Challenging the usefulness of traditional management information systems Essay

The altering economic environment coupled with increased planetary competition and the outgrowth of new fabrication engineerings has challenged the utility of the traditional direction information systems. The recent old ages have been characterized by a batch of unfavorable judgment and re-examination of direction accounting patterns and methods. The managerial cost accounting techniques have been related to the losingss that companies have been doing in the past old ages. This has led to the push for the acceptance of strategic cost direction techniques by industries and business communities likewise.

Many recent surveies have questioned the rightness of the traditional managerial cost analysis techniques. Tolerate ( 1983 ) contended that traditional cost analysis methods undermines production and is the figure one enemy of productiveness. Besides, harmonizing to Cooper and Kaplan ( 1988 ) , the traditional techniques may no longer be valid as the production procedure alterations. They argue that these techniques have failed to offer relevant, utile and timely information about concern activities that the direction needs for planning and control activities. The managerial accounting attack has used direct labour as an allotment base for costs, which is normally inappropriate ( Shark and Govindarajan, 1988 ) .

The new strategic direction theoretical account involves a batch of accent on activity based costing, cost direction system, advanced fabrication engineering cost planning and control. Besides strategic cost measuring signifiers portion of it ( Brinker, 1990 ) .

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Managerial cost analysis involves the proviso of information to troughs and other people who are inside an organisation and who are straight involved in every twenty-four hours control of the activities and operations of the company. Managerial cost analysis frequently employs old theoretical accounts of rating and control which do non offer meaningful advice in the current universe.

Managerial cost analysis provides direction with some indispensable informations to run the organisation some of these studies provide seasonably and frequent updates of relevant information for determination devising such as gross revenues, capacity use and may travel. Other studies provide information on concern chances or chances.

Strategic cost analysis involves the proviso of high quality, seasonably and relevant information that is necessary for determination devising. Some to the of import information provided by strategic cost analysis theoretical accounts include basic engineering, age of equipment, productiveness degrees, and economic systems of graduated table and experience curve effects, issues to make

Evaluation of the extent to which the passage from managerial cost analysis to strategic cost analysis has been achieved.

A displacement from the short term managerial cost analysis to the really long term strategic cost analysis has been implemented by most houses. Most companies have worked difficult to implement the behavior of outlining ; execution and rating of cross functional determinations which enable organisation achieve their long term aims. The mission, vision, policies and programs of the organisation are structured to accomplish the long term aims which will non merely guarantee net incomes but will impel the company frontward in many old ages to come.

The displacement from the traditional to the modern strategic but analysis has non been an easy causing. The extremist alterations in alteration the attack to their concern running techniques.

Cost control is the major mention point between the traditional and the advanced attack ( Muller, 2001 ) . While cost control and net income maximization has been the end of many houses many of import countries of the house are looked at these include but non limited to inbound and outbound transportation costs, alterations in rising prices and foreign exchange rates, rewards and productiveness degrees and monetary values of natural stuffs, activity costing, life rhythm cost analysis and many more.

This recognizes than in the modern universe of manifest life, riotous events such as quality control failures and machine dislocation can be really dearly-won to the company. This will take to increased labour idle clip and decreased productiveness. As a consequence the fringy net income per merchandise goes down, therefore cut downing the lucks of the company.

Unlike the strategic cost direction method above, managerial cost analysis did non look much into the happening of such things as this made it impossible to maximise net incomes made by the companies.

Traveling from the traditional method to the modern strategic cost direction methods was non easy investing in modern machinery, acceptance of high quality cost control measures, seting in topographic point everyday care cheques and many more have to be practiced. This needs extra money to finance all these. This has been a challenge but with the cooperation and willingness of fiscal establishments to offer funding, such worthwhile investing has been made possible and the operational efficiency of the houses has been enhanced.

Throughout, the activities of the house are consistent with the outlooks of direction and these in bend are with the market and the content ( Arieu, 2007 ) .

Activity based costing ( ABC ) . This is one technique that is applied in the modern strategic cost direction this technique puts less accent on direct labour as a cost driver. However, it concentrates on those activities that really drive costs such as the proviso of a service or the industry of a merchandise constituent that will organize portion of a finished merchandise.

Activity based bing purposes at following all those modern techniques that dive costs down. For illustration the acceptance of merely in clip system which does non ask the purchase of inordinate natural stuff s which will do it possible to salvage on storage and managing cost. Orders are made for those stuffs which are merely plenty to b vitamin E supplied to the market. No excess of any sort is to be entertained.

In managerial cost accounting, direct labour formed the major cost driver. Other factors were less looked at and major disbursement was on labour. This was due to increased idle clip, high labour rate discrepancy and wastages as a consequence of rich person unqualified labour grip of import production procedures.

While traveling from the managerial cost accounting to strategic cost analysis methods a batch of alterations had to happen. The acknowledgment of the fact that labour is non a cost driver was to be recognized. Then, other inefficient processs, other than direct labour had to be placed every other clip.

“ Strategic cost direction and rating is an on-going procedure that evaluates and controls the concern and the industries in which the company is involved ; assesses its competition and sets ends and schemes to run into all bing and possible rivals ; and so reassesses each scheme yearly or quarterly to find how it has been implemented and whether it has succeeded or needs replacing by a new scheme to run into changed fortunes, new engineering, new competitions, a new economic environment or a new societal fiscal or political environment ” ( Lamb, 1984 ) .

A batch of uninterrupted ratings into the fabrication procedures had to be done. This involved costs. Another hindrance was the cost together with the conservative policies of many concern proprietors. Those who failed to implement alterations were forced out of concern while the few staying 1s had to move fleetly to avoid traveling under.

Majority of the houses have learned to appreciate this strategic cost direction construct and have all appreciated it as a manner of increasing efficiency and during costs down. A displacement the manner troughs think ground and act has been influenced a batch by the acceptance of the activity based bing techniques. So it is possible to acquire the existent cost of a merchandise based on this method and besides it is possible to confront the rivals good through the acceptance of this method.

Discrepancy analysis. Managerial cost analysis techniques employ those methods that it easy for directors to compare the existent and easy for directors to compare the existent and the planned outgo. This is normally on a term footing such as 4 months a twelvemonth or so. The aims are non normally on a really long term footing, unlike the current attack in strategic direction which involves many other factors to guarantee that the house achieves its aim of decreased disbursement hence doing it possible to work within the budget.

Since many disbursals are as a consequence of inefficiency strategic direction theoretical accounts aim at decrease of disbursals in the long tally. It seeks to cut down incidences of dislocations idle labour clip and many more. In the long tally such inefficiencies are looked at ; disbursals will be kept at bay.

Strategic cost direction besides entails accomplishing higher production degree at a lower cost. Through instruction in wastage, increased machinery capacity, reduced down clip and many more, a batch can be achieved.

The paradigm displacement from the managerial cost analysis techniques to the strategic cost analysis methods requires both human and fiscal resources, which is dearly-won to bulk of the houses concerned. However, due to the importance of these modern methods to concern, a batch of attempt has been made to follow them. Up to now, some houses are to the full compliant while others are at different degrees of conformity.

Value concatenation direction. This old and out-of-date theoretical account of managerial cost analysis did non concentrate much on the consumer merchandise or even a distribution channels. This led to take down value for money for the consumer, increased pricing and inefficiencies.

“ Value concatenation analysis fundamentally focuses on value creative activity by placing value activities such as, house substructure, procurance, engineering, human-resource direction, in-bound logistics, operations, out-bound logistics, gross revenues and services and seeks to set up linkages among these activities to accomplish optimum efficiency in footings of cost and benefit. In a larger sense this attack can be extended beyond the house so as to include the providers ‘ value concatenation, channels value concatenation and clients ‘ value concatenation. “ ( Ramana, 2004 )

However, strategic cost direction technique has non merely led to increased public presentation but besides a complete transmutation across the value concatenation. The strategic cost direction theoretical accounts play a bigger function in the concern processor that influences determinations on pricing and profitableness across many dimensions.

The best industry criterions is adopted by the strategic cost direction theoretical accounts and modern cutting border technique such as value concatenation costing, outsourcing and service bing have arisen, as a consequence.

In strategic cost accounting some other extra factors are looked at. For illustration, the economic systems of graduated table and experience curve effects are keenly considered by the direction. This has non been the instance with the direction cost analysis which does non look at what happens when production is done at a degree which is lower than the desired. Besides issues that trades with the worlds of the company devising losingss in instance of undependable and unpredictable exchange is besides an of import component in long term strategic direction.

The acceptance of cheaper methods of making concern such as provider consolidation and electronic buying have been looked at as a displacement from the traditional managerial cost accounting to an up to day of the month method to the modern strategic method. This method comes with its ain costs as consolidation of the supplies is encouraged every bit good as other cost cutting steps such as Kaizen.The usage of cutting border engineering to guarantee that the right natural stuffs are obtained from the right providers at the cheapest rates possible has been advantageous to many firms.However, the degree of execution of this policy by many houses is still desiring because non many houses have adopted them. Buying has been regarded as a most sensitive country that senior directors should look into with a batch of cautiousness. It will make up one’s mind many things in the value concatenation. For illustration, if low quality natural stuffs are obtained at high monetary values, the concluding merchandises will be of low quality.Again, the clients will pay at a higher monetary value and this will offer the rivals an advantage and the market can easy be lost.Furthermore, client trueness will be lost and this will hold a negative impact on the company in the long term.

For a displacement to happen from the traditional to the modern strategic cost analysis method, it will necessitate that the house invests in modern engineering every bit good as invest in extremely qualified forces that can travel frontward the policies of the house. This has non been easy particularly for little houses, so many of them have decided to implement in stages. Full one off execution is possible with immense sum of capital nowadays, but will the easy entree to funding ; companies can take advantage of this and better on their competitory advantage.


Thin accounting: When issues of mass production are mentioned, the term thin accounting is more used and it involves monolithic production at lower costs. While it was chiefly used with the old direction cost analysis, a displacement has occurred and today, it is one of the strategic cost direction tools. It has really many advantages when incorporated with other strategic direction methods.

Resource ingestion accounting: This is a really dynamic, integrated strategic cost accounting attack which provides directors with the information needed for determination devising. This method pushes companies to follow disciplined methods of running concerns and has been adopted by many houses because it plays a batch of function in cutting down costs.

Transportation pricing: This is a cardinal direction accounting construct applied in delegating values and gross ascription to the many bing units within a concern. It is chiefly used in banking and fabrication concerns. In a bank, it is the really best manner of delegating thee involvement rate hazard that the bank has to transport as a consequence of the assorted loans it receives and besides those which it gives out. For illustration, a bank ‘s corporate exchequer section will delegate support charges to the concern units for their usage of the bank ‘s resources when they make loans to clients. It will besides delegate funding recognition to concern units who bank their sedimentations in the bank. This method is proactive and has a wider application in many sectors of the economic system. This method is besides used to bring forth histories for section concern units which can hold many utilizations both internally and externally.

By and large, the displacement from managerial to strategic cost analysis techniques has non been easier for many houses. While those who had the resources made a speedy displacement, others had to near it in stages hence the degree of execution between different houses all over the universe is different

A successful debut of strategic cost direction in the power sector

Unrealistic pricing policies in the power sector, together with deficiency of commercial orientation have led to many electricity boards doing losingss. Many in the companies in the United States made losingss when using managerial cost accounting techniques. The hapless public presentation is as a consequence of widening spread between the cost and the duty of the power, reduced works burden factoe, high transmittal and distribution costs and the failure

By following the strategic cost direction methods, it became possible to interrupt the complex construction of the distribution companies into more manageable units, and some little zonary direction units were put in topographic point.

Again, a regulative mechanism which determined the proficient and fiscal parametric quantities for public presentation, the guidelines for duty scene, and besides map as a moderator to equilibrate the involvements of all stakeholders in the sector.Furthermore, greater accent was put in topographic point to promote greater engagement by the private sector in electricity coevals and distribution. To accomplish its aims, the boards had to look into a critical constituent of strategic cost direction: Value concatenation analysis. The value concatenation for any house in any concern is wholly linked to the values of all the activities of the house from the basic natural stuffs to the terminal merchandise, which reaches the consumer.

“ Value concatenation analysis ( VCA ) has been widely used as a agency of depicting the activities within and around an administration, and associating them to an appraisal of the competitory strength of an administration. One of the cardinal facets of value concatenation analysis ( VCA ) is the acknowledgment that administrations are much more than a random aggregation of machines, money, and people. Furthermore, these resources are of no value unless deployed into activities and organised into modus operandis and systems, which guarantee that products/services are produced which are valued by the concluding consumer. In order to understand the built-in strengths of concern one has to place the value activities within and outside the place of the value concatenation and investment in cutting border engineering in the Organisation. “ ( Ramana, 2003 )

Value concatenation analysis puts more accent on the ability of the house to follow much accent to last. Some of them are: Pull offing the cost drivers better than their rivals, altering the

When this technique was implemented, the consequence was improved net incomes, reduced wastages, high consumer satisfaction and general betterment of the public presentation of the companies. Both the transmittal and production of power were transferred to a private company which runs it productively unlike when the authorities was runing it.

As a consequence, efficiency in distribution was obtained as more was added to the value concatenation than it was before when the traditional managerial cost accounting methods were being adopted.

The value concatenation perspective provides a batch of information which can non be provided by other traditional methods. The older theoretical account provides unequal information as shown below ( Beginning: Ramana,2003 )

Gross and Cost

Amount ( $ )

Entire Gross from the sale of Power


Less Purchase of power


Gross Margin


Less Outgo

Distribution and Admin Expenditure






Net income before revenue enhancement ( loss ) ( 401 )

As seen in the above tabular array, the information may non supply a batch of intending for managerial determinations. It does non even supply some extra accounts hence it is difficult to be understood. It can non demo the place of the gross, the per centum of distribution outgo and even if it is possible or non to cut down the power cost.

Based on the above, it ‘s non easy to state which concern is profitable, unless there is inter unit transportations of power from the transmittal unit to the concern unit. This monetary value can be determined on the monetary value determined by the regulator, or at a monetary value which is determined by the predominating market conditions.

Adoption of value concatenation position

When the value concatenation position is adopted, a batch of meaningful information for determination devising is presenter as shown in the tabular array below which offers more information for determination devising. . ( Source Ramana, 2003 )