Management Accounting as One of the Themes in Driving Modern Organizations - Coursework Example

Name Tutor Course Date Management Accounting as one of the Themes in Driving Modern Organizations Introduction According to Hopper, Northcott & Scapens (2007), Management Accounting is a branch of accounting that primarily deals with availing of information to the management of an organization to help in decision making so as to ensure efficiency and effectiveness in operations. Management accounting is therefore very important in providing relevant information to the decision makers. The information is prepared by a management accountant. Every modern organization needs internal information that will enable it to strive and gain competitive advantage. Traditionally the information was concerned with cost control and revenue maximization, however, in the modern approach the information is equally useful in designing strategies, policies and budgetary functions. Since the core business of any organization is to maximize shareholders wealth and management accounting aid in this goal by providing useful information then we can argue that management accounting is one of the core themes in driving modern organizations. Characteristics of Management accounting Drury (2008) discusses the following as the characteristics of management accounting: Legal requirement-Management accounting is optionally prepared and is dependent on the management. Focus- Management accounting focuses on a given segment, for example profitability and cost of some products, services or activities. Accounting principles- The management accounting preparation does not require adherence to accounting regulation instead the focus is on the management requirement of the company. Time frame- Management accounting is concerned with both the past and the future, past information is used to reach a decision about the future. Reporting frequency- management accounting reports are prepared any time as per the requirement of the serving management. For example daily, weekly or even monthly. Users and purpose-Management accounting reports are used by management mostly for decision making. Management accounting innovations Management accounting has seen a complete change from just availing some reports like income statement, statement of financial position, cash flows and computations of various ratios to a point where it includes innovative approaches such as activity based costing (ABC), the balanced scorecard (BSC) and economic value added (EVA) (Hopper et al. 2007). Activity based costing (ABC) The earlier version of ABC is what was referred to as the traditional method. It allocated costs first to cost centers which are departments then later to the cost objects such as customers, services and products. The major disadvantage was that it would overcharge or undercharge a cost center. Then now ABC came into the limelight which was allocating overhead costs in a better way and whose procedure of use is as follows (Srivastava & Lal 2009) All the main activities in an organization are identified. Examples include purchasing, dispatch, machining, material handling, and reception. Factors that determine the cost of the activities are identified. These are called cost drivers. For example number of set ups. The cost of each activity is then collected. This is also known as cost pooling. Using the cost drivers, charge the overheads to the products on the basis of activity. ABC is considered an innovation because of the following: The design characteristics combination is completely new. For example cost drivers. A number of these characteristics are considered new on various settings. For example there was no widespread usage of complex bases of allocation in the USA than in German and Sweden. The design characteristics are contained in the new concepts such as cost drivers and cost pools. Uses of ABC Cost control. Its use is widespread in manufacturing industries that have clear differentiation of activities. Such activities include material handling, machining, and purchasing. By allocating costs to activities, this method enables comparison of the costs and revenue for profit centers and comparison with budgeted costs in case of cost centers. Decision to buy or produce. ABC is very useful in cost allocation to various activities surrounding a given product. This cost is then compared to revenue for the purpose of deciding whether it is worthwhile producing a given product or buying the product. Budgets and forecasts. There is a link between activities and resources. Activities consume resources. Therefore to predict the costs for a business, ABC plays a major role by identifying the various activities which are in turn allocated resources. This way budgeting becomes more realistic as it addresses the needs of various department in which those activities fall. Process improvement. This involves analyzing the various activities to identify those that do not add value or activities that take more cost unnecessarily. It calls for avoidance of those wasted activities. For example an activity of correcting a fault on a product after a customer complains is a wasted activity since this would have been avoided in the first place. When a critical observation has been carried out on all activities, the problematic areas are identified and measures put in place to avoid them hence no extra cost for rectifying the situation. The ABC method has a few weaknesses such as being expensive and complex to administer. It is not suitable for those firms that use market based transfer pricing and availing of data about the cost pools and drivers is equally a challenge. Balanced scorecard (BSC) Karmakar & Datta (2012) argues that this is an approach which combines the financial indicators with other non financial indicators that are geared towards process improvement. It is a management system that enables organization to focus on the entire organization so as to realize vision. BSC emphasizes that an organization should be viewed from four different perspectives which are essential. Karmakar & Datta (2012) discusses the following BSC perspectives. Learning and growth perspective This perspective is mainly focused on employees as the most valuable component that an organization has. It therefore includes training of the employees on various new techniques regarding their areas of performance. Mentorship is also a key area so that employees can communicate their ideas to their seniors in the most effective way. Business process perspective It is concerned with internal business processes. It enables managers to understand how the business is moving and if the products and services are in agreement with what the customer requires. The internal business processes therefore need to be drafted well to ensure they give an organization a competitive advantage. Customer perspective Customers are the key drivers of any business. Their needs must be addressed lest they find other organizations that will meet them. Better customer service is one area that requires attention, that is, how a customer is handled. Product differentiation is another factor that will create customer loyalty. Once this is done then an organization is sure to be in business. Financial perspective This is the perspective that any firm cannot miss to address. It starts all the way from how the organization will be financed to how profits are to be distributed. Data regarding various products such as cost and revenue are fundamental in making decisions. More and more organizations are embracing the BSC as away to do business. They have realized that focusing only on the financial aspect will not be a long run goal. Internal business processes will ensure the organization will continue to produce unique products, growth and development will ensure employees are satisfied and therefore can produce desirable products and customer focus will ensure the products are always moving. Therefore BSC is a management accounting innovation since initially organizations were concerned with financial aspect, but now they have three more aspects to address to achieve sustainability. Source: Kaplan R.S & Norton P.D, using the balanced scorecard as a strategic management system. Harvard business review February 1996. PP. 76 Economic value added (EVA) Hopper et al. (2007) agrees that this innovation was introduced as an aftermath of residual income concept. It emphasizes the consideration of the cost of capital before arriving at profit for the organization. By formula EVA is calculated as: EVA=Operating profit – cost of capital. The EVA concept was developed in line with the aim of delivering shareholder value. This will mean managers will concentrate on those key areas that will ensure that will deliver value. In this regard, they may dispose off those assets which cannot generate income to surpass their cost. It is a concept that has been accepted worldwide as the most appropriate and in line with other principles. Purpose of management accounting in driving modern organizations The innovations above together with other techniques have been at hand in elaborating the key purpose of management accounting. They include the following: Cost management- This is one of the earliest purposes of management accounting. It involves allocating costs to the various cost centers to enable comparison of the costs and revenues generated. An example of the new method used is ABC. Every organization worldwide is concerned with cost and how to control it. This will help to determine wasted activities and products that do not surpass their costs. This way the production of these items can be stopped or can be outsourced (Hansen & Mowen 2006). Operational planning and continuous improvement - Budgeting is one the functions under planning. It involves allocating funds to various activities of the organizations. Every department presents its funds requirement to a central unit for example finance, which then considers the reasonableness given the previous budget. The data available is used to determine the reasonable fund that can be allocated to each department (Drury 2005). Decision making- data about any product can be used by managers to decide the viability of that product. To produce a new product, forecasted data is analyzed in order to reach a decision whether the product will be produced or not. It is through management accounting that some products may be dropped may be because they are too costly (Lucey & Terry 2003). Strategic management-this is one of the changing roles of management accounting. This role emphasizes on use of both financial and non financial information from within the organization as well as outside environment upon which the business operates. Information from outside the business is vital, it enables a business develop unique products to obtain competitive advantage. Competitor information such as price and techniques of production can be analyzed for the benefit of the business by choosing the most efficient cost reduction techniques (Horngren, Datar & Rajan 2009). Risk management-a risk is an uncertainty and can occur in both financial and non financial processes. In financial it may involve actual loss of funds or assets but in non financial it may involve failure in processes. If a process fails there will be additional resources to correct the process. Management accounting calls for documentation of the various processes and the involved costs so as to minimize wastage (Weygandt, Kimmel & Kieso 2010). Conclusion In conclusion management accounting has various roles in an organization development from decisions to strategic management. Its roles are changing so fast that soon it will be the center of all activities and evaluation of the firm. Organizations that have taken management accounting seriously with its benefits have grown and therefore is one of the themes driving modern organizations. Reference List Drury, Colin, 2005, Management Accounting for Business, 3rd edition, China: C&C Offset. Drury, Colin, 2008, Management and Cost Accounting, 7th edition, China: C&C Offset. Hopper, Trevor, Northcott, Deryl & Scapens, Robert, 2007, Issues in Management Accounting, 3rd edition, England: Pearson Education Ltd. Horngren, Charles T., Datar, srikant M. & Rajan Madhav V., 2009, Cost Accounting: A managerial emphasis, 14th edition, NewYork: Prentice Hall. Hansen,Don R., Mowen, Maryanne M.,2006,Cost Management Accounting and Control, 5th edition, United States of America: Thomson South-Western. Kaplan R.S & Norton P.D, using the balanced scorecard as a strategic management system, Harvard business review February 1996. Karmakar, Anupam, Bidisha, Datta, 2012, Principles and Practice of Management and Business Communication, India: Dorlin Kindersley. Lucey, Terry, 2003, Management Accounting, 5th edition, New York: Biddles Ltd. Srivastava, Seema, Lal, Jawahal, 2009, Cost Accounting, New Delhi: McGraw. Weygandt, Jerry.J, Kimmel, Paul D.,Kieso, Donald C. 2010, Managerial Accounting: Tools for Decision making, 5th edition, New Aster: John Wiley & Sons. Read More