The Evolution of Management Accounting - Term Paper Example

The Evolution of Management Accounting Module: Level: Assessment number: Assessment Lecturer: Word count: 1762 Words including Executive Summary but excluding references Table of Contents Executive summary ........................................................................................................1 1. Introduction .................................................................................................................2 2. Main findings ...............................................................................................................2 2.1 Management Accounting Through the Years..................................................2 2.1.1 Activity Based Costing…………………………………………….....…3 2.1.2 The Balanced Scorecard…………………………………………….....4 2.1.3 The Behavioral Aspects of Budgeting………………………………...4 2.2 Management Accounting Research: Its Significance to Modern Business…5 3. Conclusions ................................................................................................................6 4. Recommendations.......................................................................................................7 5. References...................................................................................................................8 Executive Summary Management accounting has been transforming, and while this is happening, studies were being conducted to reveal the essence of such changes to organizations. The first portion of this paper includes an introduction of the aim of the report which is to provide basic information of three areas of management accounting research that experts in the field have explored. These areas refer to Activity Based Costing (ABC), the Balanced Scorecard, and the Behavioral Aspects of Budgeting which have been further explained in the main findings section. ABC was considered relevant to the reflection of a firms economics (Cokins, 2001, p.2). The Balanced Scorecard was referred to as a means to illustrate the "cause and effect relationship of strategic objectives" (Creelman & Makhijani, 2011). Next is the behavioral aspect of budgeting, which has been considered a relevant component to the study of organizational behavior. In conclusion, it has been claimed that the ABC, the balanced scorecard, and the behavioral aspects of budgeting are useful in todays modern business environment. As a recommendation, it has been proposed that a broader and continuous research be conducted to allow the evolution of management accounting. 1. Introduction The report intends to present a brief view of the changes brought by the evolution of management accounting research to modern industrial management. Furthermore, it also aims to examine the impact of these significant changes to the administration of modern business or modern industrial management. To provide an idea of the areas focused by researchers in the field of management accounting, it will tackle three relevant topics covered by management accounting research such as the ABC (Activity Based Costing), the Balanced Scorecard, and the Behavioral Aspects of Budgeting. These topics will then be explored in relation to modern industrial management or modern business. The present methods applied in management accounting are being rooted from those applied by people in the past. Understanding the distant origins of these techniques is necessary in order for one to appreciate the use of such methods in todays modern world. 2. Main Findings 2.1 Management Accounting Through the Years The study of accounting has always been considered difficult and arduous. It is one challenging aspect of business that requires research for its continuous improvement (Argenti, 2002, p.172). Hence, a conscious effort also has to be made to understand the beginnings of management accounting (Porter & Ross, 2003, p.566). For over twenty years, management accounting research has evolved from the simple means of gathering cost information up to the present where new methods of management accounting are being introduced. Since the early 90s, numerous topics were being studied by researchers; however, due to some limitations set, only three areas of this research are about to be examined in this report. The changes that management accounting have undergone through the years give an apparent view of the acceleration of uncertainty and an increasing level of uncertainty in the volatility of the business environment, in recent times (Bhimani & Bromwich, 2010, p.1). 2.1.1 Activity Based Costing First on the line is Activity Based Costing or simply ABC. Twenty-one years ago, Johnson and Kaplan (1991 cited in Wagener, 2008, p.3) have argued that four functions are necessary to establish appropriate cost systems, and these include the following: (1) giving information in preparation for the creation of the financial statement, (2) allowing managers to stay in control of organizational processes, (3) compute short-term and long-term product costs, and (4) produce information that may be utilized for further research. Later on, the concept of ABC as a management tool became a widespread focus of researchers. It was then considered the main source of information in the setting of objectives for decision making since it enables the gathering of accurate cost information (R. Manalo & M. Manalo, 2011). The emergence of ABC even led to the creation of the ABC industry, where companies offered software packages to aid in the enforcement of ABC in other organizations (Hicks, 1999, p.4). However, the huge amount of money involved in its implementation and its difficulty daunted small and medium sized businesses from amending their cost information systems (Hicks, 1999, p.4). Nevertheless, according to Cokins (2001, p.2), ABC data reflect the economics of a firm, as well as its utilization of the resource expenses. The discovery of the ABC method is one point in history where accounting management was already being taken seriously by many researchers. From then on, ABC gained a spot in management accounting, and it began existing in accounting management practices of organizations. 2.1.2 The Balanced Scorecard In 1992, the balanced scorecard began to evolve. According to the U.S. National Research Council (cited in Transportation Research Board of the National Academies, 2011, p.27), the scorecard was made to respond to the kind “of trade-off analysis and balancing of competing values that” companies usually encounter. Pangarkar and Kirkwood (2009, p.45) have claimed that the concept of the Balanced Scorecard was gotten from the so called "tableau de bord," an idea which was conceptualized by the French people during the 1930s. Specifically, "tableau de bord" is being interpreted as the "dashboard," whereby the manager of a firm is being metaphorically correlated to a pilot (Pangarkar & Kirkwood, 2009, p.45). Christesen (2008, p.47) has asserted that understanding the impact of the various research in the balanced scorecard framework is critical to its application in organizations. One substantial benefit obtained from using the balanced scorecard framework is the establishment of a strategy map that gives a reflection of "the cause and effect relationship between strategic objectives" (Creelman & Makhijani, 2011). Through the years, the various studies, which have tackled the balanced scorecard approach, resulted to a more improvised and stable metrics in measuring a companys performance efficiency, involving all stakeholders in the process (Brown, 2007, p.5). 2.1.3 The Behavioral Aspects of Budgeting According to Mattessich (2008, p.227) upon the second half of the twentieth century, budgeting and its components became vital areas of concern in the Scandinavian accounting research. The study is evidenced with the theoretical works of Denmark and Madsen during the 1950s and 70s, which have aimed to investigate budgeting and its role in management (Mattessich, 2008, p.227). It has paid attention to the use of standard operating procedures in the research allocation process of an organization (Lowe & Shaw 1968, cited in Chapman et al., 2009, p.7). As inferred by (Ezzamel, 1994, p.213), organizational change usually takes into consideration the internal restructuring of resources that are primarily attained by way of a corporate budgeting system. Smith (2007, p.149) has even contended that budget systems will not run smoothly if only its technical aspects will be analyzed; hence, its behavioral aspects also have to be studied. In addition, many studies have been made addressing the behavioral aspects of budgeting, which have found a link between individual behavior and budgeting (Smith, 2007, p.149). As a matter of fact, one research conducted in the behavioral aspect of budgeting has revealed that budgets can serve as a motivational tool into improving organizational behavior, in a manner that is acceptable (Burns and DeCoster cited in Kumar, 1989, p.7). As explained by Lucey (2003, p.198), the human, social and the organizational factors, which have a role in the budgeting process, are all essential and must not be set aside. Although a lot of studies have been made regarding the behavioral aspects of budgeting, most outcomes are complex; thus, broad definitions have become hard to formulate (Lucey, 2003, p.198). 2.2 Management Accounting Research: Its Significance to Modern Business The changes in the process of information gathering have been providing a basis for the appropriate justification of management accounting developments (Temin, 1991, p.68). Thus, the same amount of effort is needed in the study of management accounting. Still, according to Hopwood, Chapman and Shields (2009, p.1409), these studies may not be sufficient to support what management accounting is, at present times, even if the modern methods such as the ABC are being used by companies. Management Accounting is still in its evolutionary stage. Hence, the several tools and methods of management accounting have to be refined, improved, and restructured into a system. This continuous evolution may take a long time thereby delaying the construction of a fully developed management accounting system in an organization (Thukaram, 2003, p.10). The modern business environment is one that is capricious in a sense that it tends to change and shift its focus from time to time (Avis et al., 2008, p.465). Nonetheless, this argument is being evidenced by the changes that management accounting research has revealed through the years. Activity Based Costing (ABC), the Balanced Scorecard, and the Behavioral Aspects of Budgeting are only some of the many topics covered by management accounting studies. Still, despite the fact, these three relevant areas of management accounting have contributed largely to the success of various organizations since the 90s until the present time. It is simply a matter of choosing the right management accounting approach and using it smartly as a tool to solve the problems in organizations. Having examined the three chosen areas of research in management accounting, and its importance to modern business, it is then timely to provide a conclusion and a valuable set of recommendations for further study in this particular subject matter. 3. Conclusions The purpose of research is to uncover hidden potentials or to discover other usefulness of any subject matter. When it comes to management accounting, research is necessary because the absence of which may interrupt its evolution; thus, hindering the possibilities of its further development. The many methods of management accounting including ABC, the balanced scorecard, and the behavioral aspects of budgeting are indeed useful in todays modern business environment. Since nothing stays permanent even in the world of business, research will always remain vital. Hence, management accounting will continue its evolution, which will be proven, through never ending research, arguments and hypothesis formulation. 4. Recommendations Research in the field of management accounting has to continue for as long as businesses exist; hence, research effort has to be aimed at targeting greater heights from time to time. Secondly, studies conducted have to include a wider view of management accounting as a tool for organizational success. This has to be done in order to overcome the limitations if ever there will be, in the future studies on management accounting. Lastly, determination has to be kept heightened not to waste time in conducting management accounting research. This will allow the immediate gathering of ideas and information that will be useful both to organizations and management accounting researchers. 5. References Argenti, P. A., 2002, The fast forward MBA pocket reference, John Wiley and Sons: New York. Avis, J., Burke, L., & Wilks, C., 2008, CIMA official learning system management accounting decision management, CIMA Publishing/Elsevier: Oxford. Bhimani, A. & Bromwich, M., 2010, Management accounting: retrospect and prospect, CIMA Publishing/Elsevier Ltd: Oxford. Brown, M. G., 2007, Beyond the balanced scorecard, improving business intelligence with analytics, Productivity Press: New York. Chapman, C. S. Cooper, D. & Miller, P., 2009, Accounting, organizations: essays in honour of Anthony Hopwood, Oxford University Press: Oxford. Christesen, D. A., 2008, The impact of balanced scorecard usage on organizational performance, University of Minnesota: Minnesota. Cokins, G., 2001, Activity based cost management: an executive guide, John Wiley & Sons, Inc.: New York. Creelman, J. & Makhijani, N., 2011, Creating a balanced scorecard for a financial services organization, John Wiley & Sons, Inc.: Singapore. Ezzamel, M., 1994, ‘Organizational change and accounting: understanding the budgeting system in its organizational context’, Organizational Studies, vol. 15, no. 2, pp. 213+. Hicks, D. T., 1999, Activity based costing: making it work for small and mid-sized companies, 2nd ed., John Wiley & Sons, Inc.: New York. Hopwood, A. G., Chapman, C.S., & Shields, M. D., 2009, Handbook of management accounting: volume 3, Elsevier: Oxford. Kumar, K., 1989, Management accounting in emerging perspectives, Mittal Publications: New Delhi. Lucey, T., 2003, Management accounting, 5th ed., CIMA Publishing: London. Manalo, R. G. & Manalo, M. V., 2011, Modern product costing technique in the age of competition, eBookit.com: Massachusetts. Mattessich, R., 2008, Two hundred years of accounting research, Routledge: Oxford. Pangarkar, A. & Kirkwood, T., 2009, The trainers balanced scorecard: a complete resource for linking learning to organizational strategy, Pfeiffer/Wiley: California. Porter, T. & Ross, D., 2003, The Cambridge history of science: the modern sciences, Press Syndicate of the University of Cambridge: Cambridge. Smith, J. A., 2007, Handbook of management accounting, 4th ed., CIMA Publishing: Oxford. Temin, P., 1991, Inside the business enterprise: historical perspectives on the use of information, The University of Chicago Press: Chicago. Thukaram, R., 2003, Management accounting, New Age International (P) Limited, Publishers: New Delhi. Transportation Research Board of the National Academies., 2011, National cooperative freight research program report: performance measure for freight transportation, Transportation Research Board: Washington. Wagener, D., 2008, Activity based costing and its later development into activity based budgeting and management, Grin Verlag: Germany. Read More