Strategic Management Accounting Development Accounting Essay

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"Management accounting has moved away from traditional transaction-based financial information to non-financial and futuristic information". Discuss the above statement, highlighting the new roles of management accountants and accounting in modern business enterprises.

Indeed, 'management accounting has moved away from traditional transaction-based financial information to non-financial and futuristic information' as highlighted by the essay question. Traditionally, management accounting was largely relegated to 'calculating costs' as well as preparing budgets. At the onset the tools available to the management accountant were limited. Costs were calculated at 'per unit', 'per hour' and 'per square meter' and the budget was the only tool for cost control. Johnson and Kaplan (1991) noted that overheads were not much of an issue at this time as most costs faced by companies were direct labour and material costs. Traditional management accounting therefore appears to have been well-suited to the operations of businesses at that time. Things have changed, businesses have changed, and their operating environments as well as their competitors have changed. Management accounting has had to follow suit or be left behind.

To understand this development it is worthwhile reviewing its historical roots in brief before discussing its development up to date. Major changes in management accounting were introduced in the 80's with the birth of 'strategic management accounting' (Simmons, 1981). To put this discussion into perspective, management accounting generally involves the provision of information required by management to facilitate and enhance decision making (Weetman, 2003).

Historical perspective of management accounting

In their book, 'Relevance Lost', Johnson and Kaplan (1991) document the historical development of management accounting from the development of double entry book keeping by Fra Pacioli through the years where businesses were small enough to be managed by their owners. At this time, the only major stakeholders of business included raw material suppliers, labourers and customers (Johnson and Kaplan, 1991). The researchers note that the focus of owner-entrepreneurs at this time was to 'collect more cash from sales to customers than was paid to suppliers of the production inputs, primarily labour and material (p. 6). The historical narrative then goes to the time of the industrial revolution and the birth of 'economies of scale' in the nineteenth century. As noted by Johnson and Kaplan, businesses saw it advantageous in terms of cost efficiency and profitability to expand significantly through long term contracting and the birth of the 'organisation'. The new form of organisation came with formal structures, division of labour and departmentalisation. There was a need to decide on appropriate prices for goods and services, effect control at different levels in the organisation, and measure the effectiveness of processes as well as the performance of managers at different levels of the organization (Johnson and Kaplan, 1991). The tools in the management accountants brief case at this time was 'absorption costing' where full (labour, material and overhead) costs of products are allocated to individual units and the 'budget' which served as a tool for control. Arguably, this led to the development of what we now call 'traditional management accounting'.

Other narratives of the development of management accounting cite the work of Taylor (scientific management) as playing a pivotal role particularly in directing management accounting to focus in material and labour cost efficiency (Aitken 1985, Kanigel 1997). Credit is also given the contributions made by the managers of Du Pont Power Company for the development of performance measures such as the return on investment (ROI) ratio. Johnson and Kaplan note that ROI was used by the Du Pont Company to inform capital allocation decisions as well as to measure managerial performance. Looking at the measures; Budgets, Absorption Costing and ROI, it seems fair to infer that the numeric or quantitative financial information provision was the remit of management accounting. Arguably, this was what the firms needed at this time.

The development strategic management accounting

Many researchers in the 1980's, began to realise that the management accounting practice at that time (the 1980's) was unsuited for effective business management. Johnson and Kaplan (1991) who were one of the key critiques of management accounting noted that 'by 1925 virtually all management accounting practices used today (1991) had been developed: cost accounts for labour, material and overhead; budgets for cash, income and capital, flexible budgets, sales forecasts, standard costs, variance analysis, transfer prices, and divisional performance measures' (p. 12). To expand on this, the implication is that for 65 years management accountants had been using the same techniques. In the 1920's they were fewer firms, a very limited range of manufactured products, no consumer choice and probably no competitors. Arguably, given the business environment at this time non financial performance measures such as customer satisfaction, firm learning, employee development etc. were relatively unimportant.

Management accounting was further criticized for being too outward (shareholder) oriented as it was aimed at producing information that would be used for external reporting rather than for management decision making (Bromwich and Bhimani 1994, Bromwich, 1990, Simmons, 1981; Roslender 1995). It appears that significant changes in the business environment warranted a new look at the role of management accountants. Roslender and Hart (2003) noted that the 1970's and 1980's were characterized by evolving product and process technologies, a change in the competitive landscape, and changes in the attitudes of consumers. Technological development and the birth of computers meant that the focus had shifted from gathering and analysis of information as this could be automated. Competition in industry was becoming more multifaceted through the development and introduction of new products and services. Customer attitudes were changing spurred by increased choice from different product and service providers. Porter's 1980 work also indicated that firm competitiveness could be achieved through different dimensions- cost leadership, differentiation or niche. This exposes and puts into perspective other aspects which earlier management accountants had not considered. A successful differentiation strategy and a competitive position for example could be achieved through flexibility, speed and (product and service) quality thus relegating the importance of cost minimization (Hopper et al., 2007). To achieve such standards of flexibility, quality and speed requires management measures that are non financial in nature. In fact Simmons (1980, 1981) proposed the integration of the management and the marketing functions as the way forward emphasizing the need to be focused on the customer.

The development of strategic management accounting to date can be said to have occurred in three phases (Roslender 1996). The first phase of the process largely involved the advancement of new management tools which were argued to be more dynamic and relevant for cost accounting and management compared to tradition absorption costing techniques. Some of these tools included Life Cycle Costing, Throughput accounting, Strategic Cost analysis and Backflush accounting (Hopper et al., 2007). Life cycle costing realised that a firm can control the costs of certain products differently at different stages of production, with the ability for cost control highest at the product research and development stage. Although these tools shifted the focus from mere measuring and reporting on costs to somewhat attempting to influence and control costs they lacked an overall evaluation framework.

The second phase of the development process involved the introduction of guiding frameworks to inform and direct management accounting (Roslender, 1996). Turney and Anderson (1989) introduced the Continuous Performance Improvement (CPI) framework. This framework advocated a cyclical process for management accounting which begins with the setting of objective and ends with an evaluation of performance. It advocates that a business starts by setting out is aims, goals and objectives (where it wants be, what it hopes to achieve), set out its strategies to meet these objectives (what actions it will take to achieve its goals and what is the best route towards goal achievement) and finally evaluate and improve its performance based on past processes and results.

The Strategic Cost Management (SCM) framework was also introduced by Shank and Govindarajan (1989). The remit of SCM was that management accountants can significantly cut costs by identification of different cost drivers within a business. The three areas of focus are value chain analysis, cost driver analysis and competitive advantage analysis (Hopper et al., 2007). Carr and Tomkins (1996) contend that through these three themes, the framework considers issues of output quality and reliability, customer requirements, flexibility of manufacturing and industry competition. Cooper and Kaplan (1988) developed the Activity Based Costing (ABC). This technique introduces a new way of cost allocation in which indirect costs and overheads are more effectively allocated (unlike in absorption costing). The principles on which ABC is based are sound and this led to its rapid adoption in the 1990's.

Roslender (1996) contends that the third phase in the development of strategic management accounting involves mainly the integration of techniques (phase 1) and frameworks (phase 2). The need for integration arose because most of these techniques and frameworks either had weakness or were not holistic in their approach. The most successful of the many integration attempts was that of Kaplan and Norton (1992, 1996) - The Balance Score Card. This was one of the first frameworks to explicitly recognize the role of non financial measures in performance evaluation. Hopper et al., (2007) contends that financial measures are too abstract and too aggregated to be useful for manufacturing decision making while non-financial measures are more real and therefore more relevant to operational decision making. The Balance Score Card is acclaimed as one of the most holistic frameworks for strategic management. The framework is based on four different perspectives; Customer, Learning and Growth, Internal Business processes and Financial. Kaplan and Norton (1992, 1996) assert that it functions by translating vision, aims, objectives, goals and strategy into measurable objectives. The role of financial information is not disregard but is aligned side by side with other equally important perspectives.

In all, management accounting seemed to have moved from a position where it provided information based on historical activities to a position where it becomes more proactive and future oriented. The balance scorecard for example advocates aspects such as customer orientation and learning and growth of employees and the firm. Under the learning perspective, managers are required to continuously forecast the future direction of their industry, and to develop their employees towards these future directions. Today most firms send their managers on refreshment courses and executive MBAs at top universities to ensure that they keep abreast with current and probable future developments in their industry. Many businesses also continuously engage with their customers and their competitors in order to quickly spot new trends or proactively respond to future trends. The management accounting function has increasingly had to engage with the marketing function to respond to current market trends.

Despite the criticisms that have been levelled on the budgeting function and its relevance in the past three decades (BBRT, 2010) [1] , budgeting has survived and be rejuvenated in the form of participatory budgeting to enhance its position to provide management with futuristic firm information.

Roles of today's management accountants

Traditionally as highlighted by the paragraphs above, management accounting was largely relegated to cost keeping and budgeting. The management accountant was in charge of ensuring that the firm doesn't overspend and that prices were set at levels that will cover the total costs of production. Fleichman and Parker (1991) have made an attempt at documenting the traditional role of management accountants in the 19th century. Their evidence points to the fact that management accountants were responsible for such aspects as expense control, responsibility management, product costing, overhead allocation, cost comparisons, costs for special decisions, budgets, forecasts, standards, and inventory control (Parker, 2002). From a review of literature in the area, Parker (2002) argues that certain key driving forces have driven the changes in the roles of management accountants today. Amongst these key forces are the internationalisation and globalisation of businesses, information and communication technology, the birth of the knowledge based economy, the use of internal and external auditors, calls for broader scope accountability, broadening of firm stakeholder base [2] , changing work patterns and work attitudes. A review of the skills demanded of current management accounts offers intriguing insights on the changing roles of management accountants. Management accountants are increasingly being required to have skills and core competencies such as communication, leadership, critical thinking, customer and market focus, information technology awareness, broad business awareness, and integration of financial and non-financial information (Parker, 2002).

Siegel and Sorrensen (1999) and Parker (2002) argue that there is a reinvention of the role of management accountants within the corporate world. Siegel and Sorrensen (1999) studied a sample of accountants from the Institute of Management Accountants in the US. The researchers noted that the term 'management accountant' was not used to describe any of the accountants in their sample. Management accountants had evidently been branded differently and were known by other titles such as business managers, business controllers, corporate finance analysts, and business partners which reflected their roles within firms (Siegel and Sorrensen, 1999). Burns and Yazdifar (2001) have conducted research into the roles of management accounts. They found that the tasks of management accountants varied from one firm to another and amongst others included; presenting management accounts, interpreting management accounts, profit improvement, business performance evaluation, cost control, financial control, planning and managing budgets, strategic planning, decision making and implementation, generating value, designing and implementing new information systems.

Parker (2001) and Pierce (2001) conclude that strategic managers of today must possess skills including technological abilities, leadership, communication and analytical abilities and must shift from their historical role of stewardship towards more strategic planning and management, feed forward control, knowledge management, risk management, change management and environmental management.

Accounting in Modern business enterprises

The field of accounting in general has changed and expanded tremendously beyond its traditional management information provision, record keeping and financial report preparation. As management accounting has experienced major changes in the last three decades, so too has financial accounting revolved. Major changes in financial accounting have been brought about by the changing legislation in the area. The current trend in financial accounting is the drive towards harmonization of accounting regulations fostered by the International Accounting Standards Board (IASB). Before the introduction of International Financial Reporting Standards by the IASB, each country and its local standard setters were responsible for enacting financial reporting legislation for their companies. This presented problems as businesses grew across boarders with greater internationalisation brought about by the onset of globalisation.

The growth of the professional accounting service industry and the business consultancy industry has also changed the face of business accounting significantly. Many small to medium size businesses now outsource strategic decision making to professional accounting firms or business consultancy groups (Parker, 2001). This has led to the development of strategic management consulting as a standalone entity, separate from the firm. Bigger businesses are still able to afford the services of a strong inside team of management accountants. Nonetheless, they are increasingly using the services of accounting firms to strengthen their strategic decision making in major areas such as takeovers and general business expansion (Pierce 2001).


This essay has attempted to discuss how 'management accounting has moved away from traditional transaction-based financial information to non-financial and futuristic information'. This has been done by reviewing the development of management accounting from its humble beginnings in the nineteenth century through the major changes that occurred in the 1980's. These changes have been attributed to the heavy critique from researchers that the area faced during this period. Most of the critique was centred on the assertion that management accounting had lost its relevance (Simmons, 1980, Johnson and Kaplan, 1991). The development and introduction of new management accounting techniques were highlighted alongside the birth of new frameworks to inform management accounting. The balance scorecard was highlighted as one of the most holistic frameworks till date (Kaplan and Norton, 1992, 1996, 2001). In the subsequent sections, the new roles of management accountants as shown by research were highlighted (Pierce, 2001, Parker, 2001) and finally the changing face of accounting in modern business enterprises was discussed. In a nut shell, management accounting as a function and a research agenda has had an endearing lifespan.