Management Accounting for Modern Business - Essay Example

? ACCOUNTING WORK Table of Contents Table of Contents 2 Introduction 3 Discussing the ways in which strategic management accounting can supportthe business in managing the current challenges it faces 7 Reference 9 Introduction Presently the business environment is experiencing transformation from its traditional framework due to the competitive and dynamic nature of the business. Most of the companies are getting dominated by the international competition. The primary cause of this competition is demand based supply and widely accepted e-commerce. Since, the utilization of management accounting tools is important for most of the companies with the aim of developing logical and reliable business strategies. The primary features of management accounting are to help the organisation in the area of decision making, control and support strategic planning (Kaplan and Norton, 1996, p.58). In this essay, the researcher will stress on the different aspects of management accounting tools and the effectiveness of management accounting tools. Discuss and evaluate the purpose and effectiveness of management accounting for modern business In the modern business firms, the management accounting is mainly used for taking competitive decision making by collecting, communicating information and processing. This tool helps the management of the organisation to control, evaluate and plan on business process. This tool also relates to the present strategy of the business firm with the existing ones. The function of management accounting is multidimensional and interrelated with the various departments. The mechanism contributes in monitoring different activities in business and helps the businesses to meet the goal of the organisation. In this function, the management and the board is mainly focussed on those activities which are the key drivers of future financial result. This controlling activities influence the corporate governance activities of the organisation. With the help of various analysis report, the management accounting track the lack in control system also and measure the divergence from the expected result. In the variance analysis, the management compares the expected performance with the actual performance (Brickley, Smith and Zimmerman, 2005, p.256). The approval of financial decision also depends on the management accounting decision. Most of the members of the audit committee (at least 40 %) hold the specific qualification. But it has been seen that the common management accounting tools is used by the audit committee rather than the directors of the business firm. In this point of view, at the time of taking financial decisions, management accounting reports are not adequately presented. On the other side, it is noted that the decision of Director is not sufficient for 69 % of the companies. Most of the major financial decisions are taken by the senior management of the company by utilizing the key areas of management accounting tools (Blocher et al. 2010, p.54). Most of the traditional business firms did not evaluate the performance of CEOs and senior management before general annual meetings. The management accounting tools determinates the financial results from various segment of operation that signifies the performance of CEOs. The modern businesses maintain good corporate governance practices by following codes of business practices, compliance to relevant laws and rules and regulation. The corporate behaviour is important to maintain the corporate governance. So, corporate behaviour should be stringent in corporate DNA by maintaining the principals and ethics. The management accounting mechanism sets the standard behaviour for the purpose of hard coding. This mechanism also provides the periodic report which highlights corporate culture monitoring result. On the other side, this is a tool which is a custodian of ethics. So, it is very easy for the business firms to trace the fraud and mal practices. Comprehensive Implementation of Management Accounting Tools: In this part the researcher explains the implementation of the management accounting tools. The researcher takes the example of Tesco to explain the implementation of management accounting. Tesco is a UK based super market which is enlisted in London stock Exchange. Here the researcher mainly uses three mechanisms i.e. Balanced score Card, Profit linked and performance measurement system. Balanced Scorecard: The balanced score card is used to measure the financial as well as non financial performance of Tesco. The senior management team of Tesco use balanced scorecard for the purpose of translating vision and strategy. There are four wings of Balanced Scorecard i.e. learning and growth, business process perspective customer perspective and financial perspective. This is a basic measurement for company’s growth. It reflects the company’s capability to manage the three types of resources i.e. human capital, information capital and organizational capital. The company should take adequate strategies to manage the human capital i.e. employees. Tesco utilizes the performance appraisal, employee motivation, training and development technique to handle these resources properly. The company prioritize the employee more even over the customers. The customers are the king of super market industry. So, customer satisfaction should be first priority of the organization. The organization does this by fulfilling the requirement of the customers (Cadbury, 2002, p.56). The company aims to optimize their business as per the requirement of the customer. Tesco should concentrate more on the quality because it is the basic requirement of the customer i.e. the price over quality factor. The life cycle of the company is also affected by the internal business performance of the company. In financial analysis it has seen that the profitability and liquidity ratio of the company is very low than the market standard (Weakness indicator) while the efficiency ratio stays at satisfactory position (Strength Indicator). (Charan, 2005, p.598). Profit Linked Performance measurement system: The annual report of Tesco shows that the management teams highlights the changes of profitability overtime into measure of changes in certain elements by sub dividing different elements. These changes are systematically linked with the business strategy and mission of the company. There are mainly four criteria of profit linked system in Tesco i.e. capacity utilization, price recovery, measurement of productivity and other performance related measurement. The higher management of the company initiates the developmental efforts, with systems which categorises measures of profitability into measures of price revival as well as productivity (Brewer et al. 2009. p.21). Discussing the ways in which strategic management accounting can support the business in managing the current challenges it faces The modern organisation requires fixing the segment of business to integrate the business strategies with the management accounting tools. The integration is essential to find the geographical market, customer types, delivery channels, range of products and services. The corporate requires relating the business strategy with the Strategic Business Unit (SBU). The SBUs are the separate department or subsection of the company which deals with the external market of the business. Generally, the SBUs deal with the different products and services and the function of one SBU is different from other SBU of the same company. For example of property agency, the sales lines and strategy of this type of company must be different in rural area comparing to the urban area. The SBUs provide clear instructions on how to compete in different market positions. Here for the purpose of measurement and implementing the strategy, the business firm spent additional expenditure. Most of the companies spent this money due to the exceptional performance like enhance the brand value, outstanding quality etc. The differentiation tool is also an important tool which draws a comparison among the competitors in the market. In this case additional cost is acceptable if the strategy provides extra benefit to the customer and the business firm can increase the rate of profit within the premium price set (Kaplan and Norton, 1996, p.79). The first aim of any company is to achieve the break even by increasing the rate of profit. The management accounting tools determine the short term as well as long tem return of investment which is very helpful for the strategic team at the time of designing the strategies. The strategic management unit track the performance of the business firm which facilitates in cost benefit analysis and financial performance analysis (Cadbury, 2002, p.96). Reference Banker, R.J. and Johnston, H.H. 2002, Strategic Management Accounting and Control. Schaeffer-Poeschel Publisher, Stuttgart. Blocher, J., Stout, DE., Cokins, G. 2010. Cost Management: A Strategic Emphasis. 5th Edition. McGraw Hill companies, New York. Brewer. PC., Garrison, RH., Noreen, EW. 2009. Introduction to Management Accounting. 5th Edition. McGraw-Hill, New York. Brickley JA, Smith CW and Zimmerman JL 2005. Corporate Governance, Ethics and Organisational Architecture. In: Corporate Governance at Crossroads. Edited by Chew DH, Gillan SL McGraw Hill, New York. Cadbury, A. 2002. Corporate Governance and Chairmanship: A Personal View. Oxford University Press, Oxford. Charan, R. 2005. Boards that Deliver: Advancing Corporate Governance from Compliance to Competitive Advantage. Jossey-Bass, San Francisco. Kaplan, R.S. and Norton, D.P. 1996. Using the Balanced Scorecard as a Strategic Management System. Harvard Business Review. Read More