Why Traditional Practices Have Been Criticized for Not Being Relevant and Flexible - Assignment Example

1) Identify and explain why traditional practices have been criticized for not being relevant and flexible. Traditional accounting practices have typically been characterized of the following: 1. A practice that has short term focus 2. Accounting practices lacking value innovation 3. Very conventional financial projections and planning 4. Having too high innovation costs 5. Typical lack of finance 6. Fraught with too long payback periods Given that scenario, it was in the late 1980s, that traditional accounting practices came under fire. More precisely it was educators and accounting practitioners who were criticized of using traditional accounting practices even then since there had been a sea change in the same during the last 60 years or so. Not only that what came under heavy criticism was also the curriculum taught to accounting students, which had remained the same despite a radical change in the practices during then last six decades. Also, during this period business environments had changed along with the way the businesses are done. In spite of the great progress made in accounting concepts during recent years, accounting that has been carried forward from the mid-twenties are beset with numerous criticism of existing practices and with unsolved problems of considerable magnitude. Current accounting literature certainly doesn't suffer from a lack of ideas and suggestions for improvement and expansion of accounting literature. Critics of today even opine that new sticking to the old accounting practices have retarded the new innovations from being employed and considered for purpose of betterment of accounting practices. The criticism finds its genesis in a presumption that professional accounting institutes feared that management accountants would increasingly be seen as superfluous in business organizations. It is based on this premise that later a number of resources were employed to the development of a more innovative skills set for management accountants. A reference to cost control can be used to draw a distinction between ‘traditional’ and ‘innovative’ accounting. Cost accounting is a central method in management accounting, and traditionally, it was variance analysis that was management accountants’ principal technique. Variance analysis, on the other hand, is a systematic approach to the comparison of the budgeted costs and actual costs of the raw materials and labor used during a production period. While some manufacturing firms still use some form of variance analysis, it nowadays tends to be used in conjunction with innovative techniques such as activity-based costing, which are designed with specific aspects of the modern business environment in mind and life cycle cost analysis. It is considered that lifecycle costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i.e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product. Activity-based costing, popularly termed as ABC recognizes that the amount of activities in modern factories determine manufacturing costs. Activities could be the number the amount of production equipment idle time and production runs per month. Therefore the key to effective cost control is giving attention to these activities and optimizing them. In typical modern factories, both activity-based costing and lifecycle-based costing recognize the importance of avoiding the disruptive events like quality control failures and machine breakdowns. This is far more important than reducing the costs of raw materials. A tradition is a belief, an action, a behaviour pattern, or an attitude which finds justification in the present largely because of its general acceptability in the past. The tradition mmay well have had a logical acceptability in the past and/ or may even not have been so widely accepted in the days of its practice. While the basis of the usage and application may be sound or unsound, continued usage itself is of prime importance in the mergence of tradition. From this analogy it is clear that tradition in general may have a logical justification; however, in accounting, an example of a logical tradition may be the cost basis for recording the results of business transactions. 2. Define what rolling budgeting are, examine how they can be implemented and discuss their advantages and disadvantages Rolling budgets are also called continuous budgeting, and more often than not, involve maintaining a plan for a given amount of time period in the future. In the present corporate scenario many see implementation of rolling budget from the perspective of technological resources, which means software. It is widely suggest that to implement rolling budgets technological advancements must be used, even though it is not considered to be a solution, and that is one of its disadvantages. In rolling budgets, a new time period is added in the future as the current time period that ended is dropped. Results are achieved in the same fashion. Multinational like General Electric and Electrolux prepare strategic plans and then integrate annual operating budgets that are divided into four-quarter rolling budgets, and smaller high-tech public companies A scholar Randy Myers identifies in his article Budgets on a Roll a number of problems with annual static budgets. The author says that on examining the problems closely you get to know that these actually are human resource or management problems, where the proper development and use of budgets as just described was simply not understood. One example cited was that of an "account director" who would land several large clients "early in the year and make his annual budget" and then "coast" the rest of the year. This is not a problem with the budgeting process. It is a prime example of inept management and human resource functions that do not know how to plan and develop proper incentive systems. Advantages and disadvantages of rolling budgets Rolling budgets are implemented for a variety of reasons based on the advantages they offer. One of the advantages is that if bottom up budgeting is chosen, the process is simply too slow to get implemented. The annual budgeting process can take up to five months by the time each of the aspects is taken into account, reviewed and approved, often requiring several iterations. The rolling budget process together with the change in the accountants’ role as the budget preparer is expected to significantly reduce the time required to complete the budget process. Also cited are several other advantages for introducing rolling budgets, including that by allocating budgets, say on a three monthly cycle, it will reduce the propensity for cost managers to build in contingencies. Even with predominantly fixed cost businesses, it is acknowledged that a one-year horizon is still a long time, and with this duration comes uncertainty. Managers compensate for this uncertainty by building in contingencies within their budgets. Once the contingency has been built in there is propensity to spend it so that the same contingency can be acquired the following year. Beyond budgeting as an alternative approach to tradition budgeting It is generally accepted that fixed budgets don’t work today. Too static an element, it kis held that a budget as an instrument locks managers into the past - into something they thought last year that it was right. Since economies are changing rapidly and one has to be effective in a global economy with as many and rapidly shifting market conditions with quick, nimble and cut-throat competitors, organization have to be able to adapt constantly to this shift and their priorities have and utilization of resources have to be brought into force accordingly. This is to ensure that they create most value for customers and shareholders. In order to do that, they need the right concepts, management processes and tools – concepts such as the Beyond Budgeting Management Model. For this new management instruments have made their presence felt on the scene and one such instrument is Balanced Scorecard. This helps better in the alignment of the entire organization with corporate strategic objectives. This also helps focus on the essentials, and has created the right foundation. Because if corporate strategy and the objectives are clear for all people in an organization, one can principally react faster to changing market conditions. It is here fixed budget comes into their way and prevents them from really doing the right things. At times as this what is missing is a more flexible operational planning and control model and accountants opine that beyond budgeting model fill this gap. Beyond Budgeting overcomes the restrictions imposed by traditional budgeting. It increases the adaptability of enterprises and promises new possibilities for strategic enterprise management by making resource allocation more adaptive and flexible. It is held that when beyond budgeting model is used, organizations can be managed successfully without a fixed annual budget. Companies such as German ALDI Group, French chemical company Rhodia, and Boots Healthcare International have demonstrated the efficacy of beyond budgeting. Beyond budgeting is based on 12 key performance management principles: 1. Beat the competition 2. Reward team-based competitive success 3. Make strategy a continuous and inclusive process 4. Draw resources when needed 5. Coordinate cross-company interactions through market-like forces 6. Provide fast, open information for multi-level control 7. Create a performance climate based on sustained competitive success 8. Build the commitment of teams to a common purpose, clear values, and shared rewards 9. Develop strategy to front line teams and provide the freedom and capability to act 10. Champion frugality and challenge the value-added contribution of all resources 11. Organize around a network of teams that dynamically connect their capabilities to serve the external customer 12. Support transparent and open information systems References: Marc P. Lynn "A closer look at rolling budgets: the challenges associated with an effective implementation of rolling budgets are management challenges, and software technology can only become part of the solution when managers are ready to use it to enhance their deci". Management Accounting Quarterly. Fall 2004. FindArticles.com. 26 Aug. 2008. http://findarticles.com/p/articles/mi_m0OOL/is_1_6/ai_n11832736 Eric W. Noreen and Ray H. Garrison, Managerial Accounting, 10th ed., McGraw-Hill Irwin, New York, N.Y., 2003. Randy Myers, "Budgets on a Roll," Journal of Accountancy, 26 Aug. 2008, http://www.aicpa.org/pubs/jofa/dec2001/ myers.htm. Andy Neely, Mike Bourne, and Chris Adams, Cranfield School of Management, "Better Budgeting and Beyond," CFO Project, vol. 2, 26 Aug. 2008, http://www.cfoproject.com/ document.asp?d_id=2094. Read More