Relevance of Management Accounting In Todays Society - Essay Example

Relevance of Management Accounting in today’s society Relevance of Management Accounting in today’s society Management accounting is one of the modern business terms or functions evolved during the last few decades. Earlier accounting information was limited to the accounts department employees and the top management. Other departments such as production, quality, technical, marketing, engineering, purchasing etc had little information about the accounting procedures and information. However, the development of scientific management techniques in the corporate world stressed the importance of spreading accounting information to the entire departments of an organization to improve the efficiency of the organization. Earlier financial accounting, cost accounting etc were some of the renowned terms in the corporate world; however, at present apart from these accounting systems, management accounting is also gaining prominence. This paper briefly analyses what is management accounting and the relevance of management accounting in today’s society. What is Management accounting? Management accounting combines accounting, finance and management with the leading edge techniques needed to drive successful businesses. It advises managers about the financial implications of projects, explains the financial consequences of business decisions, formulates business strategy, monitor spending and financial control, conduct internal business audits and explain the impact of the competitive landscape (What is Management accounting?) Man, material, machine and money are the major resources of an organization which should be managed properly to raise the productivity and efficiency of an organization. All these resources were earlier managed by concerned employees and department managers alone. For example, production workers and managers were responsible only for the production management whereas purchasing manager and employees were responsible only for the materials management. In other words, all the managers and employees were bothered about their assigned duties alone earlier. They never thought about the consequences of their activities. For example, earlier production people often stopped their production activities even for silly problems of the machineries since they were unaware of the impacts of such stoppage of production to the organization. Even an hour long production loss may cause substantial damages to the organization. After the development of scientific management principles in the 1990’s and the subsequent development of management accounting, production workers also started to get the exact information about the losses incurred by the organization even for an hour long delay in production. In other words, the production workers started to realize the depth of problems caused to the company due to their deliberate production delaying activities. The above awareness force production employees to avoid such unnecessary delay or stoppage in production thus the company would be benefitted immensely from that. Not only the production department, all the other departments can also improve their efficiency and productivity if they get accounting information. “Management accounting systems were made in conjunction with scientific management movement” (Johnson, 1991, p.10) and moreover, it succeeded in revealing the importance of sharing accounting information to other departments in order to make the employees aware of the consequences of their activities and to improve the productivity of the organization. According to Johnson (1991), “management accounting system serves as a two way communication link between the senior and subordinate managers”(Johnson, 1991, p.4). It is impossible for the top managers to take decisions based on the data available to them alone. Data may not guide the manager always in the right direction. Feedbacks from the top and bottom are necessary for the managers to take sound decisions. Employees often twist the information before passing it to the top management, if they feel that the content of the information is harmful to them. Management accounting helps to reduce this upward distortion in the communication process. Reduction of distortion in communication will help the managers in getting exact information and to take proper decisions. “In earlier years companies gained competitive advantage mainly through economies of scale and low cost production and therefore the accounting model defects were not much significant” (Johnson, 1991, p.202). The importance of management accounting was not realized by the corporate world earlier because of its blind confidence in traditional accounting methods. Organizations thought that the mantra for success was to reduce the cost of production as much as possible and sell as much as product possible in the market. However, the corporate world realized that cost reduction alone may not increase the selling. The importance of relationship building among different stakeholders was realized by the corporate world rather late. The above awareness forced corporate world to give more focus to build relationships with stakeholders. Management accounting was one method adopted by the corporate world to strengthen its relationships with the employees. It should be noted that “Bad management and noncompliance with recommended and approved accounting standards attracted considerable blame for 1960’s corporate failures” (Clarke et al, 2003, p.50). Earlier, managers did not take their employees in confidence and they were reluctant in passing sensitive information to the employees. As mentioned in the example in the previous paragraph, managers never passed the accounting information to the employees earlier. The lack of information prevented the workers from working smarter and the corporate world suffered major setbacks during the latter half of twentieth century. “Bankruptcies and liquidations in the early years of 1990’s evoked the necessities for taking actions to prevent unexpected failures” (Clarke et al, 2003, p.7). According to Certified Management Accountants, Canada; For management accountants, a working knowledge of scenario planning can help in applying core management accounting disciplines, such as cost management, profitability analysis, risk management, and performance measurement as well as forward-looking strategic and operational planning, budgeting, and forecasting (Management Accounting Guidelines (MAGs), 2011) Huge fluctuations are taking place in today’s business world. It is difficult to anticipate what is going to happen at the very next moment in the corporate world. The recent recession came quite unexpectedly and no economic gurus or business experts were able to forecast or predict it. If implemented properly, management accounting will help organizations to overcome such difficult periods. “In the boom periods of late 1990’s earnings management, the manipulation or the favorable interpretation of accounting standards to achieve desired performance targets became a dominant feature in the corporate world”(Clarke et al, 2003, p.33). As in the case of other segments of human life, corporate business philosophy is also changing rapidly. The attitude, living standards and life philosophies of the people are changing rapidly because of the huge developments in science and technology. These changes often reflect in the working styles of the employees. Current employees do not like to work like machines; they like to establish close relationships with the organization they are working for. In order to build the trust and confidence of the employees, it is necessary for the organization to take the employees in confidence and share sensitive information to them. Management accounting helps organizations to build mutual relationships with the employees. “The task of management accounting is to say how to use certain means to the best advantage”(Johnson, 1991, p.52). Working harder and working smarter are entirely different things. A hard worker need not be a smart worker; also a smart worker need not be a hard worker. A smart worker may deliver more than a hard worker even if he appears to be working less. In other words, the essence of improving productivity and efficiency of an organization may not depend on hard work alone. Smart use of machineries and other equipment can help an organization and its employees to improve their productivity. Management accounting helps workers to work smarter rather than work harder. For example, consider a fabricator is fabricating acrylic dispensers for two different clients. It is quite possible that the organization is charging different prices to these clients because of their different needs (one customer may ask for more polishing work on the dispenser while the other may not need that). If the worker is aware of the requirements of the clients and the unit prices of the dispenser, he can control his works accordingly. In the absence of such information, the worker may polish all the dispensers equally well and the organization may suffer because of that. “Management people often refer cost accounting as a meaningless procedure because of the obligation of the accounting manager to cooperate with production manager” (Johnson, 1991, p.137). Production manager is the one who knows the exact amount of material and labor needed to produce a particular product. Accounts Managers often take the feedbacks of production managers before they calculate or estimate the price of a particular product. In management accounting, the above procedure is unacceptable. According to management accounting principles, apart from cost of labor and cost of raw material, the business climate also should be analyzed before estimating the price of a product or service. Even though management accounting is so popular in corporate world at present, it has some disadvantages also. Johnson (1991) has pointed out that “Management accounting system fails to provide accurate product cost since costs are calculated based on labor rather than the demands made by each product on firm’s resources” (Johnson, 1991, p.2). Management accounting gives over emphasize to labor while deciding the price of a product or service which is not advisable. Labor is only one resource of the organization. Mobilization of the entire resources of the organization is necessary for the organization to survive in the market. For example, consider an organization has a huge stock of a particular raw material which can be used to produce a particular product. If the organization was able to consider the availability or stock of raw materials while calculating the unit price of the product, it can definitely reduce the unit price and can compete effectively in the market. On the other hand, if the organization fails to account for the availability of the raw material and considers only the labor needed for manufacturing the product, it may raises the unit price and subsequently its competitive power could be decreased in the market. Another drawback of management accounting is the fact that “Management accounting reports reduces productivity since operating managers forced to act against the economic and technological reality” (Johnson, 1991, p.1). It is impossible to assess the performance of an organization before recession, during recession and after recession in a similar fashion. Sometimes the performance of the organization during recession would be far better than its past performance even if the figures do not support it. This is because of the loopholes in management accounting procedures. Conclusions Management accounting is gaining prominence in the corporate world at present because of the development of scientific management principles. It has changed many of the traditions prevailing in management and cost calculation in the corporate world. Management accounting make use of the business climate and the economic conditions along with the labor cost and cost of materials while deciding the unit prices of the products and services. It strengthens its relationships with different stakeholders. References 1. Clarke F, Dean G and Oliver K (2003). Corporate Collapse: Accounting, Regulatory and Ethical Failure Publisher: Cambridge University Press; 2 edition (July 21, 2003) 2. Johnson T.H. (1991). The Rise and Fall of Management Accounting. Publisher: Harvard Business Press (March 1, 1991) 3. Management Accounting Guidelines (MAGs), (2011). Retrieved from http://www.cma-canada.org/index.cfm?ci_id=4614&la_id=1 4. What is Management accounting? (2011). Retrieved from http://www.cimaglobal.com/About-us/Why-CIMA-is-different/What-is-management-accounting/ Read More