Analyse How Has Management Accounting Evolved Accounting Essay

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Over the course of history the definition and the role of management to organisations changed from time to time as the environment around it changes. 'Management accounting is the practical science of value creation within organisations in both the private and public sectors' (CIMA Global, 2012). A more detailed definition from business (2012);

"The process ofpreparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day-to-day and short-term decisions."

This definition reflects the reality of management role in the manner it was perceived from manager's perspective before the war. Management Information systems assisted supported growth during 1850-1925 periods as highlighted by Chandler (1962). During these periods the management control practices 'evolved from the demands of senior executives to help them understand their internal operations, to make new product and investment decisions, and to motivate and evaluate the performance of their employees' (Kaplan, 1984).

As organisations grew, the introduction of multi-divisional became the new structure of organisations. A new form of management accounting system had to be introduced to assist management in order to' accomplish centralised control with more decentralised responsibility' (Kaplan, 1984). This was a major innovation as people understood that if a firm is to expand, responsibilities will need to be delegated and the system will also need to be able to appraise, consolidate and centralise all these responsibilities and performance in line with the company's-wide financial policy (Kaplan, 1984). Johnson (1994) however, claimed that the introductory of the new management system and the growth of multi-divisional enterprises played a major role behind the idea of how top managers managed by numbers. In a series of articles Kaplan, Johnson and others revealed how management had lost its relevant to modern business. The Authors jointly agreed that the main cause of management accounting irrelevancy was because of the inappropriate use of accounting information to manage. This theme was strongly emphasised throughout Johnson's (1994) article.

This paper aims to critically analyse how management had lost its relevance to modern businesses (American firms in particular) after the war, evaluating several reasons behind its failure to keep businesses competitive in comparison to other global competitors. The second part of this essay will aim to evaluate the ideas of Strategic Management and to what extent will it offer to revive management accounting to regain relevance.

How Relevance was Lost?

Majority of the sophisticated practices used by firms today were innovated by 1925. These practices were mainly needed for the 'management accounting system to facilitate the control and coordination of a firm's diverse activity' (Kaplan, 1984). However, these practices were built for firms who engage in mass production of standard products with high direct labour. This differs to modern diverse organisations which has lower direct labour in relative to its overall costs. Thus it comes as no surprise as to why management accounting in general is thought to be off relevance to modern organisations.

Furthermore, this was not the only static unchanged practice that was still present after the Second World War. Du Pont measure of financial performance and efficiency through the use of ROI (Return on Investments) became the centre focus measure of all managers after WW2. Kaplan highlights the success of the ROI the early 1900's. However, this applies to 'basic functional organisations' (Kaplan, 1984) that are quite rare to find in modern business age due to the increase complexity of modern businesses. Nevertheless, ROI was one of the first to recognise the changes in organisational structure and the 'realised' truth of organisations not being a single-activity enterprise (Kaplan, 1984).

Adversely, the ROI measure brought along with it a devastating effect that prevented top-managers from seeing the true performance of divisions and subsequently the whole organisation as the performance measure was subject to major flaws and manipulations. Interestingly in the past, GAAP standards had given firms opportunities to manage income and expenses in order to achieve steady earnings growth - also known as income smoothing. Kaplan (1984) claimed that the 'excessive focus on short-term financial performance,' in modern enterprises in turn allowed managers to exploit the abilities to manipulate ROI and meet expected profits - by engaging in non-productive and non-value-creating activities. Other techniques which risked the long-term competitiveness of the enterprise were through expenditure reduction in order to enhance profits. But why weren't these flaws realised with General Motors? Kaplan (1984) stated that there was less short-term financial performance during the 1920's and 1930's. What could have possibly driven short-term profits today and not in the 1920-30's? One vibrant reason was due to major globalisation in the 1980's compared to the 1920's. Edward Deming argued that in today's business, the markets are the main drivers of firms - through quarterly report performance and interim dividends (David, 2012).

Another major contributing factor to the loss in competitiveness of American firms was the change in the manager's way of thinking about how a successful firm is run. After the 1950's firms lost sight of the processes by which its people and customers make it competitive and profitable in the global economy (Johnson, 1994) - focus was placed more on financial results. Could this have been due to market forces? Even in modern organisation today it does not take an academic to understand that loss of customer focus can be harmful to a business - known as the core of marketing. Unfortunately, this was the reality of businesses after the 1950's.

Johnson (1994) compared these managers to the pre-war managers (Intuitive/real-time vs. financial results based), which he described to act intuitively to their environment and their well-run processes to keep customers satisfied in order to achieve their competiveness and profitability.

Pre-war Focus

After-war Focus




Profits (short-term)


Financial relationships

Figure 1.1 - Change in the definition of processes (Adopted from Kaplan, 1984)

Global competitors on the other hand, understood that being successful in the global economy is when then customer is allowed to be in charge of the market place (Johnson, 1994) - this core marketing principle was what American firms failed to understood.

American Firms (within Constraints)

Japanese and Overseas Firms

Optimising Costs

Continuously removing constraints

Maximising profits

Figure 1.2 - Difference between success and failure (Adopted from Johnson, 1994)

Are we justified to blame modern managers' change in the way they think enterprises should be run? Evidence from Johnson & Kaplan and others suggests that they are not entirely to be blamed after-all. Business school and Management textbook writers were heavy criticised by Johnson & Kaplan and others for the role they played in promoting the idea of managing operations through financial accounting information.

The accepted fact that manufacturing operations has changed and more advanced techniques/models are being used, also the potential to exploit these techniques still remains at large. Nonetheless, simplified models (i.e. EOQ) that are irrelevant to a more modern organisation are still being introduced in textbooks (Kaplan, 1984). Kaplan (1984) argues these are detrimental effects on graduates understanding of today's complex production environment. Furthermore, the increasing technology (i.e. robots & CAD/CAM) presence in manufacturing organisations will make graduates feel more hostile to these environments.

On the other hand, Business schools teachings were part of the contributing factors to the how firms came to manage by numbers. Johnson (1994) stated that graduates were being taught neoclassical economists' models of business instead of studying 'real business problems faced by real business people.' Through this, accounting became known as the language of business. In addition, due to justifications made by management accountant writers that supported the idea that financial accounting information could be made "managerially relevant" - i.e. separating fixed from variable costs (Johnson, 1994). This induced the impression that anything could be managed (i.e. fixed costs) - this adversely organised organisations in a manner that made customer satisfaction a difficult task to achieve (Johnson, 1994).

For example; a taught concept that explains that as output increases, costs per unit should decrease - traditional management model of economies of scale (figure 1.3).

Figure 1.3 - Economies of scale (Wikipedia)

However, Johnson (1994) argued that these management tools that helped to promote new breed of managers 'were increasingly inappropriate to the global competitive environment.' Nevertheless, these kinds of graduates and others that came from financial & legal backgrounds dominated top executives. While the "real managers" who had the real technical and marketing experience were in less demand in the labour market. This induced the truth during this period that 'the gap between what industry needs and what management accounting education offers are widening' (Lakshmi, 2010).

As a consequence these graduates who are 'untrained in, and unfamiliar with, the technology…processes,' end up relying on "paper entrepreneurship" (Kaplan, 1984) - means of creating value through finance and accounting activities. This may be simply implied that the main art of creating value through improved products and processes in management accounting was at risk of being lost.

In short, Johnson and Kaplan agreed that 'the accounting information managers used to control and plan was not consistent with the new information-intensive, capital-using technologies after 1950's.' However, Johnson takes a strong opposite believe to Kaplan idea that the major cause of depression to American firms was not because management accounting had failed. It was due to the facts that businesses used accounting information to control operations because of the high costs involved in implementing an alternate appropriate system along those mandated by law. Based on this, there is conclusive evidence that Johnson does not believe management has lost its relevance, but MA became less useful to managers for decision making because of its inappropriate use.

Strategic Management Accounting - Our Messiah

Since Kaplan, Johnson & Others disregarded the traditional Management one way or the other. Lakshmi (2010) believe that today's management accounting will require a broad business perspective that enables managers to provide accounting information needed to make effective decisions. In addition, Kaplan strong claims that the stagnation of management practice innovation was mainly because management practices were driven by external reporting mentality - FASB & SEC.

These accounting conventions were used for internal planning and control (profit centre distortion), and the strong claim that it did not support the corporate strategy.

In light of these realisations and criticisms, it becomes more evidently clear the need for either an improved management accounting practice or a brand new practice which addresses the issues writers have criticised the old traditional management practice for failing to deliver.

The areas that requires focus from an improved/new management practice includes the following;

Should support Corporate Strategy

Give organisation a competitive edge

Deliver information that results in more effective decision makings

On the verge of these requirements, Accounting Scholars introduced what is thought to be the "Messiah" to the growing deficiencies of Management accounting - Strategic Management Accounting (SMA).

Management Accounting has been criticised greatly for not recognising the effectiveness of strategic brand management (Roselender & Hart, 2006). Haider et al. (2011) reveals the idea behind Strategic Management;

"The underlying assumption of this discipline is that it improves upon the traditional management accounting by enlarging its scope and realigning it more tightly with other disciplines such as strategy and marketing"

Chapman (2005), Hopper et al. (2007), Okoye (2008) and Haider et al. (2011) who have specifically condemned Management accounting for internal organisational focus and hence sight of potential opportunities, and threats are lost as a result. Strategic Management has promised to counter these faults as focus is placed both on internal and external aspect of the organisation (Smith, 2005).

Furthermore, its ideas also revolve around providing a competitive advantage to firms by collecting competitor's information (procedures and business techniques) to deliver more effective decisions. Other SMA ideas/theory includes the following; marketing focus, future orientated and competitor's perspective (Haider et al., 2011).

It is widely cited that strategic management accounting practice delivers the best of both worlds. On one hand, it retains the traditional Management accounting practice and on the other it addresses the issues associated with management accounting. The table below (figure 2.1) illustrates the differences between the traditional Management accounting and Strategic Management Accounting.

Traditional MA

Strategic MA





Single entity




Out-ward looking


Manufacturing focus

Competitive focus


Existing activities









Data orientation

Information orientated


Based on existing systems

Unconstrained by existing systems


Built on conventions

Ignores conventions

Figure 2.1 - Key difference between Traditional MA and SMA (Adopted from Haider et al., 2011)

The question that remains unanswered is to what extent will Strategic Management Accounting restore management accounting relevance to businesses? Haider et al., (2011) claimed that SMA will fill the gaps omitted by the traditional Management Accounting 'by promoting and supporting mechanisms of implementing TQM and its improvements.' In addition, Johnson (1994) and Powell (1995) similarly flagged up TQM as a possible solution that is used by the Japanese to gain competitive edge in the global market as key in to assist businesses to manage processes. Its techniques promote the idea of empowering people, and they will in turn improve and manage processes - staffs (Internal) and customers (external).

Processes are managed by 'shifting the emphasis from top-down control to bottom-up empowerment' (Ezzamel et al., 1997), unlike most American firms - whereby 'managing by the numbers with top-down financial control systems' (Johnson, 1994). Although, (Ezzamel et al., 1997) argues that TQM offers the exploitation of employee's potentials to be exercised and lowering financial constraints. On the other hand, Wruck (1994) research provides evidence that TQM does not resolve all organisational problems and does not necessarily enhance value of all firms. It further lay condition for that TQM is reliant on the 'effective combination of both new and old management practices.' This is a major drawback especially to a firm's management that is used to managing by numbers and thus changes would be difficult in implementing. Furthermore, Powell (1995) criticises TQM ideology, and claimed that businesses could still gain competitive advantage without it.

While there is a 'strong relationship between organisational performance and a formal strategic plan' (Haider et al., 2011), research has also shown that the adoption of strategic management has not fallen in line with its hype. Thus, Haider et al., (2011) concludes that 'there is a need for some caution as the supporting empirical evidence is not overwhelming.' CIMA (2009) study indicated that the uses of old Management accounting tools still dominates Strategic Management tools across the globe - Variance analysis (73%), Overhead allocation (67%), while Activity Based Costing and Kaizen Costing were 30% and 6% popular respectively in its uses.

Why are firms failing to adopt a practice which promises to offer them a competitive advantage and better rational decisions?

Innes et al. (2000) highlights that the implementation of SMA concept were not guaranteed and moreover, discouraging factors such as; costs, complications and time consumptions slows the process of adopting. Haider et al., (2011) documented the slow and limited recognition of SMA; this might be due to many reasons. On one hand, firms might be unaware of SMA advantages, techniques and ideas. Another major reason could be because of the fact that SMA does not completely break away from the existing Management Accounting (Haider et al., 2011) and firms are sceptical in adopting the "same" old traditional Management accounting.

Okoye (2008) article shares a different point of view, it believes that the traditional management accounting lacks relevance and trust that in a perfect competitive market strategic management will surely give firms a strong competitive advantage - hence management accounting will restore its relevance in the business world.

In conclusion, the writers cited have all agreed upon a new management practice. Whether Strategic management accounting will fulfil its promises and replace the old management accounting is still inconclusive as research highlights its radical slow diffusion. Nonetheless, SMA techniques and ideas shows the switch of focus from accounting numbers, by incorporating non-financial information as well in its decision making - which sets to counter the criticism of old management accounting of "managing by number."

Finally I truly believe that strategic management accounting will help in restoring the relevance of management accounting. However, there is still a long road ahead. Firstly, businesses will need stronger evidence that convinces them that the old traditional management has truly lost its relevance. Secondly, business schools must change their curriculum and implement the teachings of SMA ideas and tools to graduates. Johnson (1994) stressed that if management is to regain relevance, financial management mind-set teachings must be replaced. In doing so we are preparing our graduates to a world of global competition, whereby 'the language of business is variation in processes' (Johnson, 1994). However, for modern enterprises who are failing to recognise SMA might believe in the old saying; "the devil you know (old traditional management accounting) is better than the angel you don't (Strategic management accounting)".