Role of Accounting Practices in Managing Contemporary Organizations - Essay Example

ROLE OF ACCOUNTING PRACTICES IN MANAGING CONTEMPORARY ORGANISATIONS ROLE OF MANAGEMENT ACCOUNTING (NOT JUST BOOK KEEPING) AND ACCOUNTING PRACTICE IN MANAGING A CONTEMPORARY ORGANIZATION Introduction The initial role of accounting in a traditional organization was majorly book keeping. Thus, the initial function of accounting inspired most definitions of accounting in line with book keeping activities. According to Donaldson (2009), it can be defined as a process of collecting, analyzing and interpreting data to provide information on the performance and financial position to aid the user in making informed economic decisions. However, contrary to traditional practice, accounting has new roles in an organization apart from the book keeping activities. Management accounting is one such emerging function of accounting where accounting is geared towards management function. Management accounting is having a major role in the overall success of the business environment away from book keeping activities. The new changing role of accounting, practice in organizations includes management accounting function in supply chain management and management support for the adoption of new technology in firms. Accounting initially had no role to play in these activities as their role was confined to the bookkeeping activities; the changes in management accounting have turned around the role of management accounting making it an important factor in every organization. Both the private and public sector are becoming reliant on the new role of management accounting in business. However, change has never been easily adopted in organizations. Resistance to change is common thus the changing role of management accounting is not being received with open arms. Several barriers to change are cropping up delaying the implementation of management accounting practice in organizations. Theoretical framework This research paper is aimed at looking at the various changes in the functional unit of management accounting based on case studies by various scholars. The role of management accounting practice in various organizations will be looked into. The barriers to change in an organization preventing implementation of management accounting practice are also of interest in this research. Discussion Supplier buyer partnership to reduce cost Traditionally, buy or make decisions were made based on cost of production. The cost of producing the goods was considered over the cost of the goods from an external supplier. Where the cost of production was found to be lower than the cost of outsourcing, internal sourcing was preferred. However, if the cost of production was higher than the cost of outsourcing, outsourcing was preferred. Price of the goods was the only determinant of purchasing decisions made. Suppliers were less secure about their sales since buyers went for the cheapest supplier in the market. Therefore, high costs were incurred by the suppliers as they would keep a high inventory to meet supplier needs as when they arise and risked having dead stock if other suppliers reduced their prices. At some point, compromise on quality would be necessary to reduce the cost of production, thus enabling suppliers engage in the price war to attract customers. High specifications from firms outsourcing the products from outside suppliers further increased the operational cost of suppliers thus affecting their profitability. An involvement of management accounting in the supply chain gave a better insight into through supply chain apart from the price approach. Away from the cost of purchasing the goods from the supplier, the firm incurs other costs that were not being considered when making the buy or make decisions. All in cost is an approach developed by Rajagopal and Bernard, 1993, p. 18. The approach t only considers the cost of purchasing the goods from the outside supplier, but also incorporates the cost of receiving the goods in the firm and the additional cost of transforming the supplies into finished goods ready for sale in the market. The two approaches will determine the firm’s attitude towards the price of supplies from outsourcing; budget cost model and internal estimate model. The budget cost model is based on the expected end price of the goods being produced. The main method used in this case is target costing. Target costing is a casting technique where the final prices of the goods to be sold in the market are set beforehand. The profit margin that the firm wants to get from the goods is then decided upon to get the final figure of the expected expense that the firm will incur in supplies and finishing. Therefore, the firm is able to make a budget on its supplies based on the expected expense t be able to achieve the desired price level and profit margin. In the case of internal estimate model, the internal cost of production determined the firm’s attitude towards outsourcing. The cost plus approach considered the total cost of production of the goods internally, including the opportunity cost of producing the given product against other products that can be produced internally. The costs of purchasing the goods from an external supplier are added up with the cost of finishing the product ready for sale before making decisions. All these are though the aid of management accounting practice in the firms. Furthermore, there is a need for collaboration between purchasers and suppliers to reduce the costs incurred by suppliers. An understanding of the costs incurred by the suppliers will help purchasers accept the prices charge while trying to reduce the costs incurred by suppliers. An example of a move by purchasers to reduce the cost of production by suppliers is to reduce the product specification requirements enabling suppliers produce homogeneous goods at lower costs. Placing orders in good time also reduces the costs incurred by suppliers in inventory management due to uncertainty of demand. In the long run, reduced cost to the suppliers will translate to lower prices for purchasers. A research by Seal et al, 1999, p. 314, focused on an assembly firm based in Europe that got its supplies from another firm specializing in producing the supplies. Despite the long working relationship between the two firms, the two firms developed a mistrust between them. The purchaser occasionally shifted to another supplier for price advantage and came back to the original supplier when prices were favorable. The research was aimed at developing a partnership relationship between the assembler and the supplier to come up with a lasting working relationship that will reduce prices to the purchaser by reducing costs of the supplier. The researchers acted as the neutral intermediaries to catalyze the process of developing a working relationship. Through convincing the suppliers of their neutral ground and good intention, Seal and his group were able to access the costs records of the supplier and suggest ways of reducing the cost. Both firms desired to have lower costs and were trying to devise ways of reducing their operational costs. After lengthy discussion and several meetings, the two firms agreed to the open book system as they developed the partnership. New accounting practices were adopted and efficiency in both firms was soon achieved. Through sharing ideas on costing and sharing benefits of cost reductions, collaboration between firms is achieved in the absence of an oversight authority due to the mutual benefit derived from the relationship. Risk sharing and increasing value for money Moreover, partnership leads to sharing of risk between suppliers and purchasers. Increasing the value for money is the ultimate goal of public institutions in the public interest. A partnership is usually developed between the private and public sector after an open tendering process for supply of goods and services given by private investors. Through the private-public sector partnership, the risks are shared out so that the public does not bear all risks. The open tendering system allows the public sector to select the best supplier who gives value for money while minimizing net present cost. An analysis of the net present cost of the project from the privately financed solution and public sector comparator and estimated through discounting. If the privately financed solution is of lower net present cost than the public comparator, the partnership between the private firm and the public firm is developed for mutual benefits. Shifting of risk from the public to the private sector increases value for money of the public firm since the public does not incur all risks associated with the project. The passport agency case study by Edwards and Shaoul 2002, p.405, showed the importance of partnership as a way of transferring risk from the private to the public sector. The UK passport agency needed to introduce new electronic passports to minimize fraud. An analysis of the cost of the UKPA producing the passports and outsourcing was considered and it was found that the privately financed solution to the project was far cheaper. A public tender was conducted and the winning company won by accepting liability for any system failure due to the suppliers failure. Therefore, the public did not have to bear the risk of failure of the system. A good partnership was developed with the private sector bearing the risk while benefiting from the tender. The public sector also benefited from the lower risk and reduced fraud in passport use through accessing electronic passports. Barriers to management accounting change Though there are benefits to the management accounting practice, the road to adoption of this process in not smooth. There are barriers preventing the adoption of the practice which may be internal to the firm or externally motivated. The lack of commitment from the management to adopt the management accounting practice is one such barrier. Coupled with resistance to change and insufficient resources, implementation of the management accounting practice is a challenge. A case study by Robalo 2014, p4, on the adoption of key performance indicators and income statement approach in the National Postal Service of Portugal failed to achieve its set objectives due to various barriers. The aim of the two innovations in the firm was to account for financial results of different functional areas of the institution through the income statement and to provide indicators for measuring business performance through the key performance indicators measurement. Innovation of the financial management practice is usually aimed at improving efficiency of the firm. However, there was a gap between the rules and routine. The gap contributed to the failure of the implementation of the plan within the stipulated time limit. Instead o having reports on KPI on monthly basis as earlier planned, the firm had annual reports. The gap between the rules and routine was because the firm was used to a given routine and was resistant to adopt the new rules which were contrary to the existing routine. The failure in implementation was further contributed by the absence of management commitment to the new system coupled with insufficient number of staff to handle the reporting required. Therefore, by the end of the study, the system had not achieved its desired objective in the firm. Also, the case study by Kasurinen 2002, p.8, on finish based metal groups demonstrated the difficulty in implementing management accounting change in an organization. The firm was divided into five business sectors according to product line and two divisions which were also the strategic business units. Identification of strategic business areas of the firm as well as the profitability of the firm was identified before the onset of the study. The management aimed at increasing profitability. The application of the balanced score card was the new management accounting practice to be adopted in the firm during the case study. The problems encountered during the project were numerous. First of all, during the preparation of the project, some strategies were not clearly outlined leading to confusion as the managers were unable to lead to a specific strategy. The project also faced a complex environment as it appeared to create competition within the firm. Managers were also reluctant to implement the project which appeared not to give their division an upper hand over other managers. Further, the general divisional manager of the project resigned just before the onset of the project leading to de-motivation of employees and other managers. At the end of the study the project did not successfully achieve its set goals and objectives. Conclusion The involvement of accountants in management has given rise to the management accounting practice. The new innovations in practice have improved the performance of firms by identifying sources of income, reducing costs and sharing risks through partnering. However, the road to management accounting practice has not been smooth. Many challenges have hindered the implementation of the system in firms. However, management in those firms that experienced trouble implementing the management accounting practice admits the importance of the innovation to the firms. For example, the general manager of Finish based metal group was keen to observe that the project could have pulled through save for some huddles and was preparing to re-launch the project in three months time. The willingness of the firm to launch the project all over is a clear indication of the importance of management accounting in firms today. BIBLIOGRAPHY Donaldson, L., 2009, The Normal Science of Structural Contingency Theory, in Studying Organisations: Theory and Method (Eds. Clegg, S. and Hardy, C.). Sage, London. Edwards, P. & Shaoul, J. 2003. Partnership: for better, for worse? Accounting, Auditing & Accountability Journal, Vol 16, No. 3, pp. 397-421. Kasurinen, T. 2002. Exploring Management Accounting Change: the case of balanced scorecard implementation. Management Accounting Research, Vol. 13, 323–343. Purchasing in the 1990s, International Journal of Purchasing and Materials Management, Rajagopal, S. and Bernard, K., 1993. Cost containment strategies: challenges for strategic Robalo R, 2014. Explanations for the gap between management accounting rules and routines: An institutional approach. Spanish accounting review, Vol. 17, No. 1. Seal, W. et al. 1999. Enacting a European supply chain: a case study on the role of management accounting. Management Accounting Research, Vol. 10, 303-322 Winter, 17-24. Read More