Management Accounting Techniques - Essay Example

Management Accounting Techniques Name Institution Course Date In the current business environment, competition is intense in both corporate and business worlds. The business owners continue to demand business strategies that help their businesses achieve its objectives and competitive advantages in all its business operations. Management accountants have an important task of providing information used for making informed business decisions. Indeed, their roles are vital in controlling organisational cost, productivity and pricing decisions (Ashfaq, Younas, Usman and Hanif, 2014. Traditional management accounting techniques have failed to cope with the demands of globalization and requirements needed in the manufacturing practices. These techniques are incapable of providing the accurate costs of products. Modern management accounting techniques have therefore been invented to deal with the challenges brought by global competition, technological changes and changes in the manufacturing practices. However, traditional management accounting systems are still used because of its benefits to the organization. This essay analyses the contribution of traditional management accounting techniques in an organisation, the necessity of modern management accounting techniques and the role of accountants in the implementation of the modern management accounting techniques in an organisation. Overview Management accounting techniques can be used for a variety of purposes by organisational managers. They can be used for tracking, recording and reporting financial information for purposes of managerial review (Zoni, Dossi and Morelli, 2012). Often, the national accounting standards are not followed by management accounting. Managers can choose to create their own accounting systems in accordance with their business operations, company objectives, or the need to have business information (Chanegrih, 2015). It is not surprising that management accounting brings significant benefits to the organisation. These benefits usually coincide with the company’s ability to improve the overall business profitability and operations. In its management accounting function, a manager can create a firm’s competitive advantage through development of cost allocation processes. Contribution of Traditional Management Accounting Techniques Traditional management accounting techniques are beneficial to firms that emphasises on low-price strategies. Indeed, they can assist organisations in lowering their operational expenses. In most cases, organisations utilize management accounting information for purposes of reviewing the cost of operating business as well as economic resources. Managers are able to understand how much it will cost to successfully carry out organisational business. Additionally, traditional management techniques are useful in analysing the quality of various economic resources important in production of goods and services (Askarany, 2003). In case the overall quality of the product is not affected after cheaper raw materials are used, managers can carry out this change in order to reduce products. Organisations make decisions from time to time on various issues that affect the organisation. Traditional management accounting systems contribute significantly to the organisations by improving the decision making process (Hilton, 2004). Managers can utilize management accounting information for making decisions rather than make organisational decisions by using only qualitative analysis. Often, management accounting provides qualitative analysis for purposes of making decisions on various opportunities. Managers can carry out a review of each opportunity by utilizing qualitative analysis in order to be fully sure they understand about business decisions. Measurement of performance is achieved by using traditional management accounting techniques through budgetary control and standard costing. It assists managers to know the deviations that exist between the actual cost and standard cost. If standard cost is less than the actual cost, the performance is good. Efficiency of employees can also be achieved through budgetary control techniques. The importance of traditional management accounting techniques cannot be overstated. They are capable of increasing financial returns of a company when used correctly and in situations that demands them. Management accountants can conduct preparation of financial forecasts that relate to consumer demand and effects that consumer price changes have in the marketplace through these techniques. Managers usually use this information in order to be sure that the goods and services produced are meeting the demand of consumers at the current prices. In addition, organisations keenly follow the competitive nature of the economic marketplace. Indeed, competition is capable of reducing organisational financial returns through its business operations. Traditional management accounting techniques provides information that is used for performance evaluation (Chenhall and Langfield-Smith, 1998). It also provides information that is used in planning organisational operations. In most cases, budgetary systems have been traditionally used to assist the organization in conducting short-term resource planning while capital budgeting is for the long-term. ‘Irrelevance’ of Traditional Techniques in era of Global Competition Recently, global competition has significantly increased and the challenges for managers have intensified than has ever been. In order for management accounting to remain relevant, adapting to changes in the managers needs is necessary (Chenhall and Langfield-Smith, 1998). As a result, modern management accounting techniques has emerged. Indeed, traditional management accounting techniques have been severely criticised for failing to cope with the requirements that is needed in the manufacturing practices brought by technological changes (Askarany, 2003). For this reason and some other inadequacies in the traditional management accounting systems, modern systems are important to address these challenges and the problem of global competition. Intense global competition calls for organisations to use more accurate tools to enhance the cost of its products and services. Traditional management accounting techniques cannot adequately and accurately provide the total cost of producing a product. In this case, firms cannot understand how resources are being used in order to achieve strategic results. Cost volume analysis analyses organisational costs and revenues important in the decision making process. Organisations need to link its operations with its objectives and strategies. Traditional management accounting techniques cannot assist an organisation in carrying out these activities. Contemporary techniques are therefore necessary to provide organisation with accurate accounting information for effective decision making (Ashfaq et al., 2014). In fact, activity-based costing provides factual and accurate picture of how costs have been allocated in a firm. Traditional management accounting systems focuses on the internal problems or concerns inside the organisation (Chenhall & Langefield-Smith, 1998). Moreover, they are financially-oriented. It includes techniques such as cost variance analysis- budgetary control tool and performance measures that are profit centred. On the other hand, modern management accounting techniques utilize both financial and non-financial information. Additionally, they explicitly take a strategic focus (Chenhall & Langefield-Smith, 1998). This is manifested in various benchmarking techniques and the manner in which activity-based costing is designed. Adoption of innovative management accounting techniques have been significantly carried out by many firms in order to deal with rapid technological changes, intense competition and changes in the manufacturing processes (Watts, Yapa and Dellaportas, 2014). These techniques are adopted in order to lower the cost of production, increase productivity and improve products quality (Watts et al., 2014). Traditional management accounting techniques have failed to provide organisations with detailed information on activities that are important in achievement of its objectives. They have not kept pace with the increasing demands brought by changes in technology to the manufacturing sector. Today, accurate information is needed in making various organisational decisions. Modern accounting management techniques remove distortions inherent in the traditional management accounting systems (Watts et al., 2014). It also provides accurate cost information useful in making better decisions in the organisation. In addition, modern management systems assist an organisation to achieve efficient strategic planning. Necessity of Modern Management Accounting Techniques Contemporary management accounting techniques are developed to deal with environmental changes. It is as a result of development of additional processes in the organisation (Chenhall and Langfield-Smith, 1998). Modern business environment is very competitive and demand for information is uniquely high. Flexibility of modern management accounting techniques helps in gathering important information that can be used in giving a firm its competitive advantage. The rapid development of technology and competitive pressures has forced companies to seek comparative advantage in order to remain viable (Watts et al., 2014). In a dynamic and competitive business environment, management accounting techniques is thought as an important tool that organisations can use to achieve comparative advantage. It is therefore not surprising that one of the fundamental functions of companies is to design and maintain effective cost management techniques. Traditional management accounting techniques are generally tailored towards preservation of the status quo (Drury, 2008). The ways in which organisational activities are performed are not reviewed with these techniques. Containment of cost is emphasized rather than reduction of costs. Development of information and communication technologies has enabled customers to easy access to the products they need and when it becomes available. As a result greater supplier competition needs to be developed. On the other hand, new production techniques have enabled suppliers to sell products of high quality at low and competitive prices. Satisfaction of customer demands is the main focus of these new management accounting techniques. An intense competitive environment has been created by these new developments in the business environment. Traditional management accounting techniques are not able to deal with these developments because traditionally, competitiveness was defined on the basis of defeating a competitor on cost (Drury, 2008). However, the current business environment requires organisations to carry out two steps in order to achieve competitiveness which traditional techniques do not provide. It entails listening to the demands of customers and eliminating waste in a continuous manner. Indeed, organisations become successful by learning how customers will be satisfied and what satisfy them. Reduction of waste including accounting practices that are not production brings the question onto which accounting tools should accountants rely on. Standard costing has been criticized for reducing volumes produced to the level that is required by the demands in market in lean organisations. In this case, inventory is considered wasteful (Collier & Agyei-Ampomah, 2008). This results in higher expenses and higher per unit overheads which negatively affects the selling prices and reduce profits in case prices do not change. Traditional costing methods favour mass production of goods by relying on economies of scale (Collier & Agyei-Ampomah, 2008). However, in most parts of the world especially Western economies, mass production has significantly declined. In contrast, the aim of lean production is to make products one by one in order to satisfy the needs of customers. Indeed, lean production focuses on the entire organisational operations as oppose to a certain department. Budgeting and costing techniques may no longer be relied so much as before hence decreasing the relevance of traditional management accounting techniques in the modern business environment. Role of Accountants In the last 10 years, dramatic changes have been witnessed in the business environment. The conditions in the industries and environment have become more volatile as the use of technology continues to increase in organisations. Moreover, competitive threats have increased especially from the global business environment. The role of accountants as the only supplier of accounting information continues to be challenged by other organisational stakeholders (Lucey, 2008). In order to meet these challenges, accountants should have sufficient knowledge in various disciplines in order to provide the requisite information when needed. In fact, accountants are required to master new concepts and management accounting techniques. They must be critical of the present techniques and information for purposes of ensuring their future relevance. In the future, accountants will have a challenging task as modern management accounting techniques continue to adopted and evolved. The role of accountants has increased in the wake of modern management accounting techniques. They have become indispensable and play an integral part in the organisational decision making process. Hilton (2004) argues that accountants have become significant strategic partners in the management team of organizations. Modern management accounting techniques is relatively new managerial accounting term that will certainly continue to increase significance of accountants. Hongren, et al., (2003) contends that contemporary management accounting techniques means ‘a changing set of concerns among management accountants’. Previously, management accountants used to carry out its activities in the organisational accounting department and report to financial controller. Today, management accountants are found throughout the organisation as they help in implementation of modern management accounting techniques. They work in cross-functional teams consisting of employees from research and development, marketing, production and distribution departments. Globalization of markets has brought changes to the traditional functions of accountants occasioned by the need to adopt new management accounting systems. Historically, management accountants were regarded as ‘mere counters of figures’ (Ahid and Augustine, 2012). Today, accountants estimate the competitive position of an organisation by using the modern management accounting techniques. Due to competitive pressures, accountants assess organisational competitive advantage and how its position can be improved. The increase use of technology in organisations has enable accountants to track information on performance in the modern management accounting systems. There is an increasing pressure for firms to lower the prices of their products and services. Accountants are tasked with the job of understanding which organisational activities are responsible for high costs (Lucey, 2008). They evaluate the benefits and costs derived from total quality management initiatives. It is their role to quantify costs and benefits that is needed in increasing satisfaction of customers. In fact, accountants measure the product costs and benefits throughout its life span. This function is increasingly important as rapid technological innovations has shortened the life cycles of products hence the need for rapid delivery of products to the market. Overall, accountants assist managers improve business performance by making better decisions based on their analysis of modern management accounting techniques used in the organisation. Conclusion Management accounting has played significant role in organisations. It provides information that is useful in carrying out internal business processes, planning and controlling and management of resources. It has evolved and it is currently utilize to measure organisational economic and financial activities. Globalization and rapid change in technology has transformed management accounting and the roles of accountants. Traditional management accounting techniques are no longer favourable as they have not evolved to meet the current demands in the business environment. The roles of accountants have since increased and they are more involved in the business operations than ever before. They continue to help managers coordinate various business functions such as cost allocations and analysis of the value gained from the resources committed to research and development. References Ahid, M., & Ayuba Augustine, D. (2012). The Roles and Responsibilities of Management Accountants in the Era of Globalization. Global Journal of Management And Business Research, 12(15), 43-53. Ashfaq, K., Younas, S., Usman, M., & Hanif, Z. (2014). Traditional Vs. Contemporary Management Accounting Practices and its Role and Usage across Business Life Cycle Stages: Evidence from Pakistani Financial Sector. International Journal of Academic Research in Accounting, Finance and Management Sciences, 4(4), 104-125. Askarany, D. 2003. An Overview of the Diffusion of Advanced Techniques. In B. F. Tan (Ed.), Advanced Topics in Global Information (Vol. 2, pp. 225-250). London: IDEA Group Publishing. Chanegrih, T. (2015). The Effects of National Culture on Changes in Management Accounting Systems. 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