Fads and Fashions in Management Accounting - Essay Example

?Fads and Fashions in Management Accounting Management accounting is about using the accounting information in order to make important decisions of the organization that would help in better managing the overall organization and improving the performance of the organization (Fei, and Isa, 2010). Management accounting emphasizes on decision making and forward looking instead of the old or historical data which the basic accounting used to emphasize. There are different methods that have emerged because of management accounting and some of these techniques are; Activity Based Costing (ABC), Grenzplankostenrechnung (GPK), Resource Consumption Accounting (RCA), etc. This report would focus on one of the most used techniques of management accounting, Activity Based Costing and how this report method has changed over a period of time. Activity based costing has been one of the highly and most used management accounting technique and it has been further developed with the passage of time. Activity based management (ABM), time-driven ABC are further enhancements in ABC to make it more effective for the organizations that adapt it. Accounting has over the years been considered as a practice that is used to record and present the summary of all the transactions that occur in an organization. Accounting was considered a system that presented historical perspective and was not highly considered in the decision making (Brimson, 1991). However, management accounting and in particular activity based costing has changed the scenario and now accounting information is used by management to make important decisions to not only improve the profitability but to also improve the performances of the organizations. Activity based costing is a management accounting technique that allows the management to identify the costs that occur in the organization. This method allows the management to analyze and recognize areas where costs are high or unnecessary cost is incurred thus it helps the management to make decisions to reduce the costs. Therefore by implementing this system or method the management is able to control its overall operational costs to a certain extent (Armstrong, 2002). Organizations that are competing for prices and their profit margin is low (Cagwin, and Bouwman, 2002), implementing ABC could allow them to control their costs and thus reduce the prices of products or earn higher profits (Gosselin, 1997). Therefore an industry that is highly competitive would give them the edge to lower their prices. Although it has been identified that implementing ABC is beneficial for the organizations and it can have several benefits. However on the other hand, ABC has its flaws and drawbacks and some of the major drawbacks of ABC are; a. Implementing activity based costing in a service industry is difficult (Startton, Desroches, Lawson, and Hatch, 2009). b. There are some costs that are shared between different departments, products, activities and therefore identifying the costs for each activity is difficult (Piper, and Walley, 1991). c. Activity based costing requires time and even if the organization hires an extra accountant to prepare and implement this costing system, then the individual needs support from each department or employees involved in different activities. d. The technique focuses on cost minimization rather than profit maximization (Hicks, 1992) So with the passage of time, organizations identified some of these abovementioned drawbacks while implementing activity based costing methods and then they changed their system or tried to modify how they implement ABC. Some organizations to improve the efficiency and improve the use of ABC tried to enhance its role and used Activity Based Management (ABM) rather than Activity based costing (Collier, 2006). ABM offers the organizations in providing information that helps them in making important long term strategic decisions. ABM helps the organizations in understanding the impact of different costs and different decisions and at the same time it offers the organization flexibility to make changes and see their impact on the overall organizational performance (Seal, Garrison, and Noreen, 2009). The focus of ABM is on continuously improving the overall organizational performances and to improve the activities of the organization by emphasizing on encouraging the management to formulate more behavioral incentives and decisions that are based on behavioral aspects rather than only accounting perspective. Moreover, activity based management facilitates the management to better understand how different costs are and what costs are correct (Horngren, Bhimani, Foster, and Datar, 2005). Therefore, ABM has been helpful in broadening the scope of the management and to make better decisions that not only considers the costs and profitability but other important aspects that could influence the final outcome (Atrill, and McLaney, 2009). With the complications found from ABC and ABM, some organizations shifted their focus on using time driven activity based costing. Time driven ABC is more simplified version of ABC and Kaplan and Anderson (2004) have named it as the Time Driven ABC. In this revised method of ABC, managers now are able to better estimate the demand of resources that are used by each product, transaction, activity or customer instead of assigning costs of resources to activities and then to different products or customers of the organization (Atkinson, Kaplan, and Young, 2004). Moreover, this new method is able to better and more accurately present the cost driver rates (Kaplan and Anderson, 2004). Time driven ABC model has many features that helps the management and some of the most important features are: a. It is easily to implement and can easily estimate. b. The changes in the processes, resources costs and order variety can be updated easily and their impact can be identified in an easier way. c. It can even be used to analyze and manage millions of transactions and even with so many transactions the model would present fast results and real time operating results (Szychta, 2010). d. This model also uses the variation of orders or consumers and thus the model can be further expanded with less complexity. e. The model helps in identifying unused resource capacity so that the management can take actions accordingly (Drury, 2012). f. The model also helps in forecasting of data, resources, and at the same time allows businesses to manage their capacity at times when the sales are high. Management accounting has changed over the passage of time. It has been more than two decades after the emergence of activity based costing however with the passage of time, there have been changes in how the organizations have been using it and therefore according to the issues being faced by organizations, and these changes have forced organizations to modify how they use these practices and techniques. References Armstrong, P. (2002). ‘The Cost of Activity Based Management’. Accounting, Organizations and Society, vol. 27, pp. 99 – 120. Atkinson, A., Kaplan, R. and Young, S. (2004). Management Accounting (4th ed.), London, Prentice-Hall International. Atrill, P. and McLaney, E. (2009). Management Accounting for Decision Makers, 6th ed. Harlow, Pearson. Brimson, J. (1991). Activity accounting: An activity-based costing approach. J. Wiley, New York. Cagwin, D., and Bouwman, M. (2002). ‘The association between activity-based costing and improvement in financial performance’. Management Accounting Research, vol. 13, no. 1, pp. 1-39. Collier, P. (2006). Accounting for Managers: Interpreting Accounting Information for Decision-making. 2nd ed. London, John Wiley and Sons. Drury, C. (2012). Management and Cost Accounting (8th ed.). Thomson Learning Fei, Z., and Isa, C. (2010). ‘Factors influencing activity based costing success: a research framework.’ International Journal of Trade, Economics, and Finance, vol. 1, no. 2, pp. 144-150. Gosselin, M. (1997). ‘The effect of strategy and organizational structure on the adoption and implementation of activity-based costing, Accounting Organizations and Society, vol. 22, no. 2, pp. 105-122. Hicks, D. (1992). Activity-based Costing for Small and Mid-sized Businesses: an implementation guide. John Wiley, New York. Horngren, C., Bhimani, A., Foster, G. and Datar, S. (2005). Management and Cost Accounting (3rd ed.). London, Prentice-Hall Europe/FT Kaplan, R., and Anderson, S. (2004). ‘Time Driven Activity-Based Costing’. Harvard Business review, available from http://www.oakforestventures.com/pdf/OFV_pdf005.pdf [Accessed 28 February 2013] Piper, J., and Walley, P. (1991). ‘ABC Relevance Not Found’. Management accounting, Vol. 69, no. 3, pp. 42 – 45. Seal, W., Garrison, R. H. and Noreen, E. W. (2009). Management Accounting (4th ed.). London, McGraw-Hill. Startton, W., Desroches, D., Lawson, R., and Hatch, T. (2009). ‘Activity-Based Costing: Is It Still Relevant?’. Management accounting quarterly, vol. 10, no. 3, pp. 31 – 40. Szychta, A. (2010). ‘Time driven activity based costing in service industries.’ Social Sciences, vol. 1, no. 67, pp. 49-60. Read More