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This paper will present a comprehensive picture of the evolution of modern management accounting methods vis-a-vis the changes found in the global business environment, as well as in relation to the particular organizational situation of certain companies. To begin with, corporate executives have to be well aware of the various aspects that might spell out the success or failure of their business venture, and the current climate of the international trade is perhaps one of the most important factors that they have to take into consideration when making strategic plans for the future.
At the same time, with new means and modes for analyzing the performance of business entities against their competitors or against an earlier benchmark, there is a need to revisit how the structural framework of the organization, its activities, processes and culture all impact on its assessment of its performance. As new and more developed information and communication technologies are introduced into the business sector, rapid changes in how these companies go about their business activities also occur concurrently. Thus, outside forces such as globalization and the subsequent liberalization of trade affect the way business organizations evaluate their failure or success, sometimes to the extent of even changing the parameters that are being measured.
But, we must also remember that internal pressures can shape the way a company deals with the business opportunities that are presented it, and ultimately how it decides to measure its success or failure. By incorporating technological advancements into its business processes, an organization can actually create an entirely different system of performing its tasks and evaluating its progress against a set of established goals and objectives. This is important especially because management accounting guides the company's decision with regards to future strategies and business goals. Without accurate and reliable information, the company cannot chart its own course and plan ahead on achieving their future objectives.
Globalization as the context for modern management accounting
We cannot deny that globalization has made such a huge impact on human affairs, both at the personal and at the collective level. With globalization and technology, the world has become flat (Friedman 2005) and it is now possible to connect with anyone anywhere in the world as easily as if he or she were just our next door neighbor.
According to Huang (2006), the globalization of economic activities is the most significant development in the world economy in recent history. The volume and variety of products that have been included in the global trade have increased drastically. Likewise, the patterns of consumption and production are no longer as stable as they were before. Economic globalization refers not just to the geographic spread of economic activities but also the "functional integration of internationally dispersed economic activities" (Huang, 2006). Thus, whole countries, regions, and other transactional parties are formed into one functional global economy through highly intricate international systems of production, trade, and finance.
Halawi, Aronson and McCarthy (2005, pp. 77) wrote that one of the main ingredients for corporate success in today's globalized environment is to acknowledging how to create and sustain competitive advantage, which ultimately depends on what a company decides it will or will not do. Competitive advantage may be defined as the "ability to ear returns on investment consistently above the average for the industry" (Halawi, Aronson and McCarthy, 2005, pp. 77) and is evident when the firms is able to create a value-adding strategy that is not employed by any of its current competitors. On the other hand, Becker and Huselid (2006, pp. 899) also concur by saying that the right corporate strategy that creates competitive advantage results, in turn, to above-average financial performance.
Continuous enjoyment of competitive advantage can only happen if (1) the level of performance that a firm attains in its implementation of the unique value-enhancing strategy is not concurrently being done by existing or potential competitors and (2) the competitors are either reluctant or unable to recreate the benefits of this particular strategy. Thus, competitive advantage can only arise from the maximization of the right strategic assets.
Organizational structure and management accounting
Hankins and Baker (2004) noted that the internal structure of an organization could actually affect how the accounting procedure is designed and carried out, and this principle applies to both the financial and the managerial types of accounting. For example, factors such as the organization's type of business (manufacturing versus service-oriented) and purpose (for profit versus non-profit) would ultimately spell differences on the company's approach to assessing its current situation.
Moreover, such parameters would also dictate how the organization would formulate strategic plans for future business directions, as well as the activities and changes that it must employ in order to achieve its aims and objectives.
From the point of view of management accounting, these parameters are the source of major considerations for formulating policies, long-range plans and strategic decisions that will ultimately affect the organization's course. Because management accounting deals with activities and processes more than exact quantitative figures, it is more comprehensive in scope. It gives depth to the figures by providing insights into, say, the current skill levels of the organization's employees and how these can be improved in order to meet the anticipated rise in demand for the product or services that it offers.
For business plans and decisions to be carried out effectively, a thorough understanding of how the organization works is a must. Management accounting helps on this score because it delves deep into the different dynamics between work teams, the employees' motivations and thoughts and about their jobs, the kind and quality of the skills possessed by the employees, the effectiveness of current operating frameworks and other aspects of the organization's life. Armed with such accurate information, any changes that the management wishes to implement to follow a particular track in the future is anchored more firmly on the realities of the organization, from its employees to its processes and resources.
The importance of management accounting practices
Different companies use different determinants to measure the success of their business activities, and profitability is just one of them. Some may look into the total consumption of raw materials to produce finished goods, while others may view market share as the most reliable indicator of good performance (Accounting Software Advisor, 2009).
Whatever determinant a company decides to use, it is imperative that the measurement is accurate, thorough, and reflective of reality. A significant purpose of developing such a measurement scale is to have a standard system that will allow the company to compare its actual performance against competitors. The measurement applied will ultimately affect the direction that the company will take in the next planning year, as well as influence important decisions such as adoption of new marketing strategies, research and development, and expansion or product diversification.
We make a distinction between financial accounting, which is mostly used for collating information that can be included in the financial report of a company, and managerial accounting, which is an analytic tool used by a company's management to plan, evaluate, and direct their operations (West Virginia Universtity, 2008). Thus we can say that financial accounting is concerned with providing an overall view of the organization's activities and money flows within a specific period of time for the use of stockholders, creditors and other outside parties. On the other hand, managerial accounting is a quantitative assessment of the same elements made for the managers, with a view to using the data gathered for future planning (Geense, 2005).
Traditional and activities based costing methods fall under the tools used in managerial accounting. As such, they are important internal analyses of the company's operations. This alone guarantees their primacy as viable research topics for developing and improving the measurement system used by companies in different industries. Today, there is an intensified interest in their functions and applicability as more and more accounting software are made available in the market. There is a need to see which costing method is compatible with which software in order to maximize their mutual benefits.
Competition in the global marketplace has forced most manufacturing services and organizations to adopt creative and flexible solutions that will enable them to keep up their productivity without incurring further costs (Akyol, Tuncel and Bayhan, 2005). However, in order to maintain an organization's competitive edge, one must be able to effectively and accurately utilize an appropriate cost calculation mechanism.
Apart from traditional and activities based costing, other forms of managerial accounting analyses are also being used to calculate the cost of production, but these methods are not as widely used as the other two. These new costing methods are bottleneck accounting and balanced scorecard. Traditionally, management accountants used variance analysis to show the the actual and budgeted costs and revenues within a specific production period. However, this practice is now being used in conjunction with new performance report schemes such as bottleneck accounting and balanced scorecard.
In bottleneck accounting, the accountant can pinpoint which bottleneck gave rise to an unfavorable difference between actual and budgeted sales (Geense, 2005). This costing method allows for the identification of bottlenecks in the production and sales mechanism. It also shows which bottleneck to solve first, based on the amount of money lost for each.
On the other hand, the balanced scorecard is a set of financial measures, operational measures on customer satisfaction, internal processes and the organization's innovation and improvement activities (Kaplan and Norton, 1992 as cited in Geense, 2005). The developers of the balanced scorecard argue that this can also be used as a strategic management system. Because of its holistic approach to measuring a company's performance-from the viewpoint of customers, for example-it can aid managers in creating objectives for each perspective and translate these into specific responses.
Financial accounting versus management accounting
The Encyclopedia of Management (2007) defines the traditional cost accounting system as a system of allocating costs "based on single-volume measures such as direct-labor hours, direct-labor costs, or machine hours" that is more aligned with complying with the requirements needed for drawing sound financial reports. In addition, it can also show revenue and expense categories such as costs of good sold, salaries, rent, supplies, depreciation, income taxes, and so forth (Brimson and Antos, 1999). Traditional cost accounting is a relatively cheap and convenient way of filling in the requirements for financial reporting.
In simpler terms, a company just takes the actual performance within a specific time frame and compares it with projected values to derive a variance. But given the relatively surface level analysis provided by traditional cost accounting methods, most companies today find it to be "incomplete and unprocessed" (Manalo, 2004). Users of this cost allocation approach say that point out that the raw data that is reflected in the budget sheet does not represent a clear and accurate relationship between the cost and the cost object. Such pitfalls in the system can lead to poor and ungrounded decision making on the part of the management.
One big problem with using the traditional costing method is that it is limited to reflecting a strictly financial picture of the company's performance, without linking the numbers to particular activities within the company (Brimson and Antos, 1999). Because budgeting is concerned only with the allocation of scarce resources, it does not concern itself with the creation of value using the said resources, which is a more profitable end goal. It also misses out on providing information that the management can actually respond to and focus on customer needs. All these shortcomings of the traditional cost accounting approach has led to the development of an improved system that can fill in the gaps left by the former.
For management accounting, we shall look mostly at activities-based costing, since it is the preferred type of management accounting at present.
Activities based costing or ABC was developed by the Consortium for Advanced Manufacturing International (CAM-I) in 1991 as a viable alternative to the existing costing approach, that is, the traditional methods (Manalo, 2004). The traditional method was developed in the late 18th century and was a model that reflected the nature of business enterprises during that time-that is, industry then was labor intensive, without automation, with little product variety and with generally low overhead costs (Emblesvag, 2000). The business landscape has changed greatly since then, and this can perhaps explain the inability of the traditional costing method to answer to the diverse needs of industries today.
In contrast to the traditional cost accounting approach, ABC measures not just in terms of direct costs such as labor or machine hours, materials or other billable goods. Instead, ABC assigns costs to activities using multiple cost drivers, and then allocates these costs to products based on each product's use of these activities (Akyol, Tuncel, and Bayhan, 2005). Moreover, this system calculates the total cost of a product as the sum of the cost of raw materials and the cost of all the value adding activities needed for its production.
Thus, it takes into consideration the organization's use of resources by the activities performed and links these costs with outputs such as products, customers and services. Each product requires a number of activities or stages of development (i.e. design, engineering, purchasing, production, quality control, inventory) and each activity consumes different resources of various categories (working time, machinery, warehouse space, packaging materials, etc.).
The ABC framework has two axes that represent two different perspectives. The vertical axis of the framework deals with the cost assignment view, that is, it specifies all the available resources that each of the company's activities can draw upon. On the other hand, the horizontal axis looks at the process view, which includes the cost drivers or agents that cause that causes the activity to utilize resources to needed to achieve a particular task (Manalo, 2004). This axis can help organizations monitor the efficiency and effectiveness of all activity efforts related to its operations.
Despite its soundness, some authors argue that the ABC is not a complete alternative to the traditional cost accounting approach and is best used as a complementary analysis (Manalo, 2004). It is more useful as a translator of critical quantitative data about the company's operations-instead of summarizing everything into a financial spreadsheet, the ABC method breaks down costs in to activities and corresponding resources that can be easily understood.
From the foregoing discussion we have seen how two factors-one internal and the other external-have made an imprint on the way management accounting principles and practices have evolved over the years. Today we are faced with the phenomena of globalization, information technology and trade liberalization, to name a few, which are ultimately changing the way business organizations handle their operations.
At this point, it is important to note that management accounting will never be able to come up with sure-fire ways of boosting an organization's performance. It can only provide guidelines and probable points for improvement. Other external factors can still affect organizational success in the future, but management accounting is a helpful tool for knowing how to approach the problem properly.