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In contemporary society, modern management accounting has replaced to traditional management accounting which are not suitable for the current market. In this essay, the role of modern management accounting, development, organizational and global context can be discussed. In addition, three recent developments in management accounting techniques include Just-in-time, Total quality management and the balanced scorecard have investigated and research.
Management accounting (MA) is a kind of technique which maintains different accounting function to the same objective of the company (Chenhall 2007; Sprinkle and Williamson 2007). Besides, MA focus on management and internal cost which different from other accounting function focus on external shareholder (Gong and Tse,2009). The objective of this essay is discuss the development of modern management accounting and how does it advanced. In the first part, some basic theory and development of modern management accounting are debated and introduced. In the second part, three recent developments of modern management accounting are presented and analyzed.
3. Critical discuss of modern management accounting
3.1 Definition of management accounting
Management accounting has a long history. A research conducted by Atkinson (Atkinson, A et al,2001,p5) believes:
"A value adding continuous improvement process of planning, designing, measuring and operating nonfinancial and financial information systems that guides management action, motivates behavior, and supports and creates the cultural values necessary to achieve an organization's strategic, tactical and operating objectives."
As a result, management accounting is a tool which can help manager to plan a business strategic, make decision to earn maximize profit by allocating resources and control the business activity (Weetman,2003). In addition, it also plays a crucial role of achieving enterprises' objectives (Lowe, 1971; Otley, Broadbent and Berry, 1995; Ouchi, 1979). Lastly, management accounting connect with other cost measures (Chenhall, 2003)to guarantee entities' performance productive and operative(Weetman,2003).
3.2 Differences between management accounting and financial accounting
Firstly, for all the user of accounting information, management accounting emphasis to internal users such as managers and employees while financial accounting particular provide information to external users such as stockholders and tax authorities (Upchurch,1998).Secondly, almost financial reporting published regulated. The financial annual report covered most essential information and data while management accounting report may publish weekly or monthly because it demand information speedily(Drury,2004). Lastly, data and information from management accounting reflect future state condition of organizations whereas financial accounting disclose past situation of them.
3.3 The shape of modern management accounting
To start with, management accounting assists manager distribute all kinds of resource to ensure function properly. On one hand, in manufacturing companies, the cost, product capabilities and quality have been prospered by management accounting. On the other hand, in service companies, accurate and opportune information is essential, which can help enterprises enhance the products quality of activities(Atkinson,2001). Moreover, management accounting can advance the growth of multiple-division firms(Atkinson,2001). Specifically, in the contemporary society, a corporation can be a winner which has strong ability to connect process, people and share information from other companies. The strategies relationship can take advantage of other companies and make their own more and more strength (GeorgeB, 2000). Thirdly, operating department manage the finance figure and budget expenses to make ratio of management accounting(Atkinson,2001).The ratio can reflect the real value of corporations. Ideally, budgeting expense arrange per year which the manager can see the company operating regularly and decide how to maximize their profit (Supply House Times ,2008). Fourth, management accounting can appraise and conduct real spending (Atkinson,2001). As management accounting is focus on the internal costing, so spending is a crucial item to calculate daily consumption and then help the manager find the balance of spending and earning. Lastly, management accounting provide feedback to find out the strengths and weakness of organization operating (Atkinson,2001). A successful organization can change quickly to adapt national competition, technological innovation and customers' demand so managers need feedback information to make decision to the next term strategies of company. If the new investment appeared, they should consider whether the previous one should be replaced by the new one (McWatters, 2001).
Improve global competition can make companies face more challenge from the world. There are some reasons for the change such as taxation policies and new regulation of government. Some companies such as DaimlerChrysler, DuPont and Samsung have decreased their labor cost and spread their business to Asia and North American market (McWatters,2001). For the global business, some national companies use the similar resource such as software system and planning standards. Because of that, global enterprises need cooperation to improve the position in global competition (Drury,2004). To start with, management accounting should calculate the cost and value of companies produce various commodities in different industries throughout the world (Atkinson,2001). For example, in this age of change, more and more companies such as Philips and Panasonic broaden their business area and not focus on one kinds of industry any more. As a result, the management accounting data should reflect the international information from other cooperation enterprises. Moreover, management accounting information communicate strategy of function (Atkinson,2001). Specifically, performance measure has fundamental effects companies' communicate and business strategy(MarkL and Jeol, 2002). The successful cooperation means earn profit, lower cost, high quality and decrease production time which depends on management accounting information. Lastly, the international competition is increasing severe because the environment and market demand are changeable. The external environment change need management accounting change to suit the market demand.
3.4 The role of modern management accounting
As modern management accounting plays a crucial role in current situation, the position of modern management accounting in enterprises become more and more essential. So there are three role of management accounting operate in enterprises as followed.
3.4.1 Making decision
Decision making means the process of integrate the development, further objective, performance plan and principle to make responsible for achieving the final target (Shields & Young, 1993). Decision not only the core of operation management but also the main work of every level of management employees. For example, decision making include performance evaluation, set budget and planning which need management accountants corporate with managers to fulfill the whole task (Sathe,1982).
3.4.2 Directing attention
Direction attention can help manager definite the responsibility and earn of the company. In addition, directing attention rely on the strategic management which connect with competitors (Weetman,2003). The competition mainly depend on the product price, quality and services so management accountants should make plans to cut cost, short product life cycle and increase technology base on management accounting information(Isa,2007).
3.4.3 Keeping the score
Keeping the score aim to solve the quantitative problem which need the allocation be fair (Weetman,2003). Modern financial score-keeping is based on the business property which emphasis on cost, sharing and allocatig (Welsh,1976).
3.4.4 Controlling the process
Control process is one of the most importment role of management.It is helpful for manager to revise the measure and reform the work in order to ensure the operation regularly. Especially for managers of small business, it also importment for them to be awareness and supply visuality and comprehension of their financial condition(Dunne,1980).
3.4.5 Solving problems
Solving problem is include various factors such as financial problems and non-financial problems. But whatever any type of problems, logical resasoning is the key point(Weetman,2003).Management accounting information can solve the problem during the costing and product process which aiming to guarantee the operation successfully.
4.Three developments in management accounting
4.1 Just in time
4.1.1 Definition of Just in time system
The objective of Just in time(JIT) system is endeavour decrese product's throughput time, which means from the order to transfer to the customers (McWatter,2001). In another words, processing system can be stable base on JIT must cut setup cost in behalf of remove the need of creation (Atkinson,2001).
4.1.2 Aim of JIT
Because the requirement of JIT is on schedule and no waste, so the aim of JIT is based on quality and quantities required, finish the task at accurate time (Drury,2004). Besides, specifically, JIT has some other goals such as elimination of non-value added activities; zero inventory; zero defects and a 100% on-time delivery service which is different from practice in reality (Drury, 2004).
4.1.3 JIT manufacturing and management accounting
Management accounting sustains just-in-time manufacturing. For example, it is obvious that monitoring, identifying and making decision in JIT manufacturing is accord with management accounting. Besides, it is more significant on deliver to customers timely, products cycle time and defect rate in modern management accounting (Drury, 2004). Based on JIT situation, management accounting is simpler than general. For example, aiming to it is no need for expend time on recording costs, so the job cost sheets can be reduced. In addition, the number of accounting transaction also decreased. Some firms cut 20% of volume by their total number (McWatters,2001). In summary, the advantage of JIT manufacturing is ensure the operation effective and waste decline, but some staff worked on single think it is hard to process because JIT depend on corporation (Atkinson,2001).
4.1.4 Case of JIT
Tobor toy company is a typical case of just-in-time manufacturing. This company is mainly product high quality toys and the main products is robots.After JIT manufacturing system, the total annual benefits of Tobor toy company is $858,680 which is more than $300000 of one-time costs. Specifically, firstly, reduction in rework costs is $616680. Secondly, reduction in work-in-process inventory-related costs is $134000. Lastly, contribution from sales increases resulting from improved production cycle time is $108000.
For increased sales, the annual sales is also 180000 robots for the past three years but the production cycle time is reduced by 6.5 days, so that the time of offering robots to customers had shorten and effective. Because of the company use JIT process to remove defective robots, so any defective robots are eliminated and reworked. The total incremental costs of production per robot are $196.1 and average net sales price is $250 so contribution margin per robot is $53.9. Without JIT system, the contribution would have been lost because of reduction of cycle time.
For work-in-process inventory, the average WIP inventory has drop by $95600 after JIT system. The main reason is that when defect rates are increasing, inventory of rejected robots are raised too. So the defect rates have lowest owing to JIT system, so WIP inventory have reduced a lot.
For cost of rework, reduction of major defects after JIT is 4500, cost per correction of that is $42. So JIT cost reduction of major defects is $189000 (4500*$42). In the same way, reduction of minor defects after JIT is 11880, cost per correction is $36, so JIT cost reduction of minor defects is $427680(11880*$36).
4.2 Total quality management
4.2.1 Definition of TQM
Total quality management (TQM) which lower the costs and optimize the quality of products and services of the enterprise and improve the satisfaction of customers (McWatters,2001). Besides, TQM approach is a kind of management function which has two major typical features. The first one is TQM concentrate on customers services. The second one is problems can be solved by various tools such as benchmarking (Homgren et al,2008 ).
4.2.2 The plan-do-check-act cycle
Plan-do-check-act (PDCA) cycle is the most crucial TQM problem-solving tool. In practice, the PDCA cycle identify probable reason for the problem by data analysis and then give the solution(Homgren et al,2008). In the "do" stage, the solution can be managed, in the "check" stage, the consequence can be verify. In the "act" stage, if the conclusion is useful, the propose is carried out. If the conclusion is useless, the group returns to the primary data and start again.
4.2.3 "Prevention-appraisal-failure" model
Prevention cost includes designing and implementing part such as planning, assurance and determining products. Appraisal costs include checking material and supplies, evaluation and equipment inspecting. Failure costs include internal and external aspect.
4.2.4 Case of TQM system
Mortgage Express is a UK company which provides products in market buy or let and recommend products to customers. It has £3 billion assets and 310 staff.
By the TQM system, every employee has two hours quality time each month which used to advanced activities. Besides, the company has three approaches to accelerate achieving the goal. In the first place, the manager decide to maximize value for company' shareholder. In the second place, putting customers services as the first task of company. Thirdly, managers encourage all of employees do their best (Mortgage Express,2009).
4.3 The Balanced Scorecard
4.3.1 Definition of the balanced scorecard
The balanced scorecard is a function which related to performance measures. It help manager to organize the measurement of operation to achieve the goals (Weetman,2003). In addition, the balanced scorecard can transfer enterprise strategy a clear objectives to make it practical (Atkinson, 2001).
4.3.2 Four perspectives
a) Financial Perspective
Financial performance measure contains profit, sale growth and risk. The financial perspective aim to demonstrate the investment to the shareholder (McWatters,2001).
b) Customer Perspective
The customer segments include existing and potential customers. Perspective of customer aim to make customers satisfied and loyal by increase service quality and enhance the relationship (Drury,2004).
c) Internal Business Process Perspective
On one hand, managers can improve the process to meet customers' demand. On the other hand, new process can be developed to broaden a new market (Atkinson,2001).
d) Learning and Growth Perspective
If an organization wants to achieve the goal, it need appropriate objective, facilities and system. Because of that, appropriate learning and training should be carried out (Mcwatters,2001).
4.3.3 Case of Balanced Scorecard
UNUM corporation is an insure company which headquarter in Portland, Maine, USA. UNUM corporation has 7200 employees and $4076700 total revenue in 1997. Besides, the company also has some subsidiary life insurance companies all over the world (UNUM Corporation,1999).
UNUM's balanced scorecard comprise of four parts: UNUM people, operating effectiveness, customer satisfaction and shareholder value. Every part has vision, quantifiable measure and goal. From the balanced scorecard, if the corporation wants to achieve the goal, they should focus on investment and employee's working environment. In another words, some measurement should be done such as increase the number of employees to agree the corporation's behavior and develop a trust relationship between employees and managers (UNUM Corporation,1999).
In conclusion, modern management accounting is a new accounting function which based on internal cost and help managers make decision and control the performance measure. Moreover, management accounting system should be developed step by step to make it more complete and prefect in the future.
6.Appendix 1 UNUM Balanced Scorecard
We will have the mind of a customer and the pride of an owner.
A benchmark survey will integrate the company's employee surveys
into a tool for gauging progress.
Our goal is to improve annually on the score established by the
benchmark survey. In addition, we will monitor our progress towards
the goal on an ongoing basis through formal and informal gathering
of employee opinions.
We will increase customer value by rethinking, improving and
streamlining our business processes.
Operating costs will grow at no more than one-half the rate of the
By 1998, our total operating costs ratio will be reduced by approximately
UNUM will provide the best value in offerings matched to customers'
needs in the markets we choose to serve.
Each UNUM area with an external customer chain will develop a
customer value measurement tool. It will be aimed at determining
our customers' assessment of the overall value of our products and
We will continually improve our customers' perception of the value
of UNUM's offerings so that the number of customers who DO
NOT rate UNUM as 'very good' will have declined by 40 per cent
when we compile our final measurement in 1998.
We will deliver consistently superior long-term value to UNUM
Shareholder value will be measured in terms of total return - ie dividends
plus share price appreciation.
We will achieve a total return that consistently places UNUM
among the top 125 companies listed on the Standard & Poor's 500.