Management Accounting Issues - Essay Example

?Introduction: With the advent of information technology, s have found a way to aggressively bargain with a product or a service provider. Information technology has allowed consumers to go on the internet, and extract all pertinent information regarding their desired product or service. Since, customers are now in a position to compare one service or product provider with his rivals, they can engage in negotiations, bending in their favour. This shift in paradigm has made businesses more customer and competitor oriented, whereas, previously these businesses were more internally focused. This shift in orientation has brought with it the requirement to induct new practices and upgrade exiting practices. In this endeavour, a change in the orientation of management accounting is required. Rather than just supporting internal processes and providing information for decision making by top management, management accounting has taken a more strategic outlook (Baines and Langfield-Smith, 2003). Management accountant, from just being focused on operational issues have added new responsibilities in their job description. These responsibilities are more strategic and have to do with knowledge regarding customers, financials, human resources, and processes. Thus, management accountants have become strategic accountants in this new and evolved business environment (Dixon, 1998). In reaction to a more pronounced competition, companies have started doing competitor appraisals, changing from its previous practice of internal assessment. A framework for strategic management accounting, based on contingency theory has been adopted by companies. This framework allows companies to better adapt their internal business processes to fit the underlying variables in the external business environment (Langfield-Smith, 2008). The internal business processes should correspond with factors like the firm’s size, business strategy, and market orientation etch. In order to design business processes in this way, the urge is to use management accounting techniques which have strategic applications, and use the insight of management accountants in strategic decision making. The second point requires giving management accountants a more active role in the strategic management processes (Cinquini and Andrea, 2007). These changes, although very dramatic, are essential to maintain a sustainable business. Businesses from being mechanical have become more organic, making them sensitive to the slightest of change. But in order to maintain a competitive business operation changes in the way things are done is required. The development of commercial management expertise, including marketing, general management and financial management, has become essential (Atkinson, Banker, Kaplan, and Young, 2011). This has given rise to the concept of looking at the business holistically. This concept of looking at the business from a 360-degree viewpoint has given precedence to the build-up of cross-functional teams, team-based structure and horizontal integrations. This new approach has blurred the line between boundaries and has lead to a culture build around information sharing and collective decision making. Firms who believe in this have merged their activities across their supply chain to become more customer and competitor focused (Bisbe, Batista-Foguet, and Chenhall, 2007). As mentioned earlier, management accounting has taken a more strategic outlook, with a focus on strategy, long term future oriented time frame, and an external focus, whereas previously, this focus was more towards internal processes and a short-term time frame. Thus this change is more of a strategic nature rather than of any other reason (Potter, 2005). Consequences of the changes: As highlighted earlier, businesses in order to face the hostile business environment effectively and efficiently have become more nimble and strategic in orientation. Traditional functional departments have been dissolved to form cross functional teams. Functional areas are working keeping in mind the organisational strategy, thus aligning them more closely with organisation wide strategy. This new setup has changed the roles of every office bearer and in light of this change the role of management accounts has also changed (Atkinson, Kaplan, Matsumura, and Young, 2007). This new role requires them to take active part in strategy building, streamlining business processes and keeping a vigilant eye on competitors. Previously, management accountants were more involved in providing information for top level managers, so that they could make strategic decisions. But now these strategic accounts not only provide data that help in making a strategic decision but also help in formulating a strategy. This new role has created a utility for these accountants in cross-functional teams (Lowe, 2001). Since companies are now adapting processes to fit the external environment, they are also conducting competitor and customer analysis. In this they focus on competitor and customer accounting procedures before undergoing strategic decision making. A company’s costing, planning, controlling systems and performance measurement systems all take this in to account, while undergoing their own independent procedures (Steen, 2011). Since the companies have shifted into this new paradigm, they have started turning to other means in order to maximise company’s profits, and in turn shareholders wealth. In this regard, fields like marketing and public relations are attracting the attention of businesses, which are will to spend extra amount just to evoke customer response and stimulate demand of their product or service. Whereas, previously the attitude was to come up with a product or service which had a utility for the end consumer, but now the attitude is to first create a need amongst consumers and then come up with a product that satisfies this need (Kaplan and Atkinson, 1998). The nurturing of the need is done keeping in mind the cost that would be incurred to satisfy this need. This mentioned notion requires a close working relationship between marketers and management accounts. Both parties needing one another’s input and insight to take the company on a forward looking path (Lovell and MacKenzie, 2011). Thus, a relationship of mutual trust and cooperation is created by this changing business environment. Another much important aspect of this change has to do with the evolution, in the tools and techniques used by traditional management accounts. Contemporary management accountants are now resorting to those tools and techniques that enhance their strategic outlook (McSweeney, 1995). Since in this paradigm management accountants are more involved in the strategy decision, they are expected by their teammates to bring in knowledge that will help in furnishing an effective strategy. This makes it imperative upon management accountants to get associated or familiarised with tools and techniques which help them to justify their position in strategic decision making process of their company (Munro, 1995). New Management Accounting Techniques: Attribute Costing: This concept refers to the practice of costing for specific product related attributes which will appeal to the customers (Cadez and Guilding, 2008). Doing this helps a firm to make trade off decisions regarding which product attributes to offer, keeping in mind there feasibility to the firm. Competitive Position Monitoring: This practice entails analysing competitor’s competitive position by looking at trends regarding its sales, market share, production volume; unit cost, unit price, and return on sales etc (Cadez and Guilding, 2008). Brand Valuation: The concept deals with the assessment regarding the financial worth of a brand through a valuation process. In this valuation process variable like brand leadership position, stability, market, internationality, trend, support and brand attributes are assessed. This combined with historical brand related data helps to define the worth of the brand (Cadez and Guilding, 2008). Strategic Pricing: In order to come up with an optimal price, which maximise profit margins, communicate value and match competitors’ prices, a firm needs to consider multiple variables like: price elasticity, competitors’ price reaction, market growth, economies of scale and price etc (Cadez and Guilding, 2008). Customer Profitability Analysis: This concept entails profit calculation from a specific customer segment. This is done by tracing the cost that would be incurred to bring the customer in this customer segment to the company’s products for example cost of marketing and distribution. Moreover, the company also needs to come up with a figure of expected revenue from this customer segment. This process is also known as “customer account profitability” (Cadez and Guilding, 2008). Value Chain Costing: This approach requires allocating cost to all the activities forming a company’s supply chain for example procurement, design, production, marketing and distribution. This allows a company to trace cost across the supply chain, and try to influence this cost by undertaking cost reduction strategies. This approach can result in a cost related competitive advantage for a firm and make its operation competitive in the market place (Cadez and Guilding, 2008). Application of these concepts in the Tourism Industry: Travel agencies price a tour package for a country by keeping in mind the number of attract destinations the country is able to provide. By assessing the country’s most attractive attributes, which will attract tourists the most, a travel agent builds a travel package (Pavlatos and Paggios, 2008). This is an application of “Attribute Costing” in the tourism industry. In the global tourism industry the rivalry exist between countries, which are competing to attract tourist and earn foreign currency. In order to increase their market share, countries invest on projects and infrastructure that will create attraction for it (Athiyaman, 1995). The projects and infrastructural developments that would be undertaken will be done keeping in mind the investments made by rival countries in this regard. In this way the tourism ministry will be engaging in “Competitive Position Monitoring”. Countries that have succeeded in creating an image of “Favourable Destination Spot for Tourism” are adding this attribute in their travel prices. The travel packages also add this accomplishment in the prices of the tour, comparing these prices with the prices of a tour package of a rival country, helps to assess the worth of the country (Oslen, 2004). This is an application of “Brand Valuation”. Once a country has established favourable brand equity for itself it is than able to influence prices of its tour package. It can charge extra on its travel visa and the ticket prices of its local destination spots can also reflect this favourableness (Oslen, 2004). This is an application of Strategic Pricing” To display exclusivity in its brand a country can issue visa to only those tourists who are most likely to visit the country on every vacation, rather than issuing visa to one time visitors. Since the earlier mention customer segment will bring more business for local business men, a country can give special treatment to them (Oslen, 2004). This is an application of “Customer Profitability Analysis”. Tourism industry is one of those industries which are highly dependent on infrastructural development and facilities development. This cost which comes as a result of undertaking massive number of development projects and augmenting activities is large enough for the tourism industry to keep track of each and every cost bearing activity. This data can then be used to assess the benefits that accrued as a result of particular developmental investment. If the revenue generated by a particular investment is less than the investment made than any similar projects should not be undertaken in the country from than onwards (Oslen, 2004). This is an example of “Value chain costing”. Reason for Selecting these Techniques: Since, the business environment has evolved; it has shifted the focus of business leaders and practitioners to concepts like branding, cost shrinking, competitive pricing, and analysing customers, therefore it was this vary reason which provided the opportunity for discussing these strategic techniques. These techniques discussed earlier, have at their epicentre concepts like these. So in order to illustrate the practicality of these concepts these techniques have been discussed in relation to the Tourism industry. Specific Advantageous for the Tourism Industry: These techniques prevent the tourism ministry from squandering vital resources. These resources which include funds are very hard to get, and this makes it even more important for the ministry to employ them efficiently. Through these techniques a country can keep track of all the costs it incurred in order to make its country a favourable tourist spot. Data or results of these tools will enable a country to design a differentiating promotional campaign for itself. In this promotional campaign the country will communicate the value proposition it has the capabilities to deliver. Epistemic Change in Management Accounting: After discussing the changes that have befallen the industry and the resulting change in the role of management accountants, it is now pretty much clear that the role of management accountants has switched from operational support to a more strategic one (Chenhall and Langfield-Smith, 1998). The contemporary knowledge of management accounting is making using of tools and techniques with strategic aims and purposes (Kaidonis, 2009). Management accountants who have the prior knowledge of their usability have therefore gained importance in the organisational framework. The most important change that has come in this regard is the development of a forward looking and long term strategic orientation of management accountants, which is substituting the short-term attitude of these accountants (Lord, 1996). Implications of the changes in the Management Accounting Techniques on Intrinsic Sustainable Development: Since the advent of these changes, an orientation towards objectivity has taken over managers. In this regard managers are applying tools and applications which allow them to make direct impact on the operations of their organisation. They are utilising tools and procedures which are built around sound logic, are practical and address the encompassing business environment (Roslender and Hart, 2003). This tendency has been developed in managers to address the need of ensuring sustainable business operations. To ensure sustainable business operations, business managers need to exploit those tools which enable them to identify probable opportunities of competitive advantage. They also want tools which allow them to incorporate these competitive advantages in their business operations. So in this regard these tools have come up for mangers to make use of if they want to design sustainable business operations for their businesses (Adler, Everett, and Waldron, 2000). These new tools and techniques also help practitioners to comprehend the changes in the business environment. These tools help them to become sensitive to even the smallest amount of change, which has the capability to influence their businesses. Furthermore, these tools are consistent with the contemporary form of organisational setup, which requires the building up of cross-functional teams to maximise employees’ productive capabilities and to nurture a healthy organisational culture. 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