Management Accounting And The Traditional Cost Systems Accounting Essay

Published:

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

Management accounting identifies, collects, measures, and reports information that is useful to managers in planning, controlling and decision-making. Management accounting is concerned with the provision of information to those responsible for managing businesses and other economic organizations to help them in making better decisions about the future of organization and in controlling the implementation of decisions they make. Management accounting has a variety of techniques and tools, including traditional volume-based costing system, budgeting, variance analysis and responsibility accounting, to meet the needs of managers in traditional manufacturing environments. However, the effectiveness of these tools in more contemporary settings has been questioned. In a series of articles, Cooper and Kaplan have also drawn attention to the limitations of traditional product cost systems. One of the main criticisms of management accounting during 1980s was the techniques used to allocate overheads to products/services. Conventional product costing systems use volume based measures such as labour hours or labour dollar to allocate indirect costs. The direct labour-based measures that were suitable to the allocation of overheads in the 1920s were not found suitable to the advanced manufacturing environment of 1980s. Advanced manufacturing techniques dramatically changed the manufacturing processes in many organizations. The companies produce a wide range of products, direct labour cost represent only a small portion of total manufacturing cost in such organizations, and overheads are of considerable importance. Further intense global competition of the 1980s created a need by managers for more accurate information on how product mix, introduction and abandonment decisions affect their organizations' profitability.

Traditional cost systems also provide inadequate information to support organizational continuous learning and improvement. The new competitive environment requires that managers and operators have timely and accurate information to help them make processes more efficient and more customers focused. Traditional standard cost/flexible cost systems prepare and issue summary financial information according to the cycle of the organization's financial reporting process, typically monthly or every four weeks. This financial information has some serious limitations to support the organizational continuous learning and improvement. The information on variances against standards promotes a controlling not learning view. The variances are not easily understandable by frontline employees and do not promote an integrated process view of the organization. Workers need a suitable combination of financial and non-financial measurements. Japanese have developed innovative cost management systems such as Kaizen costing and pseudo-profit centers for their front-line employees to enhance their ability to develop efficient and cost effective processes. In response to these criticisms, a number of innovative management accounting techniques have been developed across a range of industries. These include activity based costing, target costing, strategic performance measurement systems, benchmarking and value chain analysis. The survey of related literature provides the systematic evidence regarding the usage of contemporary management accounting techniques in many countries. There is lack of knowledge concerning the current state of management accounting practices in developing countries like Pakistan. It is argued that due to cultural factors, Pakistan manufacturing companies are slow in adopting new management accounting practices. The existing literature on the subject brings home the fact that there is a need for conducting a study to examine the extent to which contemporary management accounting practices have been used in Pakistan. There is also a need to study the association between the use of contemporary management accounting techniques and financial performance.

This study makes a major attempt to find evidence on how widely traditional and contemporary management accounting practices have been adopted by the Pakistani industry. Empirical Findings of the Study: The results of the study found that the needs to 'improve overall profitability' and 'cost reduction' are the major priorities for management accounting in Pakistani companies. Budgeting for planning and control is the most widely used tool of management accounting. About 97% respondents use it moderately or extensively. However, findings of the study showed that current usage level for newly developed management accounting techniques is comparatively more as compared surveys on Pakistani manufacturing firms. Results indicate that the firms using or implementing contemporary management accounting techniques such as activity based costing, activity based management, life cycle costing have greater business size vis-à-vis non-users, except target costing. This finding is consistent with literature. Around 73.3% of respondents implementing/using activity-based costing indicated that the need to have accurate cost information for product pricing is the most important reason. Results of the study found a positive association between the adoption of ABC and company characteristics such as degree of customization, pressure of competition, business size, and proportion of overhead to total cost. However, none of the differences was found to be significant at 10% level. Product costing decisions are the most popular application of activity based costing in Pakistan companies as about 80.0% are using it extensively or frequently. Sixty per cent of the ABC user respondents indicated a significant or somewhat significant improvement in the Return-on-Investment (ROI) followed by operating income.

Results of the study indicate that companies exposed to low pressure of competition have significantly different and greater priorities for 'automating processes' as compared to the companies having high pressure of competition, whereas companies exposed to high pressure of competition had significantly greater priorities for 'developing a more profitable product mix' as compared to companies having low pressure of competition. Further, results show that the companies exposed to high pressure of competition have significantly different and greater importance for the need to have 'improved processes' as compared to the companies having low pressure of competition. The extent of usage of ABC for 'product launch decisions', 'product redesigns', and process redesign, choice of marketing channel decisions was significantly different and greater in case of companies exposed to high pressure of competition as compared to the companies having low pressure of competition.

From this research, we can conclude that Pakistani companies use various management accounting techniques and practices. However, this research provides less insight into precise nature and details of these practices, and the organizational processes and actions that precede or are initiated by these techniques. Using alternative approaches (e.g., case study research, and interview method), one may attempt to investigate why and how companies implement various contemporary management accounting techniques, pitfalls in implementing and their success in achieving intended goals. Also one could study, whether adoption of these practices was designed to improve performance or to give external appearance of being modern, rational and efficient.

Writing Services

Essay Writing
Service

Find out how the very best essay writing service can help you accomplish more and achieve higher marks today.

Assignment Writing Service

From complicated assignments to tricky tasks, our experts can tackle virtually any question thrown at them.

Dissertation Writing Service

A dissertation (also known as a thesis or research project) is probably the most important piece of work for any student! From full dissertations to individual chapters, we’re on hand to support you.

Coursework Writing Service

Our expert qualified writers can help you get your coursework right first time, every time.

Dissertation Proposal Service

The first step to completing a dissertation is to create a proposal that talks about what you wish to do. Our experts can design suitable methodologies - perfect to help you get started with a dissertation.

Report Writing
Service

Reports for any audience. Perfectly structured, professionally written, and tailored to suit your exact requirements.

Essay Skeleton Answer Service

If you’re just looking for some help to get started on an essay, our outline service provides you with a perfect essay plan.

Marking & Proofreading Service

Not sure if your work is hitting the mark? Struggling to get feedback from your lecturer? Our premium marking service was created just for you - get the feedback you deserve now.

Exam Revision
Service

Exams can be one of the most stressful experiences you’ll ever have! Revision is key, and we’re here to help. With custom created revision notes and exam answers, you’ll never feel underprepared again.