Comparison between the Function of Controlling and Management Accounting - Assignment Example

3 Comparison between the Function of Controlling and Management Accounting The comparative management accounting discipline is still new in a way that there still exist gaps to be filled in by carrying out research related to management accounting. One most preferred way of doing this is to amalgamate various cost accounting concepts and techniques applied in different parts of the world, which in turn enables understanding of the divergence of one or more systems of management accounting with respect to other. In this regard, while keeping in view the evaluation of US and German ways of cost controlling and management, it is viable to determine how different areas of management and controlling like planning and budgeting and reporting and support functions, differ in the two countries. In this chapter, therefore, the above stated three functional areas of controlling and management accounting have been discussed and analyzed by focusing on the approaches being followed in the United States and Germany. TO BE CONTINUED 3.1 Planning and Budgeting 3.2 Reporting 3.3 Management Support Function (Performance Measurement and Evaluation) 4 Cost Accounting Practices As has been mentioned in the preceding sections of this study, there are different terminologies used to address similar concepts in different business environments. According to IFAC (1998) “different labels, in different languages, are used to refer to management accounting around the world” (p. 84). TO BE CONTINUED 4.1 In the U.S. In the United States, the management accounting practices provide reports not only on the cost accounting and related matters, but also other financial reporting matters. These include providing financial reports to stakeholders of companies, which are other than management. As a result of these practices, it can be stated that the intended users and focus on management accounting in the United States and Germany differ significantly from each other. TO BE CONTINUED 4.2 In Germany While considering the management accounting objectives prevailing in Germany, it is observed that the practices of managerial accountants are aimed at ensuring that there are no irrational or baseless decisions being made on the basis of information provided by management accounting function in an organization and that the functions of controlling, planning and governance are effectively carried out as well (Macharzina, 2003; Kupper, 2005). TO BE CONTINUED 4.3 Trend in Management Accounting Apart from considering the cost accounting practices in the two countries individually, it is also considered useful to present a comparative evaluation of the cost accounting practices in US and Germany. For this purpose, it is pertinent to consider the research work of Krumwiede & Suessmair (2007), who have compared the cost accounting practices in US and Germany. The work of Krumwiede & Suessmair (2007) is important for this study, as it provides a detailed analytical comparison of the trends and practices in related to management accounting functions of firms operating in Germany and US. In this way, key differences and similarities can be identified and understanding can be developed as to what trends are being followed by organizations in these two countries. Krumwiede & Suessmair (2007) carried out a primary research to explore the basics which result in adoption of differing cost accounting practices in the two countries, and researched the cost accounting practices of both manufacturing and non-manufacturing companies operating in the United States and Germany. The study is significant in a way that it involved personal visits of researchers in selected business corporations and carrying out of survey of selected representatives from each company. In their survey, Krumwiede & Suessmair (2007) included 148 German business entities and 130 companies from the United States from different sectors in both countries. The researchers found in their study that business entities, whether manufacturing or non-manufacturing, give more preference to advanced costing techniques, which in other words refer to RCA, i.e. resource consumption accounting. The survey carried out by Krumwiede & Suessmair (2007) included various statements, which addressed different areas of management accounting and costing systems and concepts dealt with in organizational setups. Majority of the statements were required to be responded on the basis of a 7 point Likert scale. In the first place, Krumwiede & Suessmair (2007) inquired respondents from Germany and United States about their organizations’ focus on management accounting. Focus on Management Accounting Question Asked Germany United States Managerial accounting receives strong, active support from tip management 5.79 4.76 Our company pursues advanced cost accounting methods 4.56 3.52 We have a strong internal decision support, planning and control focus in our firms 4.81 4.28 Internal decision support, planning and control are as important as financial reporting in our firm 5.65 4.93 Approximately, what percentage of accounting employees perform primarily internal decision support-related functions 40.3 35.3 Source: (Krumwiede & Suessmair, 2007) As far as long term emphasis in the managerial accounting practices is concerned, German firms have shown to be more long term oriented in comparison with firms operating in the United States. As for instance, firms from Germany have stated that there focus is on long term targets and short term profit maximization is of not a great concern for them in contrast to US companies. Moreover, there is an increased focus on reaping long term benefits of products and services among German companies as compared to US companies. Long-Term Emphasis Question Asked Germany United States We strive to maximize profits primarily in the short term (Reverse order score) 4.4 3.5 Management will continue offering an unprofitable product or service if it has a promising future 5.25 4.88 Current profit is the only real goal at our company (Reverse order score) 5.16 3.89 Our firm faces a lot of pressure to meet short-term profit goals (Reverse order score) 3.78 2.97 Source: (Krumwiede & Suessmair, 2007) In addition, as far as importance given to precision in management accounting is concerned, German respondents agreed to a greater extent to the statements presented in this regard in comparison with the respondents from United States. Krumwiede & Suessmair (2007) included four statements in the survey questionnaire to understand the importance attached to precision in management accounting by firms operating in Germany and the United States. Apart from importance given to accuracy in management information, German firms are observed to be giving more importance to attention on precision of information, to be exact and precise in analysis and to determine precise solutions for matter under consideration. Importance of Precision Question Asked Germany United States There is strong attention to precision in our company 5.36 4.92 We are careful to be exact in our analysis 5.41 4.84 It is very important for managers to have precise answers to most questions 5.66 4.91 Our management information must be highly accurate in most cases 5.13 5.24 Source: (Krumwiede & Suessmair, 2007) A general implication of this result, as noted by Krumwiede & Suessmair (2007) too, is that the firms operating in Germany are more concerned with precision and accuracy related to the information produced by their cost and managerial accounting function. Moreover, Krumwiede & Suessmair (2007) also investigated the quality of information systems used in the management accounting functions of business entities in the two countries. Although, majority of German and United States’ business entities have agreed that they make use of an ERP system, which complements their management accounting function, but German companies seem to favor more to ERP information systems than US firms. Information System Quality Question Asked Germany United States All processes in our organization are fully described and mapped out 4.91 3.66 Our Information System across functions are highly integrated 5.31 4.5 Overall, the Information System offer user-friendly query capability to various users 4.5 3.91 Our Information System within operations or manufacturing are highly integrated 5.1 4.56 A wide array of cost and performance data is available in the Information System 5.25 4.4 The Information System generally provide data that are accurate and up to date 5.54 4.59 Do you use an enterprise resource planning information system? 81 % 65 % Source: (Krumwiede & Suessmair, 2007) Moreover, the comparison of quality of information systems in the two countries reveals that German firms are more concerned with the quality of information system they are using. As for instance, with regard to every statements presented in the table above, respondents belonging to German firms have agreed more as compared to US firms’ respondents. In addition to this, Krumwiede & Suessmair (2007) also evaluated and compared the cost accounting practices of both manufacturing and non-manufacturing firms in Germany and United States. The results of primary research in this regard, as shown in the work of Krumwiede & Suessmair (2007), are as follows: Comparison of Cost Accounting Practices   Manufacturing Firms Non-Manufacturing Firms   Germany United States Germany United States Application of Plant wide OH Rates 55 % 78 % 53 % 66 % Use of Target Costing 29 % 17 % 16 % 30 % Use of Contribution Margin Analysis and Accounting 79 % 47 % 60 % 51 % Use of Variable Costing & Analysis 27 % 21 % 21 % 28 % High number of RCs (Resource Cost Centers) 175 16.9 207.2 44.1 Identify at least one output measure per resource cost center 31 % 46 % 26 % 39 % Variances are reported by resource cost center 83 % 53 % 71 % 64 % Fixed and variable costs separated for each resource cost center 40 % 50 % 32 % 48 % Costs from support cost centers are transferred to primary cost centers while maintaining the distinction between fixed and variable costs 47 % 43 % 29 % 37 % Activity or Process Based cost drivers 20 % 31 % 23 % 69 % Idle capacity is identified, compared and not allocated to products 35 % 21 % 19 % 14 % Use of available capacity when computing internal cost center rates 53 % 21 % 47 % 20 % Use of replacement cost depreciation 34 % 9 % 26 % 7 % Consumption is estimated for each resource cost center 49 % 39 % 39 % 25 % Standard costs are used for most costing purposes 64 % 73 % 53 % 54 % Source: (Krumwiede & Suessmair, 2007) TO BE CONTINUED 5 Discussion and Conclusion 5.1 Discussion 5.2 Conclusion Read More