Implications of changing role of the process of management accounting.

University Degree Business and Administrative studies

Implications of changing role of the process of management accounting

he changing role of the process of management accounting have great implications to the world of practice. Before that we should first look into the issue of its evolution. The industrial revolution in the early 19th century resulted in the emergence of a factory system that create a new demand for accounting information & this dramatically change the production process. Johnson & Kaplan suggest that emergence & rapid growth of railways in the mid-19th century was the major driving force in the development of management accounting system (MAS). By 1920, sophisticated systems to record & analyze variances from standard had been implemented & articulated in the literature. In the early decades of the 20th century giant vertically integrated & multi-divisional organizations emerged out & it was that time when new management techniques like budgetary planning & control systems, ROI were devised to measure the success of the division & the entire organization. The management accounting system in service organizations evolved at a later stage compare to manufacturing organizations. In a nutshell, we can summarize the evolution in the followings –

1880 – 1925 : Most of the product-costing & internal accounting procedures used in this century were developed

1925 : Emphasis of inventory costing for external reporting

1950s/60s : Effort to improve the managerial usefulness of traditional cost systems

1980s/90s : Significant efforts have been made to radically change the nature & practice of management accounting.

Overall, these traditional management accounting practices such as cost variance analysis & profit-based performance measures, focus on concerns internal to the organization & are financially-oriented. In 1987, Johnson & Kaplan through the book “Relevance lost: The rise and fall of management accounting” concluded that the lack of management accounting innovation in recent decades & the failure to respond to its changing environment resulted in a situation in the mid 1980s where firms were using 30 year old management accounting systems that were obsolete & no longer relevant to today’s competitive & manufacturing environment. Since the 1980s, the growth of privatization, deregulation, international businesses, global competition & new information & production technology has changed the world of management accounting. These changes have special implications for transitional & newly industrialized or emerging economies. Consequently, this emergence & need due to the rapid changes have emerged in the introduction of new management tools combining both financial & non-financial information & taking an explicit strategic focus. These are ‘valued-based’ management accounting methods & take an explicit strategic focus such as just-in-time (JIT), flexible manufacturing systems (FMS), computer-integrated manufacture (CIM), total quality management (TQM), time-based management (TBM), business process re-engineering (BPR), while activity-based cost management (ABCM), life-cycle accounting (LCA), & balanced scorecard (BSC) are examples of new MASs.

Future Management Accounting

On an organisational level, in future greater emphasis will be put on core competencies, emphasis on customer & supplier relationships, downsizing, outsourcing, flatter organisational structures & team work (Barbera, 1996a; Binnersley, 1997; Burns et al, 1999). Sharma (1998) claims that in the future, management accounting will develop in areas involving “a broad spectrum of cross-functional disciplines” such as:

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Future Management Accounting

 Performance Management (eg developing key financial and non-financial indicators)  Asset Management (eg. managing a product through its life cycle)  Business Control Management (eg corporate governance and internal control frameworks)  Environmental Management (eg accounting for the environment)  Financial Management (eg activity based management)  Intellectual Capital Management (eg measuring and managing employee satisfaction)  Information Management (eg implementing and generating value from e-commerce and EDI)  Quality Management (eg implementing TQM within and organisation and managing quality improvements), and  Strategic Management (eg value chain analysis for assessing competitive advantage).

Peter Booth in his article “The future of management accounting” states that “The area of greatest changes in the management accounting discipline will be the types of practices and their underlying normative framework(s) that form ‘management accounting’ in the next millennium.” He has given some directions which are:

 The accounting quantitative base of current management accounting will merge with other general management control issues & knowledge  The focus of this management control discipline will be more on facilitating managements’ actions rather than the controlling & evaluating of them that is the present focus  The more knowledge work that involves creativity in the use of information systems will still be done within the firm  The new ‘management control’ discipline will be based around a new customer-focused framework (Armitage et al., 1994)  A generic framework for looking at the value of what a firm does, relative to others, which is independent of how a firm is actually structured  Under a value chain orientation, the key performance metrics will be those that link & coordinate activities as to how value is to be delivered to customers under the firm’s strategy  Under a customer-focused value chain framework, the focus of the new MAS will be on supporting continuous improvement & process re-engineering  The customer focused framework is the types of measurement systems which will put greater emphasis on non-financial information.

Today’s environment is characterized as dynamic, uncertain, competitive, turbulent, information and technology based, globalized. In such a situation, the need of Management Accounting has grown in proportion to the management technique developments. So, future emphasis of Management Accounting will be very much on the areas which are non-traditional and these can be categorized in the following broad areas - Creativity, Quality, Value Creation, Employee Skill, Technical Know-How, Team Work, Non-Financial Information, Activity, Customer Relation, Information Management.

Coping with the new sets of dynamic environmental conditions

Robert S. Kaplan in 1984 stated that “The challenges of the competitive environment in the 1980s should cause us to re-examine our traditional cost accounting and management control systems.” Again in 1994, he said that: “The past 10 years have seen a revolution in management accounting theory and practice”. The seeds of the revolution can be seen in publications in the early to mid 1980s(Eiler, Goletz & Keegan, 1982; Kaplan 1983, 1984, 1985; Howell et al., 1987; Johnson & Kaplan, 1987) that identified the fallings & obsolescence of existing cost & performance measurement systems. Since that time remarkable innovations in management accounting have been made & those concepts have been widely known, accepted & implemented in practice & integrated with great pace. Management accounting of today has only developed in the last 60 odd years as a result of a previous period of fundamental change in the nature of the development economics & the organizations that operate within them. As these underlying bases for management accounting practice change yet again, the discipline must change to match them. The challenge is not facing these changes but the rate at which these are taking place.

Management accounting is at a critical juncture. Increased competition & uncertain business conditions have put significant pressure on corporate management to make informed business decisions & maximize their company's financial performance. In response, a range of management accounting tools & techniques has emerged. Institute of Management Accountants (IMA) & Ernst & Young (E&Y) undertook a survey to understand the evolving role of management accountants, the goals of the organizations they serve, and the tools they use. The survey revealed that traditional management accounting tools are still widely used. Joseph Z. Szendi and Robert C. Elmore in their article “Management Accounting: Are New Techniques Making In-Roads with Practitioners?” stated the findings of a study that new techniques are being adopted while traditional systems are being maintained by manufacturing firms.

The evolution of management accounting and its changing pattern of how it takes the shape as per needs of the environment show that it will keep on changing to cope with the new dynamic environment in the future. As this is a transitional period from traditional to new management accounting, organizations still have been using the traditional techniques and implementing the new techniques gradually and successfully. Organizations are more involved in the research and development on Management Accounting than the past.

So, the role of Management Accounting in the future looks good. Proper mix of traditional and new management accounting concepts and techniques, continuous improvement and innovation through R&D, extensive development of Information Technology, consideration of economic, social, cultural, political, global, internal & external, financial & non-financial factors and most importantly a customer-focused framework will enable Management Accounting to cope with the new sets of dynamic environmental conditions.

REFERENCES

1. Drury, C. (1996). Management and Cost Accounting, 4th edn, International Thomson Business Press, pp. 831-58

2. Booth, P., The Future of Management Accounting, Management Accounting Issues Report Number 1 – June 1995

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

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

5. http://www.studyworld.com/newsite/Science/Social\Management_Accounting_In_the_Future-361249.htm

6. Forsaith, D., Tilt, C., Xydias-Lobo, M., The Future of Management Accounting: A South Australian Perspective, Research Paper Series: 03-2

7. Erkki, K. L., Future-Based Management Accounting: A New Approach with Survey Evidence, Critical Perspectives on Accounting (2003) 14, 293–323

8. Jaruga, A., Simon, S. M. H., Management accounting in transitional economies, Management Accounting Research, 2002, 13, 375–378

9. Chenhall, R. H., Langfield-Smith, K., Adoption and benefits of management accounting practices: an Australian study, Management Accounting Research, 1998, 9, 1-19

10. Szendi, J. Z., Elmore R. C., Management Accounting: Are New Techniques Making In-Roads With Practitioners?, Journal of Accounting Education, Vol. 11, pp. 61-76, 1993

11. http://search.epnet.com/direct.asp?an=10175619&db=buh>Roles and Practices in Management Accounting Today

12. http://www.studyworld.com/newsite/Science/Social\Management_Accounting_In_the_Future-361249.htm