Future of Strategic Management Accounting - Coursework Example

Future of Strategic Management Accounting Abstract The research paper has dealt with the traditional and modern methods of accounting in management decisions. The objective of this paper is to analyse the different flaws of ‘Management Accounting’ and present the modern technicalities of ‘Strategic Management Accounting’. The ways how modern Strategic Management Accounting overcome the general flaws of the traditional technique and provide an effective tool for strategic decision making has been shown in the paper. The general discussion has been supported by evidences by mentioning articles that supported the present argument. 1.0 Introduction The research paper studies the future of ‘Management Accounting’ in an organisation. Management accounting is that branch of accounting that helps the managers in an organisation to take business decisions and thus equips them with better implementation of their accounting knowledge. In order to come to the discussion whether management accounting’s future lies in strategic management, it is necessary to start from the base of it. Management accounting has its features in contrast to financial accounting and it would be wrong to compare the two. Management accounting is designed to be used by managers and not by other stakeholders of an organisation. Unlike financial accounting, management accounting is confidential to an organisation and is not reported as public information. And above all the most important distinction between the two is the technique used. The computing techniques are on the basis of the needs of the managers and it hardly follows the general accounting standards. In recent times there has been a shift in the practice of management accounting as it extends its scope towards certain other areas like the strategic management, performance management and risk management. The discussion in this research paper will be confined to the role of strategic management in management accounting. The purpose of strategic management is to play an advancing role to the concept of traditional management accounting. But there have been some criticisms also regarding changes in the implementation of management accounting. The main aim of the research paper is to critically evaluate the controversies and arrive at a distinct conclusion regarding the best practice. 2.0 Concepts of ‘Management Accounting’ and ‘Strategic Management Accounting’ 2.1 Traditional Management Accounting Techniques The concept of management accounting, though old, have seen large innovations in the past few decades. The discussion below has tried to highlight the few innovative traits of it: 2.1.1 Information Transformation Management accounting systems in the past years, before the innovations in information technology, have seen many problems in its applications in organisations. But with the development in technology and use of various management information systems, the costs that were incurred for accounting in general got reduced (Caplan, 2010). 2.1.2 Increased Product Lines in the Companies The expansion in the product lines of companies have helped to improve the performance of management accounting. It became difficult to obtain accurate cost information of individual products and then a management accounting tool was developed to solve this problem. This was an innovation of management accounting (Caplan, 2010). 2.1.3 Globalisation Due to globalisation, economies have faced the need for a more advanced accounting system which is more accurate than the normal system. Management accounting makes use of different accounting tools like transfer pricing that plays conventional role in the global economy through trade negotiation and many more. Hence the scope of management accounting was quite good during the time when globalisation actually came into being (Caplan, 2010). 2.1.4 Service Sector Management accounting has been widely used in the service companies like financial institutions, hospitality and transportation. There are even techniques in management accounting to help in determining cost of servicing a customer and also improving the time taken to service a customer (Caplan, 2010). 2.2 Strategic Management Accounting The business environment has changed in the present world and it has become extensively important for the managers to change according to the environment. Managers need to inherently participate in the strategic decision taking activities to remain competitive it its external environment. This part of the research paper deals with the study of the advantages of adoption of strategic management accounting (SMA) techniques over the other methods of accounting techniques. SMA has gifted managers with various models and frameworks with the help of which they can effectively implement their technical knowledge skills and take managerial decisions effectively. A few of the most useful findings of SMA are the balance scorecard, that helps managers implement strategies and accordingly monitor performances; the strategic variance/profitability analysis, with the help of which the measurement of the variances between actual and expected net income has been possible; profit-linked measurement systems, that measures the movement in profitability over a period of time; levers of control, a framework for developing and implementing various control systems for the promotion of strategies. These models and frameworks of SMA have taken the traditional concept of Management accounting to new heights. The main aim of SMA is to present certain modules in the field of accounting that not only serves the purpose of accounting but also helps the managers in taking compound strategic decisions (Banker & Johnston, 1989). 3.0 Reasons for concerns about future of Management Accounting It has been argued that the academicians are still comfortable with the traditional methods of management accounting. This particular notion of academicians has resulted in various controversies over the years. Use of traditional techniques in preparing students for future roles in organisations might not actually help because organisational decisions demands more than just general accounting standards. There exists a gap between theory and practice of management accounting and the reason can be ignorance of teaching staffs in adopting modern methods of management accounting. There should be concern among the management accounting educators that whether they want their educating students to be more inclined towards practicality or not. A survey on the attendees to IMA showed that the practitioners were using traditional techniques because their pace of adapting to newer technologies was slow (Hawkers & Et. Al., 2003). 3.1 Adoption of Contemporary Techniques According to a UK study in the year 1992, many manufacturing units were still dealing with the traditional techniques of management accounting. Many companies in the world were considered and their methods of accounting were analysed in the survey. The result showed that the companies were heavily dependent on traditional methods. But it should also be taken note that these figures were of around two decades earlier. Again in 2000, another survey showed that manufacturing firm were still reliable on traditional methods. It was then only a minor portion of manufacturers had adopted advanced management techniques. The trend of adoption of advanced techniques was visible only in larger firms. Barriers to the adoption of modern techniques were lack of human skills, time constraints and different managerial views over the changes. With the approach of new millennium, managers of different organisations realised necessity to shift towards advanced techniques of management accounting. The approach towards advanced management accounting focused on a more interpretative one rather than just speculative (Hawkers & Et. Al., 2003). 3.2 Advantages of modern methods over ‘Management Accounting’ Modern business demands technological improvements. The modern business world is highly competitive and within a dynamic environment, adoption of advanced management accounting is very essential. Modern businesses keep on formulating strategies to compete with other firms. It is necessary for the companies to utilise management accounting tools in order to support strategic decision making. An example will show how a strategic management accounting works in line with strategic decision making (Dr. Cheong, n.d.). Let the example of Samsung be considered. In order to decide a business strategy, Samsung would first consider their competitors and try to define cost leadership and make a relative study among different firms including their own. This type of approach helps to measure cost that they will have to incur for promoting their product. This is an example of how strategic decisions are taken with the help of accounting tools. Another example could be discussed by taking up a differentiation strategy. Firms that produce products which provide similar benefits as their competitors do not have to take decisions regarding increment of promotional costs. Additional costs will be incurred if it results in higher customer value relative to its competitors. At the same it is essential to measure whether target profit will be achieved with the increase in price set for selling the product (Dr. Cheong, n.d.). For measuring whether achievement of break even is possible with the changed cost and price structure or rather to evaluate performance from financial perspective, modern methodology like cost benefit analysis and performance driver analysis are performed (Dr. Cheong, n.d.). 4.0 Overcoming the limitations of Management accounting by strategic contribution of SMA To cope up with the modern technicalities strategic management accounting practices hold some improved practices to be used for strategic decision making. The developments in strategic planning and control have to be known in brief with the intention that the effectiveness in its implementation is understood in a broader way. 4.1 Balance Scorecard Balance scorecard helps to link performance measures and thus provide organisations with a clear view of its performance that helps them to take decisions quickly. The following four perspectives are explained through balance scorecard: learning and growth perspective, business process point of view, customer perspective and financial perspective. When all these aspects of a single firm are held in a compact manner, decision making becomes easy. The mentioned perspectives not only involves internal organisation but it also takes care of the external environment (Dr. Cheong, n.d.). 4.2 Profit-Linked Performance Measurement Systems This system involves measurement of changes in profitability over a period of time into measurement of certain elements that defines profitability. This is based on the link to a firm’s mission and vision and is implemented according to these aspects. The essence of this measurement is to incorporate profitability measures into price and productivity (Dr. Cheong, n.d.). 4.3 Strategic Variance Analysis This technique uses the comparison of predicted and actual performance by linking decision making with present operations and financial administration. Variance analysis is conducted when it comes to deviation in firm’s operations. Through this analysis, managers become able to relate variances in profit to strategic business units’ mission and vision. Strategic management accounting practices use both financial and non-financial information and consider both internal and external environments. A wider range of techniques are used in strategic management accounting than traditional methods of management accounting (Dr. Cheong, n.d.). 5.0 Future and Present of Management Accounting Uncertainties about the future of Traditional Management Accounting had started a long time back when strategic perspective of accounting was introduced in organisations. According to a study in 1994 in the South Australian region, the major initiations of moving towards a modern management accounting concept are as follows: 5.1 Drivers of Change in Management Accounting The major thrust towards the changes came from within the organisations itself. A few important moves like emphasis on peer groups, their relationships, increased competition, information and technical advancements have forced organisations to change their management accounting principles. Since management accounting techniques support operations and management of an organisation to a better extent, managers were bound to implement newer methodology of tools. The role of information technology is also vast as this provides organisations the scope to use computerised accounting systems (Forsaith & Et. Al., n.d.). 5.2 Changes in Management Accounting Functions With the changes in business environment, management accounting functions has also changed over time. There is high demand of providing information as quickly as possible. To cope up with this flexibility in demand, accountants have shifted their process of analysis towards more sophisticated systems of accounting with the help of which they are able to make prompt response to the demands. Roles of the management accountants have changed as now they act more as business analysts and change agents rather than just accountants (Forsaith & Et. Al., n.d.). 5.3 Changes in the Tasks Performed By Management Accountants Findings from the study revealed that though some traditional techniques such as ROI and variance analysis, budgeting will remain prominent in management accounting but along with that many modern techniques will also come into being. These modern techniques will require high level of human skills and knowledge by the accountants. Others areas of management like asset management, business control management, total quality management will have a fundamental role to play in the scenario. Though it is not mandatory that every organisation will have to spread like this, but for their implementation, organisational behaviours have to be considered (Forsaith & Et. Al., n.d.). 6.0 Presuming the Future of Management Accounting (Arguments) Considering the present scenario in management accounting, it will not be wrong to say that the future of management accounting lies in strategic management accounting. Along with the implementation of strategic management accounting concepts, there will also be necessity of advanced computerised systems, high development of human skills, decrement of costs, advanced growth policy and many more. This measure will support effective responses towards decision making with respect to flexibility and rationality. Contemporary management accounting has reached its final stage of implementation in many modern countries like U.K and it is in its middle stages in a few countries. When this scenario is looked at and analysed, it becomes easy to conclude that traditional management accounting and practices, except in some academic aspects, will become a history in the coming years. There are some articles and views provided below related to management accounting which will support the concept of strategic management principles more in the coming years: According to Chai-Amonphaisal and Ussahawanitchakit (2010), in order to sustain in the competitive world of today, companies should take every possible initiative as per regarding the changes in management accounting system. They have also mentioned that management accounting information system is now considered as a powerful tool for a growth firm. The term growth firm has been used to measure the future perspective of the firm. Hence it can be said that advanced management accounting system helps an organisation not only in terms of its present nature but it also considers the futuristic views of it (Chai-Amonphaisal & Ussahawanitchakit, 2010). According to a publication by Ondyogon (2010), the same SMA technique is enough to support a number of strategic issues of a company. A survey was conducted on Italian companies to test the impact of strategic factors on the use of SMA. In Italy, customer accounting, competitor performance appraisal and competitive position monitoring were among the most widely used SMA techniques (Ondyogon, 2010). Al-Khadesh (2010), in an article has forecasted the relationship between the practices such as Account Based Costing, Just-in-Time, Total Quality Management and performance improvements due to their incorporation. The evidences that have been mentioned in the article were on the financial performances of 56 companies in Jordan. The analysis depicted that 26.8% of the companies were using at least one of the tools. It has been mentioned in the article that the accountants should not only learn to use the technicalities of strategic accounting tools but they should also learn the way in which they can utilise those tools for the long-run development of the organisations (Al-Khadesh, 2010). 7.0 Conclusion In the research paper, it has been supported that the future of management accounting lies on strategic management accounting. From the study, it is evident that implementation of strategic management accounting requires proper communication of information technology tools with the intention that SMA can be effectively used in the strategic operation of a business firm. The research paper aimed to prove that in present times the traditional management accounting tools are no longer helpful for the future prospects of organisations. Advanced management accounting systems can have direct impact on the strategic visions of an organisation if implemented on time and timely implementation can only be made by regular updating of management accounting techniques. 8.0 References Al-Khadesh, H. A., 2010. Impact of Strategic Initiatives in Management Accounting on Corporate Financial Performance: Evidence from Amman Stock Exchange. PDF Cast. [Online] Available at: http://pdfcast.org/pdf/impact-of-strategic-initiatives-in-management-accounting-on-corporate-financial-performance-evidence [Accessed November 13, 2010]. Banker, R. D. & Johnston, H. H., 1989. Strategic Management Accounting and Control. Accounting. [Online] Available at: http://astro.temple.edu/~banker/Accounting/StrategicManagementAccountingHandbookChapter.pdf [Accessed November 13, 2010]. Caplan, D., 2010. Management Accounting: Concepts and Techniques. Oregon State University. [Online] Available at: http://classes.bus.oregonstate.edu/spring-06/ba422/Management%20Accounting%20Chapter%202.htm [Accessed November 13, 2010]. Chai-Amonphaisal, K. & Ussahawanitchakit, P., 2010. Strategic Management Accounting and Corporate Performance of Thai-Listed Companies: A Mediating Effect of Management Process. Business Publications. [Online] Available at: http://findarticles.com/p/articles/mi_6774/is_1_10/ai_n55283551/ [Accessed November 13, 2010]. Dr. Cheong, F. C., No Date. Implementation of Strategic Management Accounting. Introduction. [Online] Available at: http://www.hkiaat.org/images/uploads/articles/PBE_Paper_II_Strategic_Management_Accounting.pdf [Accessed November 13, 2010]. Forsaith, D. & Et. Al., No Date. The Future Of Management Accounting: A South Australian Perspective. School of Commerce Research Paper Series. [Online] Available at: http://www.flinders.edu.au/shadomx/apps/fms/fmsdownload.cfm?file_uuid=FDDF1D10-B31E-6712-C653-28CEA82BD0A8&siteName=sabs [Accessed November 13, 2010]. Hawkes, L. C. & Et. Al., 2003. Management Accounting Education: Is There A Gap Between Academia And Practitioner Perceptions? Massey University. [Online] Available at: http://www.google.co.in/url?sa=t&source=web&cd=1&ved=0CBYQFjAA&url=http%3A%2F%2Fciteseerx.ist.psu.edu%2Fviewdoc%2Fdownload%3Fdoi%3D10.1.1.111.6568%26rep%3Drep1%26type%3Dpdf&rct=j&q=traditional%20and%20contemporary%20techniques%20to%20management%20accounting%20site%3Aedu&ei=WuTcTNz5OouOvQPDiM2RCg&usg=AFQjCNEFeK723oCe4Rb6ql2I3li_xYNp6Q&sig2=2P4QIPTd54g0LaibBTUV7g&cad=rja [Accessed November 13, 2010]. Ondyogon, 2010. Strategic Management Accounting and Business Strategy: A Loose Coupling? Stories. [Online] Available at: http://sciencia.org/stories/785016/Strategic_management_accounting_and_business_strategy_a_loose_coupling.html [Accessed November 13, 2010]. 9.0 Bibliography Atrill, P. & McLaney, E., 2009. Management Accounting for Decision Makers. Financial Times Prentice Hall. Drury, C., 2009. Management Accounting for Business. Cengage Learning. Weetman, P., 2006. Financial and Management Accounting: An Introduction. Financial Times Prentice Hall. Read More