The role of Management Accounting is to use and provide accounting information to managers in a company, and by using these accounting information managers will be able to make better business decisions that allow the company to be better equipped i the control and management functions. Compared with Financial Accounting, the information provided by Management Accounting is for dynamic trend, rather than historical information. Management Accounting involves models that based on degrees of abstraction to help managers making decisions, not based on cases like Financial Accounting does. Also, Management Accounting is providing information for managers within a particular company, it is different to Financial Accounting which provides information for external users such as creditors, public regulators and shareholders. Information provided by Management Accounting is not publicly reported, it is confidential and only used by internal managers. Moreover, Management Accounting usually uses management information system to fulfill different managers' needs, whereas Financial Accounting often refers to general financial accounting standards. This essay will firstly discuss management accounting base on the papers published by Chandler (1977) and Hoskin & Macve (1990), then one innovation in management accounting will be discussed (the balanced scorecard). Finally a conclusion will be made.
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The Transformation of Large 'Modern Business Enterprise'
In 1977, Alfred Chandler published a very famous book that is called "The Visible Hand". This book has now become an important academic resource in the field of management accounting. In the introduction to this book, Chandler (1977) was particularly interested in one thing: the transformation of the American economy. He stated that the transformation was from more of less theoretical models of competitive companies to a group of large corporations. Chandler (1977) defined the modern business enterprise with two most significant changes: a) the corporations all have many levels of management with different level of power, rather than the traditional organisational structure where only the top management has all the decision powers; b) the organisations are all managed by salaried executives, unlike before where managers were limited to the corporation owners and shareholders. Such changes happened very quickly at the end of the 19th century. Chandler (1977) suggested that the competitive market which was driven by 'the invisible hand' turned into a market full of oligopolies, and the resources become controlled by the corporate managers, therefore, 'the invisible hand' suggested by Adam Smith has become 'the visible hand'. Chandler (1977) proposed 8 propositions to show the process of transformation:
In the America, when administrative coordination yield higher rate of profits than market mechanism coordination, the traditional organisations were replaced by the modern multi-unit enterprises.
The multi-unit enterprises created managerial hierarchies.
When the economic activities increased to a certain level, administrative coordination became more efficient than market mechanism coordination.
The managerial hierarchy created by these organisations became a source of power, permanence and sustainable growth.
Such process made manager including accountants become more technical and professional.
Because of the 5th proposition, the multi-unit businesses increased in size and their diversity, and different management including accounting were separated from the ownership.
Rather than increasing current profit, managers started to focus on the long term growth of the organisations.
As these enterprises grew, they altered the basic structure of major sectors and of the economy as a whole.
What is more, Hoskin and Macve (1990) suggested that managers have to become 'literate', which means that they have to be able to perform their roles by using writing-based organisational systems. Meanwhile, they suggested that "to undergo a formal Management Education is to go back to the source: competition, fear of failure, norms, tragets, success, status." (Hoskin & Macve, 1990, p22).
The Balanced Scorecard
During the period of recent decades, the field of management accounting has developed many innovations and new ideas, including activity based management, strategic cost management, economic value added and target costing. Such concepts have become more and more popular and are regularly discussed in different management accounting books. Nowadays, these concepts have also been introduced into practice in many organisations. One of the innovations in management accounting stated by Seal et al (2012) is the balanced scorecard. Balanced Scorecard was originally introduced by Robert Kaplan and David Norton. Traditionally, financial reports provided information to show how an organisation performed historically, but not much information offered about how the organisation might perform in the future. For instance, an organisation may choose to slow down the delivery time in order to increase current profit rate. However, this action may result in decreased earnings in the future due to reduced customer satisfaction. In order to solve this issue, as a performance measurement system,the balanced scorecard does not only consider beyond standard financial measures, but it also take customer, learning measures and business process into consideration: a) Financial perspective: involves measures including economic value added, operating income, and return on capital employed; b) Customer perspective: involves measures such as customer retention, market share in target segments, and customer satisfaction; c) Learning and growth perspective: involves measures including employee retention, skill sets, and employee satisfaction; d) Business process perspective: involves measures including quality, throughput, and costs etc. These four perspectives can be concluded in a diagram, which is shown as Diagram 1. Diagram 1 showed that balances exist between internal and external measures; subjective and objective measure; and performance results and the drivers of future results. There is not only involvement of these four perspectives, but also a logic link. Because learning and growth improves the business processes, which lead to a better value to the customer, which again in turn improves the financial performance.
Always on Time
Marked to Standard
Diagram 1: Balanced Scorecard
There are many advantages of the balanced scorecard. Firstly, by analysing the four perspectives of the overall performance, organisations are able to obtain a balanced view of organisational performances. Compared with the traditional methods which only analyses if the finance situation is healthy or not within a company, the balanced scorecard provides a more overall picture for organisations to find out if they are moving towards their organisational goals. The balanced scorecard enables organisations to notice not only the financial performance, but also other perspectives such as level of customer satisfaction, the business processes, and employee training etc. What is more, the balanced scorecard method does not only look at the immediate future, it evaluates the organisational performances in a more dynamic way. If an accountant notices that the organisation is not doing well and he/she has realized the financial bottom line, usually the suggestion provided to managers are to solve the immediate issues. Such actions often ignored the long term effects to the organisation. The balanced scorecard approach enables the organisations to make better decisions for their objectives at short, medium and long run at a glance. Last but not least, by applying the strategy of a balanced scorecard, the organisations can make sure that the strategic actions they implemented will results in the outcomes that they desired. For example, the organisations can asked themselves: will increase the price of a particular product contribute to the companies in the long run? The answer will depend on whether the consumers are happy about the product, or whether the processes associated with making that product improve the quality of that product. On the other hand, a few researchers have suggested there are also disadvantages to the balanced scorecard approach. Firstly, this method may be time consuming, as organisations have to plan out their objectives for each perspectives, then break the objectives down and finally decide how to reach the goals. Secondly, even though the balanced scorecard provides an overall picture in the four perspectives for organisations, it does not mean that these perspectives build the whole picture. It only involves limited financial information. Therefore, it is suggested that the balanced scorecard has to be a part of a bigger learning and growth strategy for organisations. Finally, the same balanced scorecard does not apply to all organisations' situations. It is strongly recommended that organisations need to realise their own metrics, otherwise the balanced scorecard may be meaningless. Moreover, many academic researchers argue that the cause-and-effect relationship between indicators on the balanced scorecard cannot be supported. Some indicators will not necessarily lead to a satisfactory outcome. For example, customer satisfaction and increased level of profit. Also, academics suggested that the balanced scorecard does not take competitors' actions into consideration, thus it does not offer a specific remuneration system. The balanced scorecard approach has a closed relationship with modern business enterprise. As we discussed in the previous section, management became separated from ownership. Thus the balanced scored card has offered organisations to have a overall picture, then give different tasks to managers with different responsibilities. Therefore, the balanced scorecard to some extent encourages organisations to transfer to one of modern business enterprise.
In conclusion, this essay has reviewed the book published by Chandler (1977), and the article wrote by Hoskin & Macve (1990). By discussing the suggestions and analysis stated by these authors, the key features of the structure and processes that involved in the transformations of modern business enterprises have been defined. Chandler (1977) proposed eight propositions that he thought changed the UK business market from a market driven by 'the invisible hand' to a market that the managers allocating the resources, so that the market is replaced by 'the visible hand'. Hoskin nd Macve (1990) in addition suggested two other factors influenced the market. Also, one of the recent innovation in management accounting - the balanced scorecard is critically discussed, and the evidence showed that the balanced scorecard approach has to some extent transformed businesses who adopted this approach into one of the modern business enterprise. However, there are some concerns when using this approach. In my opinion, the field of management accounting still has a lot to be discovered, and its innovations are always closely associated with the market situation.
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