Management Accounting - Johnson and Kaplans Relevance Lost - Essay Example

? A Discussion on Johnson and Kaplan’s Relevance Lost This present paper is a research paper that looks at the criticisms, which were made by Johnson and Kaplan (1987) in regards to management accounting/ control systems. In particular, the criticism stated that the MA systems had lost their relevance since they were “too late, too aggregated, and too distorted to be relevant for managers’ planning and control decisions.” However, this study has substantially established that MA systems regained back their relevance largely because they have been re-developed to ensure that they give real time information that can be used for effective decision-making. This paper contains an introduction to the topic of discussion, literature review, a research methodology that was used to collect data, a section for analyzing the data, and a last section for conclusion. Table of Contents 1 1.0 Introduction 3 2.0 Literature review 4 2.1 Accounting 4 2.2 Management control/ accounting systems 5 2.3 Management accounting and decision-making 6 3.0 Research methodology 7 4.0 Analysis 8 4.1 Supporting arguments for Johnson and Kaplan’s (1987) argument 8 4.1 Arguments against the criticism issued by Johnson and Kaplan 9 5.0 Conclusion 11 References 12 1.0 Introduction The field of management has witnessed numerous transformations that are mainly attributed to external and internal factors. These factors have redefined how management practices or functions are performed across business organizations. In the writings by Burgstahler et al. (2007), they stated that the transformations have largely affected the decision making process since there is a change in the management structure, which has integrated new roles as well as position holders. In addition, technology is also been increasingly applied in performing management functions. Despite the continuous transformation in the field of management, the constant variable has been the fact that accounting figures have consistently played a key role in the decision making process or rather they have consistently been used to decide the direction that the company should take. The strong reliance on accounting figures to perform management functions has led to the development of management accounting or control systems that were specifically designed to help the management of business organizations in the process of control, product costing and evaluation of management’s performance. However, in a seminal article, published by Johnson and Kaplan (1987) they both argued that management accounting systems had lost their relevance since they were inadequate for the modern accounting environment. In particular, they succinctly summarized the inadequacy of management account systems to cope with the demands of modern management by stating the information they generated was “too late, too aggregated, and too distorted to be relevant for managers’ planning and control decisions (Ezzamel et al. 1990). This present study mainly seeks to discuss the above statement in relation to today’s environment. It will begin with a literature review of the main topic of discussion and even a review on Johnson and Kaplan’s criticisms. Secondly, it will state the methodology that was applied in collected secondary data that were used in this study. In the third part before concluding, the study will conduct a critical analysis on the Johnson and Kaplan’s argument. 2.0 Literature review 2.1 Accounting With reference to the writings by Alkaraan and Northcott (2006), they stated that accounting as a practice focuses on recording, measuring, and communicating financial facts to concerned parties who use the facts for varying reasons. Roslender and Hart (2003) noted that in the present business environment, accounting largely focuses on the preparation of accounting reports and less on bookkeeping, which has been reduced to fairly a routine process because of the increased computerization and introduction of more effective systems of internal control. The users and uses of accounting records vary from internal to external. Internal users of accounting information are the management who are equally responsible for ensuring that the accounting system is designed in a suitable manner that can provide financial information, which are needed for decision making purposes. The external users of accounting information are shareholders who are entitled to get a copy of the company’s annual financial report. However, Roslender and Hart (2003) noted that in the context of the United Kingdom, the majority shareholders of a limited company are usually the directors of the company, and therefore, there is usually a conflict between the management and ownership of a company. Shareholders use accounting information in order to make critical decisions such as whether to increase or decrease their stake in the company. Creditors on their part use accounting information in order to decide on future dealings with the company as well as the level of guarantee for their payment. While the employees’ use accounting information in order to gauge their future employment prospects in the company. It is important to note that accounting information are further grouped into three different categories that include financial accounting, management accounting, and cost accounting. However, management accounting has gained wide prominence since it focuses on satisfying the needs managers within a business organization. 2.2 Management control/ accounting systems According to Scapens (1999), management control/ accounting systems (MA) fall in the wider category of management information system, which are particularly used by an organization as strategic resources that have the potential of according a business organization with a competitive edge in the industry/ market. This explains the development of MA systems since they were aimed at assisting the management to perform their tasks using numbers or accounting information, thereby accruing a competitive advantage because of the use of real-time and factual data . MA systems wholly rely on information management within an organization, which takes places through an entire system chain that has frequent points of collection and storage, which require managing, storing and dissemination of information. Bee and Bee (2005) further added that the process of information management takes place at every key level of a business organization’s structure, enabling each employee within a business organisation to recognize and fulfill his/her strategic role within the process. In a bid to determine the effectiveness of MA system, it is important to consider how the processes involved in different systems such as gathering, processing, storing, and distributing and acting on the information supports the needs of an organization. In the writings by Betz (2001), he stated that in the present business environment numerous MA systems have been developed to address specific business process and needs. In this regard, it is noted that there are five business information systems that include transaction processing systems, executive support systems, management support systems, decision support systems, and office automation systems. 2.3 Management accounting and decision-making Roslender and Hart (2003) stated that since the development of management accounting, a great emphasis was placed on the concept of conducting the function of management using numbers and hence, why there has been an emergence of numerous accounting systems. However, Ezzamel et al. (1990) stated that for MA systems to be truly effective they have to provide accurate information on a real time basis so that a proper and timely decision can be made. The thesis presented by Johnson and Kaplan (1987: p1) argued that MA systems that were used for the decision making purposes had lost their relevance in the business environment since information that was delivered from the system was “too late, too aggregated and too distorted to be relevant for managers’ planning and control decisions.” However, Shah et al. (2011) passed on a negative review on this criticism citing that it could only apply to the timeline when the article was written. This is because there have been remarkable improvements in regards to MA systems, which has restored their relevance in the current business environment. Johnson (1994) in article shared such as similar opinion as he stated that the relevance, which was once lost by MA systems, have been regained more so under total quality management, which is able to fully integrate information gathered from the advanced and sophisticated systems. 3.0 Research methodology In this research only the secondary research method will be applied because of abundant and reliable information that is available on numerous scholarly literatures, articles and internet sources. In secondary research or research based on literature, information is usually gathered from multiple academic sources such a valid websites, textbooks and journals usually from sources such as Business Premier and Emerald. The choice of secondary research for this paper was informed by the fact that the topic was initially finalized after a thorough secondary research, which helped in devising the research objectives, and aim of the entire study. The first part of the secondary research has been displayed in the literature review section. Vaivio (2008) cite that secondary research is advantageous because the data that are sought after already exist and the researcher can evaluate its validity before using them. This piece of research study is from a positivist point of view. This philosophy was selected as it encompassed building bridges between management accounting systems and its effectiveness on the decision making process. Previous research studies and especially the one that was presented by Johnson (1994) are also to be used in order to acquire further knowledge. The purpose of this perspective is to establish ideologies and ensure the objectives of the project are achieved. In relation to the data retrieval methods, the use of scholarly works, journals and other literature will be the only means of gathering data, which will help in critique the argument that had been presented by Johnson and Kaplan (1987). 4.0 Analysis This section provides an analysis on the data that had been gathered to support as well as refute the criticism that had been made by Johnson and Kaplan (1987), in the seminal article. 4.1 Supporting arguments for Johnson and Kaplan’s (1987) argument To begin with, Shah et al. (2011) in their studies stated that the criticism that had been presented by Johnson and Kaplan in their seminal article were attributed to three major limitations that had been identified in MA systems, which existed during the time when the article was been written. One of these major limitations is based on the fact that the information contained in MA systems were generated from financial accounting information systems that were already in existence. Because of this, it meant that MA systems were only able to provide annual and internal accounting information, which meant that there was a gap with regards to holistic and accurate information that would have reflected on the products, technology as well as the complexities of operational process. This shortfall meant that business organizations lacked crucial information that is required for operating in a competitive business environment (Ezzamel et al. 1990). Secondly, the previous MA system were in a aggregated form thereby making them less helpful to a manager who would wish to have management accounting information customized in a manner that will address certain specific business needs. Thirdly, Shah et al. (2011) stated that the criticism by Johnson and Kaplan (1987) were justified on the fact that financial accountants “window dressed” the MA systems so that it can appear desirable to external users but this made it less reliable in making managerial decisions. In the writings by Bayou (1993), he concurred with the argument given by Johnson and Kaplan (1987), as he lamented on the fact that that MA systems relied greatly on the concept of progression, which meant that the system had failed to integrate innovative techniques that were crucial in the field of management. Betz (2001) on his part stated that the MA systems placed a great emphasis on managing using numbers thereby overlooking strategic management, which is the pillar for any successful organization. Wigand et al. (1997) on their part criticized MA systems on the basis that they did not facilitate ‘intragroup’ communication and therefore, they failed to address the problem of communication barriers that could be experienced between organizations and stakeholders who were located in different locations. In the writings by Anderson (2006), he stated that the MA systems had lost relevance because they failed to reflect the developments that have been brought about by globalization and technological advancements, which equally changed how organizations conduct themselves and even how the management function is performed. The developments have necessitated a radical shift that require MA systems to shift its traditional focus on accounting information and numbers and instead develop a new focus on value addition and integration within the company. Lastly, Bromwich (1990) supported the arguments presented by Johnson and Kaplan (1987) by stating that MA systems place a great emphasis on the internal functions of a business in a bid to meet the internal needs of managers. This translates to lost opportunities that exist in the external environment and even knowledge on potential business threats. 4.1 Arguments against the criticism issued by Johnson and Kaplan To begin with, Johnson (1994) wrote that since him and Kaplan criticized MA system there has been numerous developments that include a transformation of the concept of management and increased application of information technology in business process, which also include the management function. In particular, management has transformed to new dimensions that include strategic management and total quality management. These new dimensions of management rely on an effective decision-making structure and therefore, accurate information is of great concern. Because of the need for fast and accurate information, there has been increased pressure in the integration of advanced technology in the management process in order to make the decision making process much faster and accurate (Otley, 2001). This led to the development of MA systems that are designed to address particular business needs or concerns, for example, there is a customized MA system that is specifically designed to support the decision making process. In this regard, Agarwal and Lucas (2005), stated that the decision support systems within the MA systems are designed to have interactive platform, and they are end user driven systems. Additionally, they can be also be customized for specific needs, such as solving ambiguous problems through mathematical and data models. By managing information using decision support systems, business organisations are able to ensure that their decision making process is effective at all levels. These means that in today’s business environment, MA systems provide information at a faster pace, and in an organized manner, which means that they are relevant for managers’ planning and control decisions. Another example of how MA systems are relevant in today’s business environment with regards to faster delivery of information in an organized manner for decision making purposes is management information systems. Laudon and Laudon (2009) stated that Management information systems use data obtained from transaction processing systems. The management information systems use the data from these systems to prepare detailed management reports on the primary operations of business organisations (Laudon, 2008). The reports detail on the internal events and operations, and are therefore, designated for use by middle level managers. By managing this information, the middle level managers in a business organisation are able to effectively manage their own dockets, assist at the tactical and operational level in the decision-making process, and assist in the planning process at the senior level (March and Smith, 1995)). 5.0 Conclusion Numerous substantive studies presented their supports for the criticisms that was levied by Johnson and Kaplan (1987) against the MA systems. However, it can be conclusively stated that the supporting arguments do not factor in the advancements that have been made on MA systems and how they are relevant in the current business environment. Moreover, the studies conducted by Johnson (1994) who was one of the critics has refuted the earlier claims and he affirmed that indeed MA systems have regained their relevance. From the arguments presented above, it can be argued that Johnson and Kaplan’s criticism of MA systems are outdated and they do not apply in the current business environment. This is because, the current MA systems are highly advanced, and through the transaction process systems, business organizations are able to generate real-time information since records are entered onto the systems also on a real-time basis. Based on such information, managers can be able to tell the actual health of a business at any particular time and therefore they can implement corrective measures that are aimed at positioning the business to respond to a particular opportunity or threat within the market. This is means that in the current business environment MA systems are particular used to enable organizations gain a competitive advantage in the business environment, which invalidates the arguments that had been presented by Johnson and Kaplan (1987). References Alkaraan F. and Northcott D. 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Qualitative Management Accounting Research: Rationale, Pitfalls and Potential. Qualitative Research in Accounting & Management, 5 (1), 64-85. Wigand, R. T., Picot, A. and Reichwald, R. (1997). Information, Organization and Management: Expanding Markets and Corporate Boundaries. Chichester: Willey. Read More