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Management accounting model and control mechanisms play an important role in industrial age as well as information age. Since the environment has been changed, organizations must adapt to change in order to compete successful in nowadays.
The industrial age, commonly refers to the period in eighteenth century. It usually related to mass production, with the mainly economics based on manufacturing with uniform and recurred methods that transformed from farming. On the other hand, the information age also known as the age of computers that was beginning in the late nineteenth century. The information became easily accessible via computers networks or digital technologies.
The first major transformation from the industrial age to the information age is changing in the social or cultural environment. This environment comprises forces such as core values, beliefs and attitudes that influence individual's preferred lifestyles and perceptions such as self-fulfillment, materialism and secularism. Companies should create quality and innovative products in order to fulfill customer's materialism and self-fulfillment.
Changes in major economic environment have an important impact on the need of adaption of organizations. The economic environment composes of factors such as income, inflation, interest rate, and unemployment that influence customer buying power and spending patterns. For example, income of individuals are higher compare to the past century, so they willing to spend more on luxury and have better life qualities. (find the example of economic of 1980 to 2010, eg, in 1998, inflation bla bla bla, then the companies need toâ€¦., unemployment so?, interest rate?)
Technology was evolving rapidly from industrial age to nowadays that had forced companies to quickly adapt in terms of their product development, price, distribution and promotions. For example, in 1800s Francis Cabot Lowell was a textile manufacturer in U.S. He builds the mills for spinning and weaving. After that, new machines such as Spinning Jenny were transformed in textile industry. The machines produce a vastly higher production levels at lower cost.
The development of technology to build new and quicker transportation networks such as the bridges, the roads and the railways. It reduces the time of goods delivery to customers and decreases the cost of transportation.
The information communication technologies industry is increasingly an important global player in help organizations to build a more socially sustainable future. The use of Information Technology to sustain business activities has increased significantly with the development of information communication technologies such as e-business, e-commerce or internet commerce. With the technologies customers able to make online order or booking via Internet. As a resulted, this is a low cost operation to companies as well as time saving or consuming for customers.
Changes in the demographic environment can result in significant opportunities and threats presenting themselves to the organization. Major trends for marketers in the demographic environment include worldwide explosive population growth: a changing age, ethnic and educational mix; new types of households; and geographical shifts in population. For example, today the boming baby is nearly 60 years old, therefore, the marketers should create their products. Unlike 40 years ago, they still are the teenagers, their need is different from now.
In many industries a large fraction of a product's life cycle costs are determined by decisions made early in its life cycle To be successful companies must now speed up the rate at which they introduce new products to the market. Therefore to compete successfully companies must be able to manage their cost effectively at the design stage, have the capability to adapt to new, different and changing customers requirements and reduce the time to market of new and modified products. Therefore to compete successfully companies must be able to manage their cost effectively at the design stage, have the capability to adapt to new, different and changing customers requirements and reduce the time to market of new and modified products.
Most of the organizations have also met the major changes in their competitive environment. Prior to the 1980s many organizations operated in a protected, highly regulated and non-competitive environment. Barriers of communication and geographical distance, protected markets, limited the ability of overseas companies to compete in domestic markets. During the 1980s, competitive restrictions were eliminated so that organizations began to encounter severe competition from domestic and overseas competitions. In order to compete effectively companies must be capable of manufacturing innovative products of high quality at low cost, and also provide a first-class customer service as well as expand the product range
Moreover, the most critical point is the need on the market had been a major change from past decade to recent decade. The business environment has been changed for every decade as well as the market needs. Many business owners need to make the adaptation on their business activities in order to be adapted into the business trend. Companies have had to become more customers driven and make customers satisfaction an overriding priority in today's competitive environment. Cost efficiency-customers will buy the product with the lowest price, all other things being equal, keeping cost low & being cost efficient -strong competitive advantegs. In addition to demanding low cost product customers are demanding high quality products & services.
Companies must be innovative n develop a steady stream of new products n services n hav the capability to rapidly adapt to changing customer requirements. Companies should achieve significant economic of scale or differentiated their product sufficiently to guarantee brand loyalty.
The transition from an industrial age to an information age has been .Most of the management accounting practices that were used in the mid-1980 had been developed by 1925 ( Johnson & Kaplan, 1987). The GAAP rules required that inventories be valued on the basis of historical manufacturing cost. Some of the management accounting tools for control such as standard costing, budgeting, and variance analysis. By the mid 1980s firms were using management accounting systems that were obsolete and no longer relevant to the changing environment. During the late 1980s criticisms of management accounting practices and then new techniques that are relevant to today's environment has been modified n implemented.
Traditional management accounting system tend to place far greater emphasis on reporting direct labor cost and efficiency, while relatively little attention is given to reporting and controlling direct material and overhead cost,
Standard costing variance analysis was developed to meet the needs of a traditional manufacturing environment. It is doubtful whether calculating variances in monetary terms for resources such as direct labour and the fixed cost, where spending is not closely aligned with consumption, provides useful information for short term cost control purposes. In advanced manufacturing environment considered that variance analysis would decline in importance as an aid to controlling manufacturing activities and cost.
Traditional management accounting system have also been criticized because they fail to report on such issues as quality, reliability, lead times, flexibility and customer satisfaction, despite the fact that they represent the strategic goals of world-class manufacturing companies. Traditionally, management accounting reports have tended to focus on cost. Consequently, the non-financial measures thatare necessary to compete successfully in today's worldwide competitive environment.
In conclusion, a vastly changes in environment began from the Industrial Age which made our lives today much richer and better. Some of the management accounting and control mechanism from this period are still used today such as budgeting and costing. Overall, the Industrial Age greatly transformed the economy, technology and society. Its impact will never be forgotten.
Problems associated with the traditional view and approach of management control is
The ways in this performance measure influencing managerial decision
The needs to balance the use of financial and non-financial measures to drive performance
The financial or accounting measures cannot fully support the objective of an organization?
The financial measures have took into consideration of key environmental factors ?
Is it fair to apply one cost of capital rate to all divisions regardless of their respective size, market age?
ROI can be used to compare performance of division of different sizes
It brought management accounting control system (MACS)from the close alignment the concepts of (MCS) and (MAS)
Monetary measure provides a means of aggregating results from dissimilar activities, profitability and liquidity are essential for company survival, financial measures enable a common decision rule applied. -responsibility centre, formal planning processes
Financial performance measures-
targets set-standard control; budgeting-incremental/zero based/ABB/ life cycle budgeting/beyond budgeting; rolling forecast
Target costing (externally forcused)- targets are price-driven(Toyota)
Accounting performance measures-roi,ri,eva. Roi-profit meansures for divisional performance, it is a relative measure of performance that can be compared with other investments.
The purchasing power of money will fall over time. For example, the declining purchasing value of money cause the lender must be compensated for it. Changes in budget caused by alterations in economic forecasts will make uncertainty happened. This is because the comparable errors affected by unpredicted recessions. The economic growth will falling, the value of assets will falling as well. Besides, the recessions might increase the unemployment rate. The managers cannot predict the budgets based on the company history, the economic downturn had made the company historical data comes to not reliable.
The Hope and Fraser statement stated that the main barrier for corporations to adaption in the environment changes is budgeting system. The budgets are consuming too much time, delaying necessary action as well as providing little reliable and useful information. Traditional budgeting also provides little valuable and dysfunctional behavior to the managers.
In recent years, beyond budgeting was introduced, which is more flexible, less complex and less sophisticated, but more effective and efficient tools. Beyond budgeting is a range of techniques such as rolling forecast and market related targets to replace the traditional budgeting. This is because of the internal flaws in traditional budgeting especially when used to set contracts. (CIMA Official Terminology, 2005) The beyond budgeting enables an organizations to improve its performance and decentralize its decision making process by abolishing the traditional budgets. It also enable the organization successfully meet the information economy and to be adaptive in unpredicted conditions. (CIMA, 2007)
In the past decades, targets were set based on financial numbers and negotiated. Nowadays, many businesses have begun to use high level key performance indicators (KIPs) under the budgeting beyond to its set targets. KIPs including return on capital, cash flows, cost income ratios and etc. KIPs in measuring their business performance and seek for the alternatives in enhancing their business operation. This method also used to maximize short and medium term profit potential. Compare with the traditional budgeting, KIPs is much faster and encourage maximum profit potential by the benchmarking bar. Besides, previously, resources were managed based on pre-negotiated budget contracts. However, nowadays KIPs used the operational resources to manage and set goals. The resources are available to front line managers when they required. These resources decisions make the manager more responsive and accountable as well as reduce waste.
Additionally, beyond budgeting rewards employees based on their relative performance, not fixed targets. Yet, rewards were linked to a fixed outcome agreed in advance in traditional budgeting. Therefore, the benefit of beyond budgeting is it reorganized and rewarded the best performers, not just the skilled budget negotiators. Then, the traditional budgets control performances and make corrective actions when necessary. Under beyond budgeting, the managers see the same information and data simultaneously. Managers have the greater focus on trends and forecasts.
One of the advantages is the managers can check and revise the plan from period to period and within a shorter period of time. For example, one's can make better allocation of resources because rolling budget help to make more accurate forecasts and plans for the next few months. The decision will be more realistic and accurate because the budgets are reassessed regularly. This is because the budgets are revising regularly, so they can check whether the plan is going smooth. It revised every month or every quarter as information comes in, based upon the latest information about sales, operations, price, performance and the strategy. However, the planning had been mostly driven by top management previously.
The other advantage of rolling budgets is the planning and control based on the forecast. For instance, the investor will consider whether to take the investment based on the previous budgets. And, he can plan for the next step after revise the budgets. Lastly, managers can add an inflation factor to the past year's budget and then include any modifications for significant changes.
Total Quality Management (TQM) programs preaches the need to identify defects during the production process, trace them to their source, find out what caused them, and make corrections so that they do not recur. This can reduce the risk in production and materials management. It also decrease the waste cost of imperfect product and increasing the quality of products. For instance, Intermountain Health Care adopted TQM system in 1990. Since the system being adopted, Intermountain had eliminated many mistakes and to upgrade the quality of medical care as well as reduce its medical related cost.pg165
In addition, Just-In-Time (JIT) manufacturing system is another method can take the place of traditional manufacturing system. This is because of their failure to alter the management accounting system in many organizations. This system monitoring, identifying and communicating to decision makers any delay, error and waste in the manufacturing process. The defective parts can be immediately spotted in manufacturing process under JIT system. The problem can then be traced to the supply source and corrected before defective parts are produced. For example,