Development of Management Accounting - Assignment Example

Development of Management Accounting Introduction Initially manufacturing companies exploited the techniques of management accounting to serve important managerial functions. This paper analyzes the historical development of management accounting that correlates with development of managerial functions. Further, the paper also studies the application of management accounting techniques into industries other than manufacturing by taking up the cases of two companies that have found the analytical value of management accounting in presentation of their achievements to impress the stakeholders. Analysis of historical development of Management Accounting “Historically management accounting evolved from the techniques of cost accounting developed in England in late nineteenth century.”(Noriza Mohd. Zamal and others, page4)i. Financial accounting and management accounting are two different streams but are interdependent in their performances, but these were cost accounting features that provided the basis for the evolvement of management accountancy. It is necessary that managers should possess enough accounting knowledge to fulfill their responsibilities as an analyst of managerial information. Management accounting is the stream that has been developed to interpret historical and other accounting data for such management decision making. The evolution of management accounting is a response to changes in procedural management of the organizations. Large corporations doing business on international basis require faster and accurate analysis of historical accounting presented by the financial accountancy. Traditionally management accounting developed alongside the development of manufacturing techniques. But modern use of management accountancy is widespread and industries and businesses other than manufacturing are using this stream of accounting for improving and enriching the accounting information for its use for management purposes. Huge Coombs and others (page 18)ii believe that “in both traditional and new classic views, management accounting is seen as taking very passive and reactive role.” Cost accounting is treated as precursor of management accounting and that appeared on scene much after financial accounting. Earlier it was a question of cost management where the control of consumption of input was the cause to develop the techniques of allocation and absorption costing. Then emerged activity based costing (ABC) that provided the right direction to management in determining the actual input consumption. Management Accounting techniques like Present value of future cash flows and Rate of return gained popularity in capital budgeting. In fact rate of return on investment was introduced “in order to be used centrally in vertically integrated firms to guide decisions on capital allocation between various activities. At a later date, when divisonalized businesses delegated the responsibility for using the capital efficiency to managers, ROI also came to be used to judge local performance.” (David Crowther, page 12)iii Management accountant’s work has changed from collection and compilation of information to interpretation of collected information helping the management in decision making; and in this changed environment cost accounting developments have played prominent role. Emergence of management accounting should be treated as a boon to analytical managers, particularly when the British costing innovations during British Industrial Revolution (BIR) and standard costing evolution in US failed to appreciate the problems of capital accumulations on the face of structural problems of market development and distribution. But these costing techniques have now emerged as main management tools for such analytical studies that help management accountants in tackling the development issues. Richard K. Fleichmann (page 72)iv has rightly observed that costing resurgence, represented by costing evolution of BIR, and standard costing evolution in fact represented the genesis of cost accounting use as a function of management accounting. One can say the management accounting has so far developed on the support provided by financial accounting and costing techniques to solve management problems. Management accounting application in non- manufacturing arena Traditionally management accounting is related to manufacturing industry, but over a period of time non- manufacturing industries have also adopted these management techniques to achieve objectives that were not possible to accomplish by adopting merely financial and cost accounting techniques. Management accounting has enlarged its application beyond manufacturing units to service and other non- manufacturing industries. Let us study this use of management accounting in two companies that are non- manufacturing. One is the Wal- Mart Stores Inc and the other is British Telecommunication Plc (BT). Wal-Mart’s international annual presentations include various fact sheets that also describe different non- business activities of the company. One of those fact sheets is called Waste fact sheet. This fact sheet represents how Wal-mart turns waist into revenue. This fact sheet is a handiwork of management accountancy presentation as is apparent following statement in this fact sheet: “Turning trash into cash – Between February 2008 and January 2009 we redirected 57 percentage of waste generated by our stores and Sam’s Club facilities.” (Walmart Waste fact sheet, page 1)v The calculation of percentages form aggregate figures of wastes is the handiwork of management accountancy, though aggregate figures might have been computed under or from financial accounting. This analytical information to stakeholders is providing the facts of Walmart activities that are add on to routine business, and thus encourage investors to increase their stakes. The second chosen company BT’s annual return 2010 (page 159)vi states analytical information about total shareholder return (TSR), which is a management reporting based on management accounting exercise. It states “BT’s TSR for the 2010 financial year was positive 62.4%, comparative with FTSE 100 TSR which is positive 50.4%.” Now this is completely management accounting exercise added to add values to the annual report only to encourage stakeholders. Conclusion Historically, management accountancy is an extension of cost accounting techniques and dependent upon financial accounting for information required for analytical and other managerial purposes. Earlier manufacturing units implemented budgeting and standard costing techniques as management accounting tools, but those now have been developed into technologies that examine the drivers of customer and shareholders’ values. Companies other than manufacturing units have now started taking immense advantage of management accounting techniques, which have developed into valuable managerial tools. Word Count: 1071 References: Read More