The role of Management Accounting and its challenges

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Section A:

Identify and discuss challenges that may be encountered, and explain briefly the effects of the challenges on the roles of Management Accounting functions in today’s organization.

Management accounting is concerned with the procurement of information to individuals within organization to help them make better decision and enhance the effectiveness and adequacy of existing operations. It allows more flexibility than financial accounting but also includes additional challenges which are competitive environment, obsolescence of traditional cost accounting and changing product life cycles, impacts of information technology (IT) and customer orientation.

Nowadays, business environment is changing faster than ever before, and the companies' success in the market depends on the timely possession of quality information. According to Carmen, competitive management accounting is an especially important to management accounting source of information for acquiring competitive benefit, and is the extended arm of strategic management accounting. The largest challenge for managers in the contemporary business environment seems to be collecting the information on present and potential rivalry to maintain the company's competitive position and determine the strategy aimed at enhancing future competitiveness. (Malinić, Jovanović, & Janković, 2012) With its competitive information, management accounting enables the organization to comprehend and recognize the improvement or sales strategy of the rivalry. However, in order for competitive management accounting to meet the requirements of organizations, it is important to know what it is that drives rivalry, and what impact it has on business operations. (Malinić, Jovanović, & Janković, 2012)

The obsolescence of the traditional cost accounting may be encountered as a challenge in today’s organization. According to Carmen, cost control is an efficient way to diminish the cost of those activities which do not bring the expected result and it is not only restricting them. Traditional cost accounting heeds the tracing of direct expenses on cost object and an overhead costs allocation. It has a tendency to concentrate only on production costs, not paying attention to alternate costs. (Carmen, N.D.) It is useful approach as long as the indirect expenses amount is diminished. Today, the indirect costs increased, the main expenses which can be traced without equivocation on cost object are perhaps the raw material costs. (Carmen, N.D.) According to Carmen, the efforts made for removing those costs which don’t increase the value to the product or service ought to be oriented to the entire value chain, which can support managers to distinguish the opportunities for cost reduction. On the other hand, more market contributes to the product differentiation to meet the consumer needs. The changing product life cycle will appear in the organization. The products or services diversity, as well as the customers, can immediate to the complexity growth of the operations. A successful organization must now speed up the rate at which they introduce new products to the market. According to Carmen, developing rivalry in all areas has brought to the reducing of undertakings result. In these condition (the demand and manufactured products diversity, decrease of product life-cycle, improvement of support activities, the development of overhead cost importance etc.) the cost decided through traditional cost accounting substantiate itself reasonable only in enterprise with a relatively moderately production system, which manufacture a small number of products and direct cost have an important amount.

The next challenge will face is impacts of information technology (IT). Information Technology is a powerful tools that huge influence in making an organization’s business a successful. We can see the impact of the technology in many business areas such as exchanging, distributed, recording and many more. Connor & Martinsons (2006) commented that information technology is a precious assistance because they provide information for making decision. (Moorthy, Voon, Samsuri, Gopalan, & Yew, 2012) Micheal Gilman (2003) discussed data mining technology and the importance of IT in providing higher efficiency resulting in improved business decisions. (Moorthy, Voon, Samsuri, Gopalan, & Yew, 2012) According to Moorthy et al., 2012, application of IT in management accounting has changed the perspective of traditional management accounting but it also face the lack of awareness and understanding of technology available and suitable based on organization to be adapted in management accounting. Besides, the impact of the internet was develops e-commerce and lend to the change of financial framework, markets, consumers’ segmentation and behaviour and employment market. (Carmen, N.D.) Peter Drucker thinks that “in time, the e-commerce will kill the traditional multinational companies” (Druker, 2004, p.65), because it is important to reorganize these organizations, totally different than it is now. (Carmen, N.D.) According to Moorthy et al., 2012, the main effect of IT is organization’s profits but the implementation of new technologies may reduce organization’s income, as the implementation is costly depending on the technology adopted. There is a risk to the organizations that if inadequate technology is chosen. However, management and accountants have to study the attainability and the usefulness of the framework before the usage of IT in management accounting.

Last but not least, management accounting likely faced customer orientation. In contemporary market economy, the achievement of an organization depends basically on its capacity to produce products and services that meet the needs and desires of consumers and to perform it better and more adequately than competitor. (Malinić, Jovanović, & Janković, 2012) According to Carmen, all the organizations are acting on the market, the place where all the exchanges are deployed and their competitiveness is appraised. The market is the place where the consumers’ wishes and producer’s wish will meet. Organization must perceive that customers are crucial to their future achievement. This has resulted in the organizations making customer satisfaction an overriding priority and to concentrate on recognizing and achieving the key success factors that are important to be successful in today’s competitive environment.

Carmen, A. A. (N.D.). Challenges of a dynamic and compex environment on management accounting. Annals of Universty of Oradea, Economic Science Series.

Malinić, S., Jovanović, D., & Janković, M. (2012). Competitive Management Accounting - Responses to the Challenge of Strategic Business Decision Making. Economics and Organization Vol. 9, No 3, 297-309.

Moorthy, M. K., Voon, O. O., Samsuri, A. S., Gopalan, M., & Yew, K.-T. (2012). Application of Information Technology in Management Accounting Decision Making. International Jornal of Academic Research in Business and Social Science, Vol. 2, No. 3, 1-14.