Organizational Changes in Management Accounting - Essay Example

EVOLUTION RATHER REVOLUTION IS STILL NECESSARY IN MANAGEMENT ACCOUNTING Introduction Organizational changes in the last few decades made it compulsory for management accounting techniques to develop and multiply at an unparalleled rate. But the view of some critics is that these changes are only reinvention of the wheel which takes place every few years. What ever is the cause or outcome change is inevitable in any field. But the techniques of management accounting even though traditional, is still in use. After following the past of management accounting starting from1850 the accounting researcher Robert S. Kaplan (1984) remarks; "Despite considerable change in the nature of organizations and the dimensions of competition during the past 60 years, there has been little innovation in the design and implementation of cost accounting and management control systems." In spite of important changes taking place in the quality and operations of organisations, the techniques adopted by companies and those mentioned in text books of management accounting date back to 1925. Thus Kaplan and many other scholars, encourage researchers to develop the subject of managerial accounting by conducting research and case studies. They state that "to describe and document the innovative practices that seem to work for successful companies" more and more research work and case studies have to be taken up. Following Kaplan and others call for research work and case studies a plethora of novel procedures in management accounting found its way into the field. A few of such new techniques were Just-in-Time (JIT), activity-based costing (ABC), and total quality management (TQM) which were accepted. According to Wendy L. Currie (1999) the objective he states is to incorporate into a single framework a number of factors that tempt the function of management accounting techniques in organisations using cases or degrees of organisational alterations categorised by N. Venkataraman. N. Venkataraman (1994) remarks that "The underlying goal for the framework is designed to reveal the distinctiveness of each technique in the organisational change context. Specifically, is there a systematic approach to applying change techniques and anticipating issues we may encounter in the change process" This paper examines the thesis statement which is; "Is this the hour to critically evaluate and reconcile the need for new management accounting techniques in the 21st Century with the compelling case for understanding and applying aspects of management accounting that have been taught traditionally" (Anthony, R, 1965) Formulating the theoretical account Thomas Walther, et al, (1997), remarks that the new environment which is produced by the authority of computing and the dislodgment of conventional accounting tasks, companies are counting on their financial specialists to "act as business partners with operations managers" by furnishing information to back up decision making. Christopher D. et al (1997 a, and 1997 b) states thus; "Accountants are increasingly involved in strategic management through the development and implementation of new accounting models integrating financial and non financial information". If the essence of the techniques intersects, accountants must clarify these intersecting areas to demonstrate how they may enforce to patronise different strategic intentions. Factors which call for changes in Management Accounting Internal organisational elements like organisational structure and culture, determine change and the execution of management accounting methods. But still sometimes these factors are not considered while implementing management accounting techniques. According to Jerold L. Zimmerman, (2001): "Total quality management, reengineering, activity-based costing, the theory of constraints, value chain management, just-in-time, and the balanced scorecard all assume that agents will enthusiastically adopt the new approach because it promises to maximize firm value." J. H. Waterhouse and Peter Tiessen (1978) remark that the structure of any organization may either be centralized or decentralized. The part played by technology in the formation of such structures has altered over time. In the past procedures were not easy if not feasible to identify and document. Actually individual proposal linked to technology was a central factor in development. Thus, the initiative taken by individuals and the changes in technology was backed up by decentralisation, whereas integrated actions and processes supported the continuation of centralised organisational structures. The structure of an organisation is linked to two other elements - the organisational user resistance and culture. User resistance is related to the strength of change and culture also shapes change. Thus the balanced scorecard is a management accounting technique which has the ability to support the cultural change. The Evolution in Managerial Accounting The management approach based on value constitutes an expansion of over four decades of managerial accounting study and application. The current stress on management focused on value is the fourth evolutionary footmark in managerial accounting (International Federation of Accountants, 1998). Before 1950, the main focus of managerial accounting practice was based on determining cost and financial control, with the support of budgeting and cost accounting arrangements. During mid-60s, this spotlight changed to the supply of information for management designing and control. This second stage was brought about by Anthony's management command framework. Anthony (1965) identified management control as the "process for ensuring that resources are obtained and used effectively and efficiently to achieve the organisation's objectives". Langfield-Smith (1997) and Otley (1999) stated that Anthony's framework distinctly discerned management control from tactical planning and functional control. He thus limited the scope of managerial accounting obligations by focusing chief attention on accounting information. At the start of mid-80s, managerial accounting changed from emphasising planning and control to reduction of waste material in business operations. This shift was provoked by the rising acceptance of quality management plans and the introduction of accounting techniques like cost of quality measurement, process value analysis, activity-based costing, and strategic cost management (Cooper and Kaplan, 1991; Shank and Govindarajan, 1994). The middle of 1990 saw managerial accounting entering its fourth stage. Now the focus was focus on scheduling and controlling waste reduction thereby elaborating to cover a more strategic stress on the introduction of firm value. This was to be achieved through the measurement, identification, and management of the creators of customer value, shareholder returns and organisational innovation. This was the era during which new managerial accounting techniques was introduced. This also promoted value creation. Even though the key focus in managerial accounting is corporate or business unit scheme, but the other lower-level functional schemes like just-in-time production, flexible manufacturing systems, and total quality management were also studied (Daniel and Reitsperger, 1991; Banker et al., 1993; Young and Selto, 1993). If the changes should make management accounting useful in the 21st century then these changes should be different from the alterations that have taken place in the field during the past.According to (Johnson, H. T. 1995) "the focus in the past was on how can we improve what we do The focus for the future should be how can we make accounting information more useful for decision making" Management Accounting is not that diverse from the conceptions that have been accepted in the idealistic possibilities of the western world. Management Accounting too is an association with reason and consequences, and the whole is the summation of the free parts (Johnson, H. T. 1995). Johnson, H. T. (1995) remarks that for some reason management accounting has not been able to centre on collecting helpful information from the operations within an organisation. Alternatively, accountants concentrated on converting management accounting information into "managerially relevant" info. In the 1950's, the spotlight was in disclosing financial info for managers to get some useful info. This resulted in changing the presentation of budget information in a cost versus actual format. Changes in Management Accounting Change is called for in the modes, approach, and operation of management accountants in most Western companies if the firms have to be appropriate and constructive in these progressively more testing times. The spotlight of management accounting requires moving from cost to value conception. The planning and operation management must begin with the demands of the customer. The function of the management accountant must shift from collector and presenter of financial data. Thus Management accounting arrangements must shift from transaction-heavy review and reconciliation engines, to lean and very important providers of business insight (Johnson, H. T., 1995). It is with the management accountant to perceive performance measurement as a significant part of his/her role. We need to develop a system that clearly links the strategic goals of the company to the measurements used throughout the organization; at every level (Brian H. Maskell and Bruce L. Baggaley 2001). Many companies undergo issues related to performance measurements especially financial performance measurements. This drives people in a diverse direction away from the company's strategy. The typical case is a company enforcing lean manufacturing modes that proceeds to use traditional variance analysis and standard costing. The measures draw the people one way whereas the lean values pull then in another direction. More often than not the financial measurements succeed and a key prospect for the company is lost or restricted (Brian H. Maskell and Bruce L. Baggaley 2001). Time and again companies face the issue of performance measurements for the efficient operations of the business at the same time try to maintain their books at traditional cost accounting methods. This not only creates more waste, but also creates a stage for disagreement, bewilderment, and misdirection (Brian H. Maskell and Bruce L. Baggaley 2001). The management accounting systems of a business must have the capacity to distinctly key out the obstructions to flow. If the business is for value creating then such values can be produced when the work flows unfettered by the company's value flows and actions. If the flow stops then value also stops and waste begins. The management accounting systems must be able to display this clearly and timely. The management accounting system should also possess a method to show the root reasons of this waste. It must also be able to depict as to how these obstructions affect the firms strategic and tactical goals (Brian H. Maskell and Bruce L. Baggaley 2001). The management accounting system should be capable of creating deep roots into the capacity analysis of the firm. Just tracking and reporting costs and variances will not be able to address the actual problems which an organisation faces when shifting from customer value focused business to a lean focused company. The management accounting systems must address these problems and provide business insight (Brian H. Maskell and Bruce L. Baggaley 2001). Wastes are hid by the traditional management accounting systems deliberately by standard costs and budgets. The 21st century organisations need management accounting which is opposite. Wastes must be clearly visible and also every time it occurs it has to be clearly indicated. The root cause of waste has to be assessed and so also its impact on the firms strategic and tactical goals (Brian H. Maskell and Bruce L. Baggaley 2001). The most important rationale of management accounting is to produce persistent and constant improvement. It is up to the management accounting systems to render measures, analysis, sorting, and penetration into the problems. The management accounting systems should not only be able to identify these issues but also render proper direction on the importance and root causes (Brian H. Maskell and Bruce L. Baggaley 2001). This induces to think as to whether management accounting has been too sluggish to shift in spite of the swiftly changing technological and organisational atmosphere in recent years. Apart from the swiftness and capability of modern systems the growth of data-base technologies also has brought about the necessity of change in management accounting. This database provides the capacity to store huge amounts of info in easily reachable ways (John Burns and Robert Scapens, 2000). When Johnson and Kaplan were exclaiming their 'relevance lost thesis' one of the causes they put forth was that management accounting is prevailed by financial reporting. They indicated that as financial reporting is an effectual necessity, it has to be conducted. Thus, if a company has only one info system, then the requirement of financial reporting takes precedence. Thus, management accounting becomes second to financial reporting (John Burns and Robert Scapens, 2000). The significance of management accounting practices in evaluating multidimensional views of functioning is quickly increasing. Nevertheless, very little info is available about such practices in those sectors which relate to service. Also very little is known about the practices of management accounting in developing countries (Johnson H.T., and Kaplan, 1987). Actually modern accountants must require a broad apprehension of organisational processes; especially production processes, and should lead to assisting and enforcing the firm's strategic plans. Modern management accountants are at present as involved in organisational actions as production and marketing managers are. This function of the accountant is very unlike to the one expressed in the writings of Johnson & Kaplan (1987). This novel "hybrid-accountant" has been shaped by information technology like ERP etc. "Management by numbers" as Johnson & Kaplan quote is still a division of management accounting. But it is only a part modern management accounting is at present used more than it was at any other time formerly for decision support and strategy. This is mused in the advance of the new role for the new management accountant, who is to be seen as a connecting pin, which attaches all facets of the organisation together (Johnson H.T., and Kaplan, 1987) . Conclusion Actually Johnson & Kaplan were right to criticise facets of management accounting within organisations, by advancing important issues about its use. Nevertheless the foremost arguments can only be enforced up to the 1980's. After this point in time, information technology arose, manufacturing industry slumped and firms were dependent entirely on different global markets. Management accounting techniques even though comparatively unaltered in theory, were used otherwise in practice and turned out to be an aid in strategic planning. "Listen to the customers, listen to the voice of the process - then the costs will take care of themselves" (Relevance Regained. Johnson1991) Reference 1. Anthony, R., 1965. Planning and Control Systems: A Framework for Analysis. Division of Research, Harvard Business School, Boston, MA. 2. Banker, R., Potter, G., Schroeder, R., Reporting manufacturing performance measures to workers: an empirical study. 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Currie, "Revisiting Management Innovation and Change Programmes: Strategic vision or tunnel vision" Omega, December 1999, pp. 647-660. 23. Young, S., Selto, F., Explaining cross-sectional workgroup performance differences in a JIT facility: a critical appraisal of a field-based study. Journal of Management Accounting Research 5, 1993. 300-326. Read More