Management Accounting Control System - Essay Example

 Management Accounting Control System Introduction In order to run one business effectively, it is essential for one manager to check whether business is keeping accurate records and accounts. Two types of accounting information are basically found in organization such as, financial accounts and management accounts. Former one describes the performance of one business that needs to be filed at company’s house whereas the purpose of management accounts is to coordinate the planning of one business and making decisions about key areas like stock and sales etc. Management accounts provide the necessary guidance to make timely and meaningful management decisions about a business. The needs of it vary for different organization in accordance to business areas of their concerns. Its needs include: Sales process which includes pricing, distributors and debtors. Purchasing process comprising of stock records and creditors. Employee record system and, Fixed asset register. As stated, preparing management account periodically is recommended but not mandatory. But, for the sake of business it is needed to maintain once in a month or quarterly in a year depending upon company profile and size. It is very hard to run a business efficiently without them. In this era of information, information system is not getting utilized as it was expected. In management account information needs to be applied properly and adequately. The best way is to break down so that the performance of different elements of the business can be measured. For example, for one integrated Circuit manufacturing company, different flows can be broken up and later on aggregated. Flows may include mask design, photolithography, oxidation and etching etc. Or, if a manufacturing industry has various processes such as, molding, embossing or welding then they can be segmented as per their sequence and finally need to be mapped together. If any financial institution is taken under consideration then, it might have more than one sales outlet and for this case separate report for each outlet is required. Management account specifically analyzes performances and includes sales, cash-flow and profit forecast which are treated as forward looking elements. The analysis generally is carried out against forecast and budget that has been brought down during initial period of the year. Information System and Its Usage According to Jung et al (2004), information is a key corporate resource that can be adopted for automation in accounting management other than its normal application in effective project management. They developed a methodology that can be applied for appraising informatization in construction industry. Informatization is a process of minimizing cultural and economic barriers by information and communication technology after proper transforming its economic and social relationships (Kluver, 2000). In other words, it is the percentage of workflow that IT supports mostly classified into technology substitution, process enhancement and transformation of organization and strategy (Hannah et al., 1995). If Kluver (2000) described the idea of informatization from social and economic point of view then, on the other side, Hannah et al. (1995) mostly concentrated on organizational concerns. Land (2004) defined information systems as “systems whose ultimate purpose is to store and manage information (as opposed to e.g. control systems, which are designed to control physical processes, and manages information only as a means to achieve this.” It is a long lived process and hence, must incorporate the changing requirement making it a robust. Information systems face different problems such as updating of documents and the integration of different systems. Information systems in industry have not been used sufficiently in this era of information technology. The importance of information systems relies on its capabilities of making business processes run more efficiently. Computer has brought our mind into such a platform that departments in any given organization can reduce time spent on paperwork by using a digital platform to keep track of all activities. Also communication between different departments within the company can be performed easier when common systems are used for data processing. The possibilities of organizations to use IT have increased due to a reduction of costs related to the informatization of the company; therefore an increment in the use of specialized software has been seen. Attaran (2004) examined a series of relationships between Information Technology and Business Process Reengineering (BPR). The term ‘reengineering’ aims to build an approach for reforming the core business in an organization in order to achieve quick and substantial gain. This way of reengineering has been used by several industries during 1990s to make its structure more effective and competitive. “In the 1990’s, significant reduction in the cost of IT resulted in enormous investments in IT applications that have stimulated increasingly complex organizational change.” IT can be used to empower line workers and to make process engineering energetic by splitting down the communication barrier. Even BPR along with IT have the power to working environment more flexible, team-oriented and coordinative. Example related to this evidence is Texas Instrument, an electronic product development company where IT plays the most important role by creating a global network and advanced computing resources which makes scope to the designer across the world to work together without their direct meeting. As companies have invested a considerable percentage of their budget in IT, there is still a gap between existing applications and these applications matching the needs of the company. “Reported increases in IT expenditure, together with limitations on organizational resources and indications of substantial project failures, are all raising the profile of investment decision-making” (Love and Irani, 2001). Josephson, P. and Hammarlund, Y. (1999) felt that, ineffective decision making or inaccurate information may lead to quality failure. Integrated and Systematic Information system (IS) is an essential tool for quality management activities; the absence of which will make the information gathering and management uncoordinated, finally landing into a situation of time wastage, increasing error and creation of misunderstandings. Information Management Back and Moreau (2000) showed that the potential benefits of information management only can be fully maximized by making possible the information exchange throughout the organization and also across all its boundaries if it has any. For this reason, integration and preservation of project information is a vital thing. Due to the rapid change in business to make the company more flexible, a methodology is needed which can permit planning, analysis and redesign of a process taking into account of the available technology and resources. In their research they identified three major information management strategies like: Data Management Strategy: It is the management of discrete facts aiming to setup an integrated data system which can connect and store all data sources. Document Management Strategy: It is the managing of formatted collection of data like memos and purchase orders etc. It enhances the user’s skill to practice documented information. Information Sharing Strategy: As name implies it nothing but the sharing information and make a correct interpretation of them. It also adds flexibility to move information instantaneously. According to Brandon et. al (1998), “due to the structure of the construction project a lot of information-bound problems arise. The compatibility of information is often not ensured. This leads to a situation with many errors and higher costs to process the information for the participants…On the other hand in many situations there is an overflow of information. Not all the information is relevant for every participant.” Authors examined the applicability of information technology within different levels. The common barriers in implementing IT in different industrial sectors are also outlined by them. Management Accounting and Information System Management accounts enable to make a comparison of one account with original budgets and forecast, manage the resources in a better way, highlight the major variations of company’s profit and expenditure etc. In a broader sense, they can be implemented for the following procedures like: Internal reports preparation in user friendly format. Collecting cash, stocks and expenses Co-coordinating and monitoring company policies Recording business transactions Evaluating market productivity etc. Based upon the usage of information system one accounting model has been proposed as shown in figure 1. Cost predictor mostly do the company expenditure prediction and other finance related forecasting which is managed by analyzer and makes the necessary correction for account section. Cost Estimating is a process where accountant assesses the total expenditure for the industry. Minkiewicz (2006) described the challenges in cost estimation for system of systems. An SOS is a configuration of component systems that are independently useful but synergistically superior when acting in concert. In other words, it represents a collection of systems whose capabilities, when acting together, are greater than the sum of the capabilities of each system acting alone (Minkiewicz, 2006). Mair (1998) gave idea about the important characteristics of SOS. It must have: Operational independence of component systems. Developing behavior. Geographical distribution. Evolutionary development process. SOS is an aggregate of existing small systems which are allowed to work together to make a large project working overall and smoothly. Minkiewicz’s article focuses on additional cost incurred or associated with the delivery of capabilities. As per the idea given by the author, mastering cost question requires setting up a connection between system complexity and engineers’ contribution towards the work. Its an important in he sense that unless and until experienced engineers are coming voluntarily showing their interest on their job, project is not going to be run efficiently. The author developed a parametric estimating methodology for hardware and software systems relying on quantification of size and complexity. The complexity is driven by project, process and organizational factors etc. However, handling size and complexity for a project together is not an easy task which results the current existing topologies to estimate the cost keeping one of the factors almost constant. Various aspects of their valuation include: Number of operational scenarios Acceptance of key performance parameters Stakeholder and supplier numbers Complexity in integration of different sections. Component stability etc Finally, it was concluded saying that in future data collection can be done to refine, update or replace cost-estimation relationship. Cost estimation for example of a construction industry should take into account the following factors: “as built” drawing cost is to be determined and incorporated into actual cost. The cost of testing and relay setting need to be included into expense sheet item. Ladder cost and cost for small tools that will be used during the work has to be entertained. Normally they are found to be 3% of labor cost. Renting and purchasing job-site trailers and offices also are a part of total expenditure. Parking of workers is an essential component and required to be assessed. Electrical project manager is one who coordinates the project. His payment and payment of supervisor will come under calculation. All these costs are to be summed up and then it will give the value of total cost forecasting (Paschal, J., 2000). While calculating cost value of money should be considered. Conclusion Manager is one who decides about the fact that whether company should be run or can be ruin. Account managing is a methodology or step which needs to be incorporated in each and every organization if it has not done so yet. This paper mostly concentrates on the applicability of information system in managing accounts. It outlined the necessity of it and then proposed a model for accounting flow after keeping into mind the rate of development of this management account. The model is supposed to give effective output if all the sections are allowed to work properly and also mapping or connection between the blocks is done adequately. Finally, it should be mentioned that, let the statement “information is not getting utilized appropriately in what way it was desired in this era of information” was a challenging issue yesterday but, today we can think of a system that can make use of this ‘information’ to a great extent with steeping into another revolutionary age. References Attaran, M. (2004). Exploring the relationship between information technology and business process reengineering. Information & Management, 41, 585-596. Back, W.E., & Moreau, K.A. (2000). Cost and schedule impacts of information management on EPC process. Journal of Management in Engineering, 16(2), 59-70. Brandon, P., Betts, M., & Wamelink, H. (1998). Information technology support to construction design and production. Computers in Industry 35, 1-12. Hannah, N., Guy, K., & Arnold, E. (1995). The diffusion of information technology: experience of industrial countries and lessons for developing countries. World Bank Discussion Paper No. 281, Washington, D.C. Josephson, P. and Hammarlund, Y. (1999). The causes and costs of defects in construction: a study of seven building project. Automationin Construction.pp.642-68 Jung, Y., Chin, S., & Kim, K. (2004). Informatization index for the construction industry. Journal of Computing in Civil Engineering, 18(3), 267-276. Kluver, R. (2000). Globalization, informatization, and intercultural communication. American Communication Journal, 3(3). Retrieved January 19, 2007 from http://www.acjournal.org. Land, R. (2004). Understanding evolution of information systems by applying the general definition of information. 26th International Conference in Information Technology Interfaces ITI June 7-10, 2004, Cavtat, Croatia. Love, P.E.D., & Irani, Z. (2003). A project management quality cost information system for the construction industry. Information & Management, 40, 649-661. Mair, M.W. “Architecting Principles for System-of-Systems.” Systems Engineer (1998). Read More