Dramatic changes facing the business environment

Published:

The business environment is undergoing a dramatic change. Companies are under increasingpressure to respond quickly to changing market conditions. In recent years the global market have been extremely competitive and business strive to survive during the economice recession born from the global credit crunch. This was caused as a result of the collapse of the US-prime Mortgage Market. major banks were exposed to the US subprime market and so, faced huge losses, this has been felt across major economies around the world due to globalisation and the convergence between international financial markets. This had a massive impacted on businesses, and as a result failure of key business. Also consumer confidence has been hit therefore consumption is low and decline in consumer wealth. Banks have also tightened up their lending criteria for businesses and individuals, so, investment is low. As a result of little consumption and investment, businesses have to cut costs through redundancies, down-sizing, restructuring etc.... which results into a significant decline in economic activity. Organisations are finding it very difficult to survive the challenge of global competition.

Lady using a tablet
Lady using a tablet

Professional

Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

This essay will be critically evaluate the argument that "management accounting functions become less important in an environment where an organisation is striving to survive. Axe should fall on this department to cut down the cost and to give the organisation a chance to survive".

Management accounting can be simply define as" a value adding continuous improvement process of planning, designing, measuring and operating non financial information system that guides management action. Motivates behaviour and supports and creates the cultural values necessary to achieve an organisations strategic, tactical and operating objectives" (reference)

The conventional management accounting method, over a period of time has been subject to many criticisms, Many theorist say it doesn't address problem of modern globalisation. some even say it contribute to global recession(reference). Most critic emphasis on the fact that traditional management accounting doesn't adapt to environmental changes.

Management accounting and accountants are often criticised for failure to recognise organisations' new strategic priorities (Johnson and Kaplan, 1987). Since the 1980's many initiatives have been implemented in order to make management accounting more strategically relevant. The one of the criticism was that management accounting was in fact dominated by financial reporting requirements and took no account of what decision-makers wanted to know. For example, standard costing systems allocated overhead costs to products that were not causing them, and standard costs were updated so infrequently those changes in the design and manufacture of products quickly made them outdated

Furthermore, the traditional management accounting numbers are accused of being irrelevant given that they are not directly associated to the company's strategy and therefore are not adequately influential on their own to push corporate change. Since financial measures ignore, for instance customer and competitor perspectives, they fail to generate early warning signals of changes in the marketplace. In other words, traditional management accounting report can be described as the reporting end result rather than the means but do not explain how the result was achieved, or more importantly what should be done differently in the future.

Changing external business environment has resulted in further developments in the tools and techniques used for management accounting. Traditional management accounting techniques had certain limitations associated with them, for instance, absorption costing methods have been found to be inappropriate in the modern environment. Similarly, standard costing' suitability with respect to its general philosophy and detailed operations has come under severe criticism. It is believed that traditional management accounting performance measures can produce the wrong type of response.

.

However before making a decision on whether to axe the management depart method, several consideration needs to be made. For example can the business remain completive? What other techinue is place to help manage the organisations cost, and can it survive without all the important measurements and advantages that comes with having a management accounting department?

As a response to the limitations of traditional amanagement accounting techniques, over the years accounting bodies have introduced a number of alternative accounting methods to management accounting.  in todays competitive marketplace, a business can only remain competitive and profitable if it s performs effectively on important dimensions such as cost, market share, quality, delivery time, customer care, and product innovation. This is called strategic management.

Lady using a tablet
Lady using a tablet

Comprehensive

Writing Services

Lady Using Tablet

Plagiarism-free
Always on Time

Marked to Standard

Order Now

(david aston) defines strategic management as "the art and science of formulation, implementing and evaluating cross functional desicions that enables an organisation to achieve its goals..".

Strategic management accounting is an approach to management accounting that explicityly highlights strategic issues and concerns. Strategic management is belive to set manangement accoutnig into a broader context in which financial information is used to develop strategies as a means of achieving sustainable competitive advantages.

The design and use of strategic cost management systems are oriented around the application of three basic tools: cost and revenue driver analysis, value chain analysis, and strategic positioning analysis (Shank and Govindarajan 1993). They have been several Important developments during the past two decades for example, activity-based costing and management, target costing, life-cycle costing, customer profitability and value analysis, and models for measuring and managing quality, environmental and capacity costs. These systems can not only help a struggling business to strive but also it help with the competitive advantage because This provides managers with relevant, accurate and timely information, by highlighting previously hidden costs, related nonfinancial data and inherent trade-offs between cost categories, so managers can identify opportunities for improvement, weigh trade-offs, set priorities, and take actions to reduce costs and increase revenues which are consistent with intended strategies.

So for a company struggling to survive can cut down its cost by using strategic management to take proper internal and external control of its operations. For example, the circle time strategic management technique can help reduce product service time. Cycle time is length of time from start to completion of a product or service (drury). Looking more into the process time can help save money from reducing or eliminating non value added activities without altering the product or service quality. So the cycle time can be minized by through the reduction of time on activities. For example the time taken to process a business loan application by banks, involves substantial non value added waiting time, thus, reducing the time to process the applications enhances customer satisfaction and creates the potential of increasing sales revenue.

Due to the global recession the operational activities of businesses continue to struggle due to less control of their cost structure. (drury) emphasis in his books that appreciation of the cost structure of a business is critical to its strategic and operational success. Even in hard times, properly managing and protecting a cost base can deliver better performance. For example ryanair. Despite the global recession and other various uncontrollable like increase in co2 charges and high oil prices, ryan air continues to deliver high profit and growth, while other major compertitors are stuggling. Many researchers believe such growth and profit can only be maintain through continous focus on all cost activities of the company. Such inniative can adubted and implementated by struggling business by putting more efforts into complete understanding of its operational (fixed) and associated cost(variable)

They are various way a compny can maintain competitiveness and reduce any form of cost disadvantage. Howver porter appraoach initial step in undertaking SMA is to definethe firms value chain (porter 1985). Porter introduced the value as a way of breaking down a firms's strategically relevant activities in order to understand behaviour of cost. Competive advantage can be gained if activities are carried out effectively. To prove futher that management accounting is not just a value adding department that only exists if the benefits exceed cost, if an organisation reconfigures its value chain, structural changes such as new production, new distribution channels and different sales approach, can reduce more cost and show a uniqueness in products and services. For example FedEx corporation reduces its cost by restructuring its express flight services by buying its own planes and implementing a sorting Hub and spoke system. Many of its competitors such as Emery copied FedEx's strategy, by acquiring own planes, opening a package sorting center, and overnight deliver. Many Management practitioners believes value chain analysis remain one of the most important strategic tool because of its ability to link activities together.by carry out value chain analysis, a firm can build a cost advantage if its cumulative cost of carrying out all the activitieswithin value chain are less than does of its compertitors. For example if multiple product units require a particular raw material, the procurence of the that material can be shared by the product units. A business without a management department won't have the advantage of reducing its cost through strategic analysis of sharing procurement activity.

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

However a business may also decide to outsource its value chain activity to reduce cost. According to (drury) if the business operates in a rapid changing market, it is advantageous to outsource its activity, if it wants to maintain flexibility. By outsourcing a business can cut cost by improvement of product process such as reduced lead time, reduced inventories and better flexibility.

It is important to point out that organisation need to strategies according to the demand of its industry. More than any other industry, the manufacturing sector felt the global recession more any other sector, A report was issued last year by a group of manufacturing research and policy organizations saying that "over the past three years a competitive cost disadvantage borne by Global competitive market and US companies has worsened by more than 40%."(reference)

A typical manufacturing company would large number in employees and smaller number of overhead departments where the direct labour costs could be as high as 80% and overheads 10% of total cost. For an organisation in this industry to survive, it was important to get some accuracy in terms of the hours, and therefore costs, of actually making components and assemblies.

Strategic method such as the ABC are mosly use in manufacturing industries to correct discrepancies in cost estimation. Its basic approach is to help businesses have a better flexible manufacturing systems, quality management, wide range of products, more customisation and faster and more reliable response to customers have all contributed to its emergence. These factors led many firms to change the structure of cost estimation. (Atkinson) describes ABC as an efficient system that helps to integrate non-financial and financial performance measures.

.

CONCLUSION

The report, called "The Escalating Cost Crisis," says the growing cost burden faced by U.S. manufacturers poses a serious threat to domestic manufacturing and the economy, in large part due to government policy issues and despite the significant improvements in productivity achieved by manufacturing companies.

Also strategic measures such as product flexibility and innovation can help a struggling organisation not only make profit but also gain significant competitive advantage. A business can strethen its stand over its competitor by innovating new product an mix.

Therefore for a business to survive an efficient cost and strategic financial management is essential.

Maximizing the utilization of its capacity is necessary for an organization to compete in the global marketplace. Efficiently managing the cost of the capacity is a key to unlocking the value-creating potential of a company's resources.