Is Management Accounting Relevant to Modern Accounting Environment - Essay Example

Is management accounting relevant to modern accounting environment? Name Institution Abstract Management accounting systems have been faced with a lot of resistance and acceptance with equal measure. The traditional management systems that were applicable after the world war two were mainly cost based management systems. The current management systems are performance oriented. This has brought about a conflict between the two forms of management styles. Various scholars and researchers have differing views of these systems. The modern management systems have become more useful and more suited to the current business environment. This has undermined the popularity of the traditional MAS to a great extent. Introduction The concept of management accounting is a concept that has elicited a lot of debate among various scholars and professionals in the accountancy field over the years. The popularity of management accounting rose with the advancement in industrialization. For a long time, companies and different organizations have adopted and utilized this concept. However, today, many scholars and professionals have started questioning the applicability of the MA concept in solving the management and accounting issues many companies are faced with today. Johnson and Kaplan(1987, p.1) are on the frontline in this in their perception of that MA is “Too late, too aggregated and too distorted to be relevant for managers’ planning and control decisions”. Some scholars agree with Johnson and Kaplan (1987, p.1) by implying that the adage of management accounting systems have been outlived by other forms of contemporary accounting practices. Others differ in opinion and they still think that MAS still has some relevance and applicability to the modern society. This paper explores both fronts and offers an overview of the MAS and its applicability (or not) in the contemporary management and accounting environment. The approach to the discussion offered in this paper will be an investigation into the works (mostly literally) of the various opinion holders in this case. A reflection of this discussion will be offered at the end of this paper (see appendix I). Management accounting defined Before this paper embarks into the discussion of this concept, it is important to have a brief knowledge and background of MAS. MAS refers to the process of providing management information and data that would enable the management to make informed decisions in their control roles. The MAS provides tools for analysis, strategizing, risk management and mitigation as well as planning. Managers in various organizations have applied these tools over time in their capacity to ensure that their organizations are well managed. Management accounting systems and their relevance today MAS have a number of varied roles. Ezzamel et al (2012, p.153) states that the basic role of management accounting was to ensure that managers in an organization have the necessary skills to steer the growth and development of an organization. The four basic functionalities of MAS offer these skills. For instance, analysis tools provide the managers with the necessary capacity to be able to analyze financial information. Risk management tools offered in MAS give the managers the capacity and the capability to detect risk avenues early and take measures to manage or mitigate these risks. These roles have been challenged by the contemporary managers. The modern managers feel that in some way, the various roles and applicability of the MAS have been passed by time. Johnson & Kaplan (1987, p.2) argue that the MAS that are used by managers in the current business world are not wholly tailored to suit the needs of the modern business organizations. So much has changed in so little time to such an extent that applying the same measures of management accounting that people applied over the years may not be very fruitful. Shah et al (2011, p.1) state that the introduction of MAS after the second world war was very instrumental in many organizations and many countries because of the capability of the MAS to offer skills that assisted largely to rebuilding of fallen cities and industries. Many of the companies that survived this war were faced with very stringent conditions of operations. Trying to rebuild themselves required a system of management that rallied across risk management, minimization and strategic development to grow these companies. According to Johnson and Kaplan (1987, p.1), this form of management worked quite well during this period. However, over the years, the business climate has changed. The system of management that was used a long time ago has lost flavor among the modern companies. Most of these anecdotes and policies that were developed by these traditional companies after the second world war were particularly helpful in steering majority of these companies through hard times. The implicit costs of operating and accounting were managed through the application of the traditional management accounting systems. There were several methodologies that were applied in the traditional management accounting systems. Firstly the MAS used the activity based costing (ABC) which related to costing changes in the manufacturing sector. The advancement in the technology levels led to the reduction of the direct costs of production. However, the indirect costs shot up. Costing and cost control was being done at every step of the process. For instance, though the automation of the production process led to the reduction of the labor and labor costs, the costs relating to depreciation of the machinery went up. The MAS used after the second world war were basically instrumental in the mass production industry. These systems allowed companies to produce goods aimed for the masses. The idea was to capitalize on the economies of scale during production. Joan (2009, p.1) states that after the Second World War, there was an explosion of interest into the transition from the traditional labor-intensive methods of production to the adoption of technology. Many of these organizations needed a new system that would allow them to have concrete measures of their accountability. They opted to go for the management accounting systems that were the norm that time. These systems offered them the flexibility and transparency as they desired. The MAS allowed consistent auditing of companies to ensure that they followed strict guidelines. The predictability and process of applicability of the MAS was adopted and embraced by many managers, especially those managing large companies. It was an excellent system of management accounting during this period (Otley 2008, p. 230). The traditional MAS is securely locked to the managers. It is seen as a tool that is to be used by the management of a particular organization alone. In other words, the MAS is not utilized by other stakeholders of the company such as shareholders and employees (Malmi 199, p.650) This gives these managers the express authority to apply these MAS policies. The decision making process then becomes faster since fewer people are consulted in this case. This was appealing during the industrialization stage where managers had to make split decisions. By not actively engaging the employees and other stakeholders of company directly, they are able to make quick decisions. The skepticism about the applicability of the traditional MAS started emerging years later in the 1990s. Johnson (1991, p. 45) states that in the last three decades, traditional MAS have lost their influence. Many organizations in the world today have become hesitant to apply the traditional MAS. They feel that the traditional MAS are not fully inclined to solve the management and accounting challenges that they face today. Carmona et al (2004, p. 26) argues that the MAS that were used traditionally are no longer trimmed to suit the needs of the modern business. The modern business world has become extremely competitive. Many managers have found that the application of the some of the management policies outlined in the traditional MAS do not really work out for them. This has led them to pursue other forms of management styles that were better designed for the modern business environment. Kaplan (1991, p. 253) agrees with this notion and goes on to state that the management accounting strategies that were used in the traditional setup are no longer seen as viable for the modern businesses. The rapidly changing business environment requires a similar paced management accounting concept. According to Kaplan (1991, p. 253), there is an increasing trend towards the transition from the old school style of management to the adoption of new forms of management styles that are more in sync with these businesses. Johnson and Kaplan (1987, p.2) show that the traditional management accounting styles have been passed by time. They remain to be rigid in a very rapidly changing business environment. Because of this, their applicability in the solution of the management problems that face many businesses in the modern era continue to be a challenge. The traditional MAS are more aligned with the solution of cost related problems. They were designed to solve cost issue through adoption and insemination of technology in their production streams. Today, technology already forms a core concept in the way many industries operate. Because of this, the management issues are not longer pegged to the adoption of technology. Rather, a trend is being observed in this case that shows how managers are moving from the old school form of control to new management systems and strategies. Johnson and Kaplan (1987, p.4) think that the traditional MAS had given the managers of a particular company too much power. The managers had the capacity to make decisions without even informing the stakeholders. Sometimes, the decisions made were profitable to all the parties involved but other times they resulted into morbid losses. According to Johnson and Kaplan (1987, p.2), all the stakeholders of the company should have the capacity to know what the company managers are doing or intend to do at a particular time. This increases the levels of transparency in an organization as well as confidence in the personnel running the companies. Sometimes, especially in the current business environment, most people only invest in companies they have little or no knowledge of. They have to trust that the managers of these companies will put their investments in a good way in order for them to realize profits and returns on their capital investments. The modern investor wants a piece of the action as much as the managers do. This investor requires that the managers deliver full information on the way the company is being run and seek the approval before executing any major business decisions in the company. This integration concept is very different from the traditional MAS that these managers have been used to. Every major decision has to have the approval of the investors. The manager no longer has the capacity to conduct major business decisions without the prior consent of the stakeholders. Kim and Ballard (2001, p.2) state that this is particularly true in the case of lean businesses that cropped up in the 1990s. It would be extremely hard for managers today to employ the traditional MAS because of an already revamped business environment. Rapid and huge technological advancements have also made the traditional MAS become redundant. The free management styles that have been adopted by most modern, technologically-savvy companies have proven that other forms of open, relaxed management accounting systems have a similar impact as the traditional, rigid MAS. As a matter of fact, the traditional MAS concepts do not seem to be in sync with the current business environment. Neely et al (2000, p.1120) states that the current trend of management system is focusing largely on performance improvement rather than cost reduction in production. With the advancement and application of the technology all the way in production, the key concern no longer lies in the indirect costs involved in the process such as depreciation of the machinery. Rather, the modern managers are focusing their approach on how to increase the revenue scales through increasing the productivity ratios. Employees are more appraised in the contemporary world than during the industrialization period after world war two. This system of control that focuses on the employee appraisal and participation has been proven to be more adaptable to the modern society as compared to the traditional MAS. Companies like Google Corporation have mastered the art of new management styles (Google Inc website 2013). Most companies in the world today are hiring young professionals to work for them. The competency and aggressiveness of these professionals have influenced even the management styles (Hopper et al 1992, p. 309). These professionals are on constant look for companies that offer them good remuneration packages and at the same time allow them the freedom to air their opinions on a variety of issues. The rigidity of the traditional MAS cannot be applied in this case. Scholarly studies have shown that the companies which still practice the traditional MAS have a higher turnover ratio as compared to the modern ones which have adopted an open management style (Wegmann 2011, p. 4). People are less loyal as before and the constant pursuit of greener pastures places the companies that still apply the traditional MAS in jeopardy. The concept of transparency and the need for investors to have some sense of control of the companies they had invested in saw a massive ripple where many companies rushed to become listed and become transformed from private ownership to public companies. The stakeholders of many companies in the modern world require that the managers consult them prior to making and executing a major decision (Coombs et al 2005, p.3). Such decisions include mergers, acquisition among others. This factor largely affects the extent to which managers can make decisions. The board of directors in many of these companies control how the internal decisions are made and how they are applied. Conclusion The discussion above offers an insight into the management accounting system as and their applicability. Through a review of literature that many scholars have conducted over time on the subject, it has been established that MAS id still popular to some of them. Others think that the age of MAS in the current business setup has been outlived. They have shown that many companies in the modern business world are going for the performance based form of management accounting as opposed to the rigid cost reduction based MAS used traditionally. The scholars and management personnel who are still in favor of traditional MAS see this as the best way through which to steer companies through hardships. Many managers who still practice these MAS view it as a perfect management tool to control their company through hardships. Through the traditional MAS, it is easier to make decisions since the managers have the control over the shareholders. The decisions made do not have to have been made after consultation with the stock holders. This makes it easy and fast to make management decisions. Those who are against this form of management in the current business world view MAS as a very rigid form of management. The argue that the modern investor is a very informed investor. He or she demands that the activities conducted in the organization be passed through him/her. This diminishes the power of the managers as control is transferred to these stakeholders. They also argue that the current management system is more aligned to performance based in place of cost cutting as was the case of the traditional MAS. According to them, the business environment is changing rapidly. As a result of this, even the management systems and processes need to change so that they can be able to capture the correct dynamics of the modern businesses. Lack of loyalty and high turnover ratios among modern companies has also made these scholars and managers look for another form of open and flexible management system. This essay has shown that the application of traditional MAS is increasingly becoming a thing of the past as people adopt newer and more dynamic modes of management and control. Appendix I – Reflection of the paper This portion offers my opinion and my understanding of the above paper. In my own opinion, the traditional MAS is still a perfect tool to be used in management accounting even today. I agree with some of the scholars and researchers that this form has lost its influence with many modern companies in the world today. However, i think it is still an important tool especially for companies which are struggling to break even in the modern business society. The fact that MAS relate to cost cutting and a rigid control allows no room for miscalculated expenditure. Companies should ensure that they try to cut all forms of cost and keep others to the absolute minimum when they cannot cut them down. This understanding relates to the fact that many companies make losses which could have easily been avoided if the expenditure scale is looked at. However, other scholars who are against this form of management accounting system have also presented an interesting case in my opinion. It is true from the discourse above that the traditional MAS does not allow the stakeholders the chance to fully and actively participate in the decision making process of the company. In my opinion, this could be devastating to the stakeholders at some point. It is my belief that the business owners should have maximum control over their businesses. If not so, they should ensure that they have control over all information that pertains to their business. Unscrupulous managers may take the advantage of the power they have been given through the traditional MAS and make decisions in the business that serves their own interests as opposed to serving the interests of the company. To this regard, i have a belief that there should be a renewal of the management accounting systems every few years. The business environment keeps on changing. The management strategy that were applied a long time ago were designed using the various parameters and to solve problems that affected them at that particular time. Today, the challenges facing businesses is totally differentiated from the challenges that had occurred during the period that the MAS were being designed. However, i believe form the discussion offered in this paper that a common ground can be found in this case. The best of the traditional MAS could be coupled with the best in the current and modern management systems. For instance, companies could offer the managers the chance to make decisions up to a certain limit. Beyond this limit, consultation has to be made. This gives them some freedom and accountability in their operations. I conclude in my reflection that though the traditional MAS is considered as redundant in the current business world, it could still be important in its application to minor companies. 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