Role and Practices in Management Accounting Today Essay

Managerial Accounting | | | | | |Role and Practices in Management Accounting Today | | | | | | | | | Table of Contents 1. Definition3 1. 1 Management Accounting As Practice3 1. 1. 1 Strategic Management:3 1. 1. 2 Performance Management:3 1. 1. 3 Management Accountant and Risk Management:3 2. Scope/Aim of Management Accounting4 3. PURPOSE OF MANAGEMENT ACCOUNTING—THE STRATEGIC TRIANGLE5 4. Traditional vs. Innovative Management Accounting Practices5 4. 1Traditional and Innovative’ Management Accounting Practices. 6 5.

Management Accounting and Decision Making7 5. 1Decision Making and Risk7 5. 2Management Accountant Role in Decision Making Processes7 5. 3Qualitative and Quantitative Analysis8 5. 4Role of Management Accountant8 6. Role of Management Accountants within the Corporation9 6. 1Activities of management accountant9 6. 2Tasks where accountability may be more meaningful to the business9 7. Current and Future Trends of Management Accounting10 8. New ways of management accounting12 8. 1Total quality management (TQM),12 8. 2Just-in-time (JIT) production and purchasing methods. 12 8. 3Activity-based costing. 12 9. CONCLUSION14 10. List of References15 Definition

According to Chartered Institute of Management Accountants (CIMA – UK) Management Accounting is “The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its Resource (economics resources). Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities” (CIMA Official Terminology). The American Institute of Certified Public Accountants (AICPA) describes Management Accounting is The process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities”. 1. 1 Management Accounting As Practice Management accounting as practice extends to the following three areas 1. 1. 1 Strategic Management: Advancing the role of the management accountant as a strategic partner in the organization. 1. 1. 2 Performance Management: Developing the practice of business decision-making and managing the performance of the organization. 1. 1. 3 Management Accountant and Risk Management:

Management accountants are contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization. Scope/Aim of Management Accounting Revised International management accounting Practice 1 (IMAP #1), published in March 1998 by the Financial Management and Management Accounting Committee (FMAC) of the International Federation of Accountants (IFAC) states that “Management accounting is an activity that is interwoven in the management processes of all organizations. Management Accounting refers to that part of the management process which is focused on adding value to organizations by attaining the effective use of resources by people, in dynamic and competitive contexts. Management accountant involves distinctive technologies (modes of thought and practice). It is an integral part of the management process, distinctly adds value by continuously probing whether resources are used effectively by people and organizations in creating value for customers, shareholders or other stakeholders. The field of organizational activity encompassed by management accounting has developed through four evolutionary yet recognizable stages. Figure below shows the four evolutionary stages Figure: The Four Phases of Evolution of Management Accounting Source: IFAC, 1998: Revised International management accounting practice 1 #1,

Management-accounting systems report the results of operations using financial and non-financial measures. These systems also help project and plan future operations. The company ABC for examples need some information to have new product these include better product cost data and metrics of on-time delivery of products. These items exemplify two of the many measures dealt with in management accounting. Cost is an example of a measure expressed in financial terms, while on-time delivery is an example of an operational measure. PURPOSE OF MANAGEMENT ACCOUNTING—THE STRATEGIC TRIANGLE The fundamental purpose of management accounting is to help an organization achieve its strategic objectives.

Meeting these objectives satisfies the needs of its customers and other stakeholders. Typical stakeholders include shareholders, creditors, suppliers, employees, and labor unions. Strategy is the way that a firm positions and distinguishes itself from its competitors. Positioning refers to the selection of target customers or markets. Distinctions are made on the three dimensions of quality, cost, and time. Different customers have different expectations about the features and performance reliability (quality) they want in a product, the price (cost) they are willing to pay, and when and how quickly they want the product or services delivered (time). Example

An ice cream company, such as Hagen Dazs, specializes in premium high-butterfat content and high-priced ice creams. Hagen Dazs is quite different from Lady Lee which makes an everyday variety of low butterfat and lower-priced ice creams. The two companies compete for different types of ice-cream consumers. Hagen Dazs also competes more directly with Ben & Jerry’s on providing a high-quality premium Ice cream, at the best price (cost), with timely introduction of new flavors. A typical statement of strategic objectives contains elements of both positioning and distinction. Traditional vs. Innovative Management Accounting Practices Traditional managerial accounting systems are mainly designed to measure the efficiency of internal processes.

Conventional management accountant’s principal performance report was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs and revenues during a production period However, much has changed, in today’s Managerial Accounting it has become the most intellectually challenging area in the field of management, and the most turbulent one. All these new accounting theories and practice aim at turning the accounting data into information highway for management decision-making planning development and process. “An effective managerial accounting system should be able to assist managers in planning, coordination, control, performance measurement, and motivation by providing information that would change the decision on hand and add overall value to the enterprise” (Drucker, 1992, The king of Management Gurus).

Knowledge base life cycle cost analysis of the product for example and as for the service based industry. Activity-based costing is the strategic depth of modern day Managerial accounting practice integrated with third generation balanced scored card for bottom line strategies. 1 Traditional and Innovative’ Management Accounting Practices. Traditional and innovative management accounting can be illustrated by reference to cost control techniques. Cost accounting is a central method in management accounting, and traditionally, management accountants’ principal technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period.

While some form of variance analysis is still used by most manufacturing firms, it now a day’s tends to be used in conjunction with innovative techniques such as life cycle cost analysis and activity-based costing, which are designed with specific aspects of the modern business environment in mind. Life-cycle costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product life-cycle (i. e. , before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product.

Activity-based costing (ABC) recognizes that, in modern factories, most manufacturing costs are determined by the amount of ‘activities’ (e. g. , the number of production runs per month, and the amount of production equipment idle time) and that the key to effective cost control is therefore optimizing the efficiency of these activities. Activity-based accounting is also known as Cause and Effect accounting. Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events (such as machine breakdowns and quality control failures) is of far greater importance than (for example) reducing the costs of raw materials.

Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, such as the provision of a service or the production of a product component. Management Accounting and Decision Making In management accounting, decision? making may be simply defined as “Choosing a course of action from among alternatives. If there are no alternatives, then no decision is required. A basis assumption is that the best decision is the one that involves the most revenue or the least amount of cost. ” The task of management with the help of the management accountant is to find the best alternative. 1 Decision Making and Risk It may be noted that every decision involves a certain degree of risk. Very few decisions are made with absolute certainty.

So a good decision would be to choose a solution with the highest probability of success and in accordance with the goals, desires, lifestyle and values etc. 2 Management Accountant Role in Decision Making Processes There are six main steps which management accountant follows in decision-making processes 1 Clarify the decision problem. One must be clear about the problem. One must look for the root cause or hidden problem rather than the apparent problem. Some skill is required to define a problem in such terms that can be addressed effectively. 2 Specify the criteria. After clarifying a problem, criteria must be specified for decision-making. What is the objective: maximize profit, increase market share or social service. 3 Identify alternatives. Explore all alternatives, their pros and cons.

This is a critical step in the decision making process. 4 Develop a decision model. This is a simplified version of the problem. No irrelevant information, only factors relevant to the problem is highlighted. It brings together all elements of a problem like the criteria, the constraints, and the alternative. 5 Collect the data. Relevant data must be collected to incorporate objectivity in the process. It may be primary data or secondary data. But it must be up-to-date, timely and accurate. 6 Choose a decision. One all formalities are completed, requisite information obtained and processed, a most suitable or appropriate choice should be selected.

Following diagram shows the decision making processes in management accounting 3 Qualitative and Quantitative Analysis Management Accountant mostly deals with financial data. But they also maintain records of physical units produced and quantities of raw material consumed, labor hours used. In addition, they asses’ qualitative factors such as employee morale, customer’s satisfaction, image of the company in the eyes of the public. 4 Role of Management Accountant A management accountant is a member of cross functional team and, having un-restricted access to MIS, makes a contribution by providing facts and figure which bring objectivity to the report.

Besides, a management accountant would ensure that the information must be relevant (pertinent to the decision problem); accurate (precise); and timely (arrive in time for the decision to be made). Companies will occasionally trade-off accuracy for timeliness. Role of Management Accountants within the Corporation Management accountants are responsible for managing the business team and at the same time having to report relationships and responsibilities to the corporation’s finance organization. 1 Activities of management accountant The activities of management accountants involve forecasting, planning, performing variance analysis, reviewing and monitoring costs inherent in the business. 2 Tasks where accountability may be more meaningful to the business

Management team vs. the corporate finance department are the development of new product costing, operations research, business driver metrics, sales management score carding, and client profitability analysis. Conversely, the preparation of certain financial reports, reconciliations of the financial data to source systems, risk and regulatory reporting will be more useful to the corporate finance team as they are charged with aggregating certain financial information from all segments of the corporation. One widely held view of the progression of the accounting and finance career path is that financial accounting is a stepping stone to management accounting.

Consistent with the notion of value creation, management accountants help drive the success of the business while strict financial accounting is more of a compliance and historical endeavor. In corporations that derive much of their profits from the information economy, such as banks, publishing houses, telecommunications companies and defense contractors, IT costs are a significant source of uncontrollable spending, which in size is often the greatest corporate cost after total compensation costs and property related costs. A function of management accounting in such organizations is to work closely with the IT department to provide IT Cost Transparency. The following chart shows the management accounting practice in different sectors of industry in Europe. [pic] Current and Future Trends of Management Accounting

Management Accounting is the wave of the future because of the new management techniques of total quality management, just-in-time manufacturing and activity-based costing. There is no doubt that the public now has a much better understanding of the profession of management accountancy and the capabilities of Institute members. Sharma (1998) reports on research conducted by Chenhall and Lang field-Smith, involving a survey of 140 manufacturing firms in Australia. A number of current and future trends in management accounting tasks and activities were observed, and are presented in Table below . Current and Future Trends in Management Accounting Current Trends |Future Trends | |High Emphasis |High Emphasis | |Budgeting for Planning and Control |Budgeting for Planning and Control | |Variance Analysis |Variance Analysis | |Capital Budgeting |Capital Budgeting | |Return on Investment Techniques |Return on Investment Techniques | |Absorption Costing |Moderate Emphasis | |Variable Costing |Balanced Scorecard | |Moderate Emphasis |Customer Satisfaction Measurement | Balanced Scorecard |Activity-based costing and management | |Customer Satisfaction Measurement |Shareholder Value analysis | |Low Emphasis |Benchmarking | |Activity-based costing and management |Absorption Costing | |Shareholder Value analysis |Variable Costing | |Benchmarking | The role of Management Accounting in the future looks good. Management Accounting is going to be the wave of future for accounting. Because of new management techniques, accounting has become more vital to the company as a whole. [pic] New ways of management accounting New management accounting techniques includes the followings 1 Total quality management (TQM),

Customer satisfaction comes first when dealing with total quality management. The quality of the company, the product and the company’s service is determined by the customer. This new management technique affects accountants who have to report and measure the employees’ performance as a whole. Product cost, service delivery and product reliability are all measured under total quality management. Management Accounting’s need is increased due to the frequent follow up reports required by managers. This need affects the accountant because his or her job is to provide the vital performance statistics. This is one reason why Management accountings future looks bright. Just-in-time (JIT) production and purchasing methods. The just-in-time method deals with the cut back of warehouse inventory. When a product is needed, it is then produced. Keeping inventories to a minimum reduces the need for large warehouses which can be beneficial to both small and large companies. The accountant’s time is now more able to be spent on managerial activities and less consumed with inventory. The just- in-time method leads to an increase in Management Account reports which can quickly generate cost estimates. There are so many companies who are using activity based costing some are listed below • Harley Davidson • Toyota Motor Company • General Motors • Ford Motor Company Manufacturing Magic Hawthorne • Management Consulting • Strategy Manufacturing Inc. 3 Activity-based costing. Activity-based costing continues with the new wave of management techniques. This form of costing is much more detailed and difficult to master but the cost numbers are more accurate. This product costing method is becoming more widely used, especially in the computer industry where direct labor costs are low and competition is high. Accountants are required to give more specialized reports that deal with the company and its production and management. These various types of management styles pull accounting into the company process more easily.

Accounting has become an actual part of the management process; therefore, the need of Management Accounting has grown in proportion to the new management styles. Accountants are now becoming a larger part of cross functional teams and are being used more in the decision making process. In July 2005, a study was conducted among Better Management members (USA) to determine the state of Activity Based Costing. An on-line survey was completed by 528 participants from companies across various industries, sizes, geographies and job levels. Following chart shows the industry vise Activity based costing practice Currently Using or Considering ABC (By industry) [pic] CONCLUSION

The results of this study clearly show that those working as a management accountant perceive their role more dynamic, and points to evidence that the change is mainly in the tasks that management accountants must undertake. Much more emphasis is being placed on strategy and decision-making roles, rather than the mere traditional areas of costing and financial analysis. The one traditional area to remain high on the list of key areas for management accounting is budgeting. Interestingly however, many of the various contemporary techniques that have been developed in response to the changing requirements of management accounting were not seen by the respondents to this study as being particularly useful.

Activity Based Costing, Balanced Scorecard, Economic Value Added, and Benchmarking were all cited as not currently used and unlikely to be used in the future. Performance Indicators was one of the few techniques respondents felt might be useful. The major implication of this study is that current ‘solutions’ to management accountants’ need for relevant skills, techniques and practices are not apparently useful. The results support most prior studies in suggesting that more emphasis needs to be placed on developing the personal skills rather than technical skills – management accountants need skill in communication, analysis, creativity and adaptability.

It seems that there is a need for more emphasis on the ‘management’ than the ‘accounting’. The challenges for the accounting profession are to find ways of developing such characteristics. By the end of this decade, management accountancy and auditing will be seen as full and equal partners within the wider accountancy profession. Management Accounting is becoming as vital as financial Accounting and will become more and more vital in the near future. List of References For the purpose of my research work I used the information available from various sources including books, news papers and internet. IFAC, 1998: Revised International management accounting practice Malaysian Institute of Accountants

American Institute of Certified Public Accountants (AICPA) Chartered Institute of Management Accountants (CIMA – UK) www. todaysfinancialnews. com www. gulfnews. com www. wikipedia. org [pic] ———————– Cost Determination and Financial Control Information for Management Planning and Control Reduction of Waste of Resources in Business Processes 1 Creation of Value through Effective Resource Use 2 3 4 Identification of problem Selection of Criteria for solving problem Look for alternatives Dev. Of Decision making model – ! “#TUVWXYZ[]^abcdve? E? E? E¦sEsE? E? E? E~vcPHh? ‘h9″6? %h? ‘h9″5? Collect the data for decision Choose from alternative