Various Changes That HaveTaken Place in the Field of Management Accounting - Essay Example

This paper is an analysis of the various changes that has taken place in the field of management accounting. Management accounting refers to the process that involves creating a partnership in the management decision making process, performance management system, and provision of financial reporting services, for purposes of assisting the management in the implementation and formulation of the strategy of an organization (Arora and Katya, 2009). Under this definition, it is possible to denote that management accounting is an important tool that managers can use, for purposes of guiding them into making policies and strategies of a business organization (Horngren, 2012). It serves an important role of providing financial information that policy formulators can use in improving the efficiency of a business organization (Garrison, Noreen and Brewer, 2010). This is a change in the definition of management accounting since the periods of 1980s. This is because in the 1980s, management accounting was not an important tool of management. It was only located at the lower levels of the supply chain system. This meant that management accounting was only used to support the business functions of the organization (Arora and Katya, 2009). It was not a critical component of management. Currently, management accounting is an important element of a business organization. It is difficult for large business organizations to ignore the importance of management accounting in their organization. This process of management accounting follows the information value chain system (Drury, 2013). This is a system that involves processes and people in the collection of data, and the design of the information system. It further allows an accountant to analyze the same data, and use the information for purposes of formulating and executing the strategies of a business organization (Arora and Katya, 2009). Management accounting has managed to transit from compliance and transaction oriented strategy, to playing an increasing role in the strategic operations of the business. This is because it is used in developing strategies for cooperate performance, budgeting, good organizational governance system, risk management, internal controls, and ethical financial reporting. This means that professionals of management accounting help the organization to develop a more competitive and successful strategy for the organization. Arora and Katya (2009) explains that this process of management accounting has evolved through four important stages. These stages are, Stage 1- Before the 1950s, the focus of management accounting was on the determination of costs, and financial control systems by using budgets and cost accounting technologies. Stage 2-By the year 1965, the focus of management accounting shifted to providing information that could be used for management planning and control. This is by using technologies such as responsibility accounting, and decision analysis (Garrison, Noreen and Brewer, 2010). Stage 3- By the year 1985, the attention of management accounting was focusing on reducing the wastage of resources in a business organization. This is by using cost management and process analysis systems (Drury, 2013). Stage 4-By the year 1995, cost management principles had shifted to the creation and generation of value. This is through an effective use of resources and technologies that examine the drivers of the share holders, and customers’ value, as well as the organizational innovation. It is very easy to recognise and explain these four processes in the evolution of management accounting (Garrison, Noreen and Brewer, 2010). Each stage in these evolutionary processes comes with new adaptations and conditions that the organization must face (Drury, 2013). These adaptations are achieved through reshaping, absorption and addition of more techniques in the previous management accounting principles. These new changes are for the purposes of improving the efficiency in which the business organization functions, and carries out its duties. The first stage of this process was characterized by the determination of costs. These costs were related to the allocation of overheads, and valuation of stocks (Drury, 2013). This stage laid an emphasis on the estimation of costs. It is because through cost estimation, managers are able to control the financial activities of their organizations. There were a variety of management techniques developed during this process. The most notable management techniques are FIFO and LIFO methods of valuation. The LIFO method of management accounting has a variety of advantages and disadvantages. One major advantage of the LIFO method is the capability it has to match the recent costs, against the current revenues (Drury, 2013). This is very useful to an organization that seeks to minimize the various costs that it incurs during its operation. This is an advantage that LIFO had, over the FIFO method of cost management. It is mainly because the FIFO system was used to match the old costs of a business organization against the current revenues of a business organization (Garrison, Noreen and Brewer, 2010). The FIFO method therefore leads to the creation of the inventory profits, as opposed to real profits, brought forth by the LIFO method. An inventory profit has the effect of overstating the profits of the organization. It is mainly because it understates the cost of goods sold. Another advantage of the LIFO method is its capability to attract tax benefits. This is because during periods of inflation, tax men will use the high figures experienced during the inflationary period. This is as opposed to the historical costs used by tax men under the FIFO method of management accounting. Furthermore, the net income of companies that uses the LIFO methods is not vulnerable to the declining future price changes (Arora and Katya, 2009). This is because inventories purchased at high prices normally are normally sold first. This minimizes the chances of write-downs in the future. The LIFO system also has its own disadvantages. This includes a reduction in the reported earnings of a business organization. This is during the period and time of inflation. Furthermore, it is possible for companies using the LIFO system to manipulate their earnings by changing their patterns of purchase, at the end of the year (Garrison, Noreen and Brewer, 2010). This gives the employees of an organization an opportunity to steal from the company. The FIFO method is advantageous because it is easy to understand, and the historical costs normally reflect the actual costs that should be used in determining the profitability of an organization (Arora and Katya, 2009). The FIFO method is also prone to errors, just as the LIFO method. This is because accountants can make clerical errors in cases of price fluctuations. These clerical errors can greatly affect the management of the organization. This is because the management might use information that is not accurate to reduce the costs of its operation (Williams, 2010). This can negatively affect the profits that the business acquires, because they will be misrepresented. Furthermore, it may easily lead to fraud by unethical employees of the company. It is therefore accurate to denote that the major weaknesses of these two methods of managerial accounting are that they can easily lead to fraud (Drury, 2013). A company that engages in fraudulent activities will most definitely fall, and it will have a negative brand name. Companies normally work hard to receive a good brand name, and this is mainly because it increases their competitive ability. It is based on these weaknesses of the LIFO and FIFO system that the management accounting process had a transition to another stage. That is the stage between the years of 1965 to 1985 (Seal and Garrison, 2012). This is referred to as the second stage in the evolution of management accounting. This stage did not only evolve because of the need to solve the weaknesses of the first stage. It also evolved for purposes of providing information that the business organization could use to generate policies that could help in controlling and planning the operations of the business organization (Garrison, Noreen and Brewer, 2010). Acting on a point of information is an essential practice that managers of a business organization need to engage in. This is because they are likely to come up with good policies that have the capability of solving the organizations problem. Access to information is crucial for the survival and efficiency of a business organization. The kind of information that business organizations normally look for, includes the needs of customers, the cost of production, the barriers of trade, and the possible competitors of the organization (Garrison, Noreen and Brewer, 2010). Management accounting helps in the provision of information relating to production costs. It further helps in the provision of information relating to the needs of the business organization, and that of customers. Managers will therefore have the capability of developing correct decisions (Drury, 2013). This is because they will be acting on a point of knowledge. The most notable accounting techniques introduced during this period includes responsibility accounting, and marginal accounting. Responsibility accounting was developed as a system of measuring accounting performance (Seal, Garrison and Noreen, 2009). It is developed from the idea that large and diversified business organizations are difficult to manage as a single entity. It is therefore necessary to separate and decentralize this organization into small parts that are manageable. These segments or small parts are called responsibility centers. They include investment centers, profit centers, cost centers, and revenue centers (Horngren, Harrison and Oliver, 2009). Through this approach, the directors of an organization can allow assign responsibilities to segment managers, and hence giving them influence over key areas of the business organization (Drury, 2013). The revenue center has the responsibility of generating revenues for the business organization. This is a critical segment of an organization, mainly because business institutions are formed for purposes of making profits or generating revenues. This center has the task of collecting any information that relates to the needs of customers, and that of the organization. It further has the responsibility of advising the management of the company, on the policies to develop for purposes of increasing the revenues of the business organization (Drury, 2013). The cost center on the other hand has the responsibility of generating costs and managing these costs (Lee and Epstein, 2013). The managers of these centers are equipped with accounting skills that can help in identifying the various costs of the business organization, and initiating measures of controlling these costs. Reduction of non-essential costs is a sure method of increasing the revenue of a business organization (Drury, 2013). The profit centers and revenue centers work hand in hand. This is because it is their responsibility of collecting information pertaining to the needs of customers, and how the organization can satisfy the need under consideration. It is therefore possible to denote that responsibility accounting focuses on the provision of financial information for purposes of evaluating the effectiveness, and efficiency of departmental managers, in regard to the financial performance of their departments. The main advantage of responsibility accounting is that it enables a large business organization to control its affairs by forming departmental units responsible for a specific segment of the company (Groot and Selto, 2013). Marginal accounting involves the analysis of financial transactions, such as assets, liabilities, production costs, etc. This is for the purpose of developing better cost strategies, for the business organization. Marginal accounting is mainly concerned with fixed and variable costs (Drury, 2013). The main objective of using marginal cost accounting techniques is for purposes of analyzing costs, and developing strategies aimed at controlling these costs (Oliver and Horngren, 2010). The second stage of the evolution of management accounting is also concerned with the management of the various costs of a business organization. The third stage in the evolution of managerial accounting occurred between the periods of 1985, to the year of 1995 (Drury, 2013). There was increased technological development, and industrialization. The focus of the management remained on cost production; however, emphasis was placed on process analysis, by focusing on cost management technologies (Groot and Selto, 2013). The main objective of the accounting techniques developed during this period was to reduce the wastage associated with the production of the products of the organization (Hilton and Marchesi, 2010). Some of the accounting techniques developed during this period of time includes Activity Based Accounting, and the Just In Time policies (Drury, 2013). Activity Based Accounting is an accounting technique that helps to identify the activities within an organization, and assign costs to each and every of these activities. This is a strategy aimed at reducing the various costs that the business organization may incur, hence increasing its profitability. The major intention of this accounting technique is to eliminate and identify the services and products that are unprofitable to the business organization (Seal, Garrison and Noreen, 2009). Furthermore, it aims at developing measures of lowering prices of commodities that are not accurate (Drury, 2013). This is an efficient method of cost reduction. Its main limitation is that it is difficult to assign costs to the various segments of a business organization. The Just in Time accounting technique aims at increasing the efficiency of the companies services by receiving products that are essential for the production process (Horngren, Harrison and Oliver, 2009). This helps in the reduction of inventory costs Stage Four began from the year of 1995. Under this stage, the focus of the company was to create value in their products, through effective use of their resources (Oliver and Horngren, 2010). Managers hand the intention and desire of identifying the factors responsible for increasing the values of their shares, hence developing accounting techniques aimed at solving these problems (Horngren, Harrison and Oliver, 2009). Benchmarking, activity based management, and total quality management are some of the accounting techniques used during this period of time (Drury, 2013). Under activity based management, the company will analyze the various activities of the organization. It is for purposes of eliminating activities that are not beneficial to the company. Total quality management involves the creation of a management policy that will permanently help in solving the increasing costs of a business organization. In as much as management accounting has changed, some of the techniques used in the previous years, are still in use in the next transition period. Techniques such as activity based costing is always combined with activity based management for purposes of controlling the costs of the business organization (Drury, 2013). The environmental and internal factors have played a great role in influencing these changes in management accounting. The major factors responsible for initiating these changes include technological, organizational design, competition, and strategies developed by business organizations. Changes in the environment of their operation contributed significantly in this process. This is mainly because it helped in the development of non-financial management accounting techniques. Bibliography: Arora, M. N., & Katyal, P. (2009). Management accounting theory, problems and solutions (Rev. ed.). Mumbai [India: Himalaya Pub. House. Bhimani, A. (2012). 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