future trend as norms. Complex calculation that use to take hours has now been limited to a matter of few minutes calculation through a computer software for example simulation, linear programming and queuing theory that was part of commercial maths are now a regular usage by management accountants. These changes have increased the quality of information now presented to senior managers. (Upchurch, 1998).

The development of international trade has now made ownership of business to be more diverse and segregated away from the daily running of the business. For example, T-Mobile is not only operating in United Kingdom, they have operations in other countries. Equally, there are more needs for uniformity because of the diverse nature of businesses these days; plus a good housekeeping to take advantage of tax authority rules and regulations where ever the businesses are situated around the world. The chief executives of a large organisation need to have quality information in to other to make quality and effective decision in running the growing business. Undoubtedly, has now led to need for timely and accurate information to senior managers in an organisation (Perrin & Murry 1996).

The changes in business environment from the 1980’s led to rethink about the usual cost and performance measurement to focus more on business strategic object measurement. Hence, the developments of a robust “make or buy decision making” aspect of business mathematic e.g. decision trees. To make the point clearer, prior 1980 companies focuses on method of costing product by the use of absorption costing or marginal costing. But now company’s management accountant can provide additional information to management whether it’s better to buy in a product that can be cheaply made by another instead of manufacturing it themselves. (Schonberger, 1986).

In the year 1992, the idea of balance scorecard was introduced by R. S Kaplan and Norton to also focus on business strategic objective rather than the usual financial performance measurement. This idea identifies business plan objectives by taking into account all aspects of employee and customer needs into account in the evaluation of companies’ performance. This can be said as business environmental needs changes companies now focuses on the current needs and redefine their strategic objective. Typically, balance scorecard translates vision into operational goals, communicate the vision and link it to individual performance, incorporate business planning, feedback and learning and adjusting the strategic accordingly (Jaruga and Simon 2002).

In today’s business, social importance has emphatic role to play. Management accounting is slowly moving away from costing and costing methods to incorporate social concepts into their reporting. E.g. businesses now use benchmarking in comparing with other companies with similar social concept to gain advantage of market share. Key performance indicators are now often used to compare performance with other competitors. Social concept in today’s world can be a good business compare with an unthinkable words in the 80s or 90s that are hardly considered in the evaluation of business performance (Porters Chain Value).

The early 90s were said to be evolutionary period where big organisation like British telecommunication,  British gas are no longer government regulated and controlled; where in the past, inefficient cost increment are easily passed on to customers. It is now the case that these organisations had to face new well informed shareholders, customers, stakeholders (employee and local authority). Now is the time of a clearer costing method that challenges the previous belief that cost can be pass on regardless, cost are now clearly review for all justification before inclusion in the product cost (Kaplan 1984).

Undoubtedly, the traditional absorption costing perform it works respect of direct material costing but failed miserably in the area of indirect cost allocation. As absorption costing takes the view of arbitral percentage regardless of the reality of indirect cost traceable to a product. The emergence of Activity based costing changed this view that a product must be directly linked to indirect cost in the right proportion that they relate to the cost of producing the product. E.g. where an indirect cost are shared equally in a multi products production line in absorption costing as a proportion of percentage, this is no longer the case with ABC (Johnson and Kaplan 1987).

A localised small enterprise used to be common activities in nations economic; this is not the case anymore as globalisation has taken a stronger stand.  Multi-national companies are stronger than ever with an extremely good or sound cost measurement. Management accountant are more and more involved   with a more sophisticated analysis to bring about cost reduction. E.g. analysing their market share in a product to strike a cost bargain with a manufacturer. These ideas are very common with supermarket like Tesco, Sainsbury, Asda and British petroleum (BP).  Purchasing and supplies personnel’s are now commonly working with management accountant to identify future area of cost reduction. Customer satisfaction, profit maximisation, return on capital employed are now becoming focal point in global business strategic plan which are more and more forming part of management accountants reports (Upchrch, 1984).

Consumers now want low cost products as well as high quality products and service. Consequently most organisations are adopting total quality management (TQM). TQM has widened from the early stages focusing on the statistical observation of manufacturing processes, to customer-focussed process of continuous improvement that aims to deliver products at constantly high quality and on time. Before 1980s manufacturing organisations thought of quality as extra costs, however at the end of 1980s they began realising that quality saved money. Before production volume was priority over quality. Now TQM is important to design and build quality, requiring management accounting operation to increase in measuring and evaluating the quality of products, services and activities that produce them; as well as time-based measures such as cycle time. Organisations must submit a quality management system to external assessments, International organisation for standard (IOS) and British standard institute (BS 5750).  It does not guarantee quality of output it just approves the quality system (Perrin and Murry 1996).

Before the 1980s organisations operated in protected domestic environment, the lack of communication development and geographical distance limited the amount of overseas competition. An increase in cost of products was passed on to customers, organisations had little incentive to maximise efficiency and improve management practises or minimise cost. However during 1980s competitors from overseas gained access to domestic markets. This caused organisations to manufacture new products of a higher quality at a lower cost and be able to provide excellent customer service in order to compete effectively. In addition organisations need to be flexible enough to handle shorter life cycles, demand of a larger range of products and international competitors. Organisations responded by substituting traditional production system with the just-in-time system which attempts to get rid of unnecessary stockholdings thereby reducing the associated cost and investing in future manufacturing technologies. This significant change in the environment has lead to the development of ‘world-class manufacturing (Schonberger, 1986).

Moreover, efforts were made to calculate the total costs involved in producing one unit of X. This emphasised the importance of absorption costing, and the accurate apportionment of costs between overheads and labour. The main issues related to planning and control, as there was no method that could be used, this led the way for a user-orientated approach. Because a distinction was made between actual and opportunity costs.  The main problem with this was the cost of obtaining information was not taken into consideration.  This was eventually recognised and integrated into the accounting procedures (Sixth Interdisplinary Perspectives on Accounting Conference).

For the most part these changes reflect an increasing need to gather and report non-financial quantitative and qualitative information. Financial figures are now thought of as part of a broader set of measures instead of the foundation of the practise. Nevertheless throughout all these changes some key features of these management accounting systems provide relevant information to help managers make better decisions and provide information for planning, control and performance measurement.

In conclusion, it’s fair to say that the social and economic change in the last ten years has pushed the change barrier further and further. As the society continues to change, so also will be change in organisation strategy in the use of information in making quality decision in the running of their affairs.  The nature and effect of government legislation in the control of a more global organisation not only has contributed, but will continue to contribute to further development of management accounting in the future. Organisation that is not ready for a re-think will further find they are unable to face competition in the new global market


Cooper, R. and Kaplan, R. S. (1999), The Design of Cost Management Systems: Text, Cases, and Readings, New Jersey, Prentice-Hall

Drury C, (2006), Management & cost accounting, edition Thompson

Glautier M W E and Underdown B, (2001), Accounting Theory and Practices, seventh edition, Prentice-Hall

Schonberger H (1986), The linkage among management systems, practices and behaviour in successful manufacturing strategy, Volume 17 Number 10 1997 pp. 967-993

Horngren T, (1972), Cost Accounting: A managerial Emphasis, Prentice Hall

Jaruga, A., Simon, S. (2002) Management accounting in transitional economies, Management Accounting Research, 13, 375–378

Johnson, H. T., and Kaplan, R. S. (1987). Relevance lost: The rise and fall of management accounting. Boston: Harvard Business School Press

Kaplan, R.S. (1984), The Evolution of Management Accounting, The Accounting Review, LIX (3), pp. 390-418

Kennerly M, (2002), International Journal of Operations and Production Management, volume 22, issue 11, pp1222-1245)

School of Computer Science and information System, Birkbeck, University of London

http://www.dcs.bbk.ac.uk/~dave/bsc_ism/coursebook02.htm Date Accessed [09/02/07]

Sixth Interdisplinary Perspectives on Accounting Conference

http://les.man.ac.uk/IPA/papers/26.pdf Date Accessed [09/02/07]

Perrin J & Murry M, (1996), Accounting for Manager, second edition

Porters Value Chain,

http://www.ifm.eng.cam.ac.uk/dstools/paradigm/valuch.html.  Date Accessed [09/02/07]

Upchurch A, (1998), Management Accounting Principles & Practice,

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