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This paper looks at the evolution of management accounting as a discipline since its formative stages to the present and the near future. It specifically looks at its role in the management of entities and its interactions with other disciplines in the interwoven management process. It also sheds light on emerging ethical issues in managerial accounting and asks pertinent questions as to their resolutions. Suggestions are also given as to possible causes of action.
Management accounting refers to the preparation of accounting information to managers to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. It is a forward looking concept and provides timely and detailed information (often to the product level) without adherence to any particular standard to the management for internal decision-making. It departs from financial accounting in that while financial accounting emphasizes on the financial outcomes of past decisions, managerial accounting focuses on the future outcomes. It also differs from cost accounting in that cost accounting focuses on tracking, recording and analyzing the costs of manufacturing a product or providing a service in a company while managerial accounting seeks to answer questions of relevant costs incurred in managerial decisions.
Evolution of management accounting
The practice of accounting has been proven to have existed as early as 3500Bc in ancient Mesopotamia where scribes kept records of farm produce and government finances. Later on in the medieval era, accounting records were also maintained by the Englishmen with the oldest surviving record being the Great role of exchequer that detailed all the monies due to the king in 1130-1180AD. Real accounting only emerged in the period after 1494 after the emergence of the double entry accounting. This coincided with the European renaissance which saw increased commerce, and spread of the art of writing, accumulation of property and capital thus raising the need for recording transactions.
Managerial accounting as a discipline may have evolved from its cost accounting counterpart. In the period from 1812 to 1920, cost accounting for processes is known to have existed but with an emphasis on operational costs and efficiency of the processes. As Maher (2002, p.2) notes, management accounting as a scholarly discipline sprouted only in 1940's. Actual dates remain conflicting among scholars as regards its emergence. However, most scholars agree that it was a discipline invented out of necessity, unrestrained by the rigid reporting rules of financial accounting, to answer the unanswered question of relevance in a changing operating environment.
Later in the period beginning 1900 to 1950, industrial age set in. big, hierarchical organizations emerged and there was need to match revenues with their costs of realization to find out if they made profits or losses. The focus now shifted to determination of costs and control of finances. This is the time that rail and steel companies emerged in the United States as did other big firms in Europe and Japan. Businesses became more complex and there was growing need for precise information to facilitate operations. Manufacturing intensified and cost and pricing information was urgently needed. That is what led to the emergence of the term cost accouitgn to refer to the processes for ascertaining process costs to facilitate financial control. Earlier on, Augustin Cournot, the French mathematician had written in 1838 that a monopolist should stop producing when costs outrun receipts (Parker 1969, p.17). This shows the centrality that was placed on cost accounting in the management of production operations. Johnson & Kaplan (1987, p.21) note that textile factories were the first organizations to develop cost accounting systems to monitor the direct cost of producing yarn and fabric. The Boston manufacturing company records dated 1815 provide evidence to that effect.
At the turn of the 20th century, some companies had elaborate management accounting systems. Dennison Manufacturing Company, that started in 1944 and had branches as far off as Canada and England kept all records of its operations from 1914. The company president stated that if company would map its future operations based on the past and present performance (Vollmers, 1998). Accordingly, he kept elaborate records of factory costs and all other accounting transactions separately run from the financial system. However, there was no detail of how the two reconciled. Despite this, it is believed to be the first evidence of a management accounting system.
In the period from 1950 to 1980, a revolution in managerial accouitgn followed. The focus shifted from tracking and recording costs to providing information for management planning and control. Research led to development of new decision making tools reflecting on economic theory. The assumptions in this period were that the external environment was relatively stable with few demand and price fluctuations. Also, scholars assumed that managerial tasks were routine and the purpose of the management accouitgn was to aid decision making.
The drive was largely pioneered by the ford foundation's initiative to restructure the management accounting information in the United States (Maher, 2000). Managerial accounting courses were incorporated in the MBA curriculum of most business schools around the USA and the world at large. After World War II, the drive to improve efficiency and profits prompted a lot of research into the field based on economics and decision theory. As a result, new tools for decision making were invented. However, these tools didn't take into account external factors such as technological developments, competition, change in demand, etc. Epstein & Lee (1999) note that these tools assumed unbounded rationality, unlimited data, and lower costs as compared to the benefits. The period also saw the publishing of the first management accouitgn text in 1956 by Robert Anthony. The book focused on analyzing new problems and measuring costs. Later in 1962, Horngren published another text titled Cost Accounting that emphasized on cost management at the expense of cost determination. At this juncture, the discipline became embroiled by two controversies; the recovery of fixed costs and the integration of mathematics into the discipline. The emergence of these controversies bent management accounting towards economic theory with concepts such as marginal costing, time value of money, opportunity costs, modeling, etc (Robles &Robles, 2000).
The period from 1980 to 1999 saw a focus shift to improved quality and efficiency, just in time processes, teamwork, and activity based costing, target costing and product life cycle management. Epstein & Lee (1999, p.6) note that there was a general agreement among researchers and practitioners that managerial accounting curriculum was not bearing upon the needs of management. Johnson & Kaplan suggested that management accounting should extend into non-financial areas and that accountants should have a better understanding of management's information needs so as to be innovative enough. This was in recognition of organizational interdependencies.
In the new dispensation, management accounting had to focus on the attainment of organizational goals. The discipline was to provide answers to diverse organizational interests such as motivation of employees, realization of desired product costs, product positioning, etc.
In the period from 2000 to the present, focus has shifted to creation of customer value, strategy, economic value added and balanced scorecard. The typical organization has been split to its value adding parts with a view to eliminating non value added activities and reduce costs. This is to cope with a competitive market with fewer barriers to entry, empowered and informed consumer, liberalized global marketplace and an expectant shareholder.
Management accounting and management functions;
human resource management
Human resource management refers to the methods of mobilizing and developing the personnel to achieve efficiency and greater productivity in an organization. This calls for balancing the interest of the employee with those of the organization. Managerial accounting facilitates the determination of the required personnel, setting targets for performance, benchmarking the organizational personnel output with that of its competitors, determination of appropriate motivational factors, determination of employee training and developmental needs and formulating bonus schemes. The modern organization knows that it is as good as its employees. Interest has been gathering around the human resource function to hire and retain the best talent as a means of securing competitive advantage over their rivals. Indeed, Conner (1991) singles out human resource stating that the sustained competitive advantage depends on specific and not replicable assets. Managerial accounting is crucial in that it facilitates proper planning for salaries and performance bonuses to attract and retain talent.
Managerial accounting and planning
Managerial accounting is responsible for setting up organizational budgets. Budgets involve the laying down of future goals of the organization keeping in mind the organization's operating environment. It involves the assessment of past activities to find lay foundation for those of the future. It predicts amounts of revenues that the organization is likely to realize and the costs for associated with their realization. In doing this, the management account identifies areas that are likely to be problematic and those that may need special consideration. Further, thee management account assigns forecasted costs to products, decides the desired margin and arrives at the desired price. He is therefore able to estimate realizable profit and issue profit warning when targets are missed.
Management accounting and marketing, selling and distribution
The channels of distribution that a firm uses can be a source of competitive advantage. Companies that are able to deliver marketing communication well to their clients and have their products within accessible locations often have an upper hand in the market. Planning for efficient distribution chains (logistics) is a function that falls within the category of managerial accountant. Coca cola has successfully used planned logistics and marketing management to annihilate its competitors. Through their well organized managerial accounting function, they changed the supply chain to cut on waste and integrate its North American operations and thus eliminate duplication. This was preceded by a thorough analysis of their value chain. Through their management system, they are able to monitor value added activities and their key value customers after a careful customer profitability analysis. Notably, in year 2006, the company undertook to deliver its products (change of operational strategy) to Wall Mart (a key value customer) after the later raised concerns of poor service by its distributors. Further, the company selectively advertises its brands to make sure that none eats into the others market share. This is a perfect example of how managerial accounting can inform on decisions involving marketing, selling and distribution.
Managerial accounting and finance
Managerial accounting helps a firm to find out its capital and operational finance needs. The company is able to plan for operational finance needs to avert production stoppages occasioned by overtrading. Additionally, management accounting enables a firm to realize an optimal cost of capital and gearing.
Management accounting and IT
The two have merged to drive the 21st century Corporation. Management information systems collect, process, store and disseminate information useful for organizational decision making. Today, management information systems provide descriptive (what is â€¦?), diagnostic (what is wrongâ€¦.?), predictive (What ifâ€¦.) and prescriptive (what should be doneâ€¦.) information for management decision making. Through complex simulations and modeling, IT has enhanced the ability of the management accounting discipline to process a lot of data and yet come up with refined output at a fraction of the costs. It has cut down on product development times, made it possible to have automated systems that eliminate the need for labor, lengthened product lifecycles through accurate product monitoring and targeting while reducing the overall cost of operations. Besides, the IT has been used in solution optimization decisions for firms producing multiple products with constrained resources. Lastly, management accounting has assumed an enterprise wide scope with the introduction of enterprise resource planning software to run all aspects of the company. This has centralized operations control, eliminated duplication and enhanced strategic planning and managerial control.
Ethical issues in managerial accounting
As noted earlier, management accounting evolved as a direct consequence of the vertical organization. This is because by their very nature, such organizations have coordination problems and there is the ownership is separate from control. The emphasis created by mainstream accounting is on summary financial measures which are poor indicators of value. For profit organizations, financial measures may be good but only show a tip of the iceberg. Other fundamentals that impact on the firm's ability to return sustained profits should be reflected. Unfortunately, management accounting provides no answers to this question as well as it only focuses on the organizational narrow aims of profitability and performance. while more and more performance management systems have emerged to solve this problem (including the balanced scorecard, Performance Prism, Tableau De Bord, Intellectual capital navigator, Critical Success Factors, Management By Objectives, Strategic Measurement and Reporting Technique (SMART), European Foundation for Quality managements Excellence Model (EFQM)), there is still very low correlation (and specifically non-linear relationships) between the measurements and overall performance. Ethical concerns abound as to the role of the management accounting measurements- are they there to simply direct attention, solve a problem, facilitate or influence a decision or just to summarize intended performance.
Another key ethical concern is on rewards. Most organizations base performance rewards on corporate performance. This is despite the fact that a handful of employees can be responsible for the overall performance of the firm. Can there be a system for determining individual level performance especially at the lower cadres so as to reward them commensurate with their effort? Remarkable progress has been made on this front by instituting performance based pay across the organizations with bonuses for outstanding performers. However, the typical bonus formula remains very complex and strongly biased in favor of top executives. For the average worker, the bonus curve steeps in the middle and flattens at the top. For the executive, it is typically steep all through. The result is an overburdened worker working under an overpaid boss.
Management accounting tends to apply double standards when enforcing policies. It has different tolerance levels in performance evaluations and weak implementation of controllability principle. For instance when a company states that it doesn't pay for effort but for results, how does it reward employees whose effort doesn't immediately pay off? When managers do not deliver their target, are they treated in the same way as other low cadre employees?
Finally, management accounting fails to capture the motivations that drive people in the organizational hierarchy. Not always are people driven by maximization of value. Others will do the right thing for the organization at personal cost. It therefore does ignore personal and group dynamics.
For the modern corporation, management accounting will be the source of competitive advantage. Increasingly, the discipline will shift to an external focus, facilitating the strategic positioning of firms' products. Going forward, relevant management accounting information will form the basis for firms' undertakings.