Management Accounting Practices in Changing Business Environment

Flashcards for reviewing the evolution, challenges, and skills related to management accounting in a changing business landscape.

Management Accounting

Refers to the process and techniques that focus on the effective and efficient use of organizational resources to support managers in enhancing both customer value and shareholder value.

Management Accounting System

An information system that produces the information required by managers to create value and manage resources.

IFAC Model Stage 1: Cost Determination and Financial Control (prior to 1950)

Focus towards the determination of product cost with simple product technology, easily identifiable labor and materials, and manual operations. Techniques used include cost accounting, stock valuation methods, and budgeting.

IFAC Model Stage 2: Information for Management Planning and Control (1950-1965)

Focus shifted to providing information for planning and control, involving staff support to line management through technologies like decision analysis and responsibility accounting. Management control was oriented towards manufacturing and internal administration.

IFAC Model Stage 3: Reduction of Waste of Resources in Business Processes (1965-1985)

Increased global competition and rapid technological development led to improved quality and reduced costs through robotics and computer-controlled processes. The design, maintenance, and interpretation of information systems became important.

IFAC Model Stage 4: Creation of Value Through Effective Resource Use (by 1995)

The focus shifted to creating value through effective resource use via technology, examining customer value, shareholders value, and organizational innovation (e.g., TQM & BPR).

Relevance Lost (Johnson & Kaplan, 1986)

Management Accounting lost relevance due to limited technical developments, subservience to financial accounting, historical and aggregated reports, failure of accounting academics to innovate, and slowed development.

Relevance Regained (Kaplan & Johnson, 1986)

Modern corporations must design new Management Accounting systems for long-term planning, and Management Accounting must keep up-to-date with environmental changes.

Roles of Management Accounting in New Business Environment

Supports strategy formulation and implementation, improves competitive advantage, provides information to manage resources, and estimates costs of outputs.

Communication Skills (for Management Accountants)

Strong written and verbal skills, including the ability to explain financial information in non-financial terms.

Interpersonal Skills (for Management Accountants)

Persuasion, diplomacy, and coaching skills to relate to colleagues from various backgrounds, along with high-level negotiating skills.

Managerial Skills (for Management Accountants)

Expertise in management, marketing, and operations to understand business functions, with strong leadership and team building skills.

Strategic Planning

A long-term planning process undertaken by senior managers to achieve organizational objectives, supported by accounting information from costing, budgeting, and performance measurement systems.

Implementing Strategies

Management accountants link planning and control with budgeting systems, ensuring budgets support organizational strategies, and using performance measurement systems to compare actual outcomes to budgets or targets.

Traditional Management Accounting

Focuses on reporting financial data and shorter-term operational issues with internal information.

Contemporary Management Accounting

Includes both financial & non-financial information, focuses on strategic issues & planning, utilizes internal and external information.

Traditional Management Accounting Techniques

Product costing, Budgeting, Variance analysis, Break even sales, Return on investment, Product profitability

Contemporary Management Accounting Techniques

Activity based costing, Balanced scorecard, Customer profitability analysis, Benchmarking, Economic value added, Target and Kaizen costing

Changes in Business Environment

Led to Organizational Change, Improve product/service quality Delivery responsiveness, Cost performance & Innovativeness

Impacts of Technology and Globalization

More businesses adopt technology, Companies to increase efficiency and flexibility to enhance competitive advantage, Globalization offer new wider market space and explore new & cheaper resources.

Pros of Globalization for Management Accounting

Access to new markets, cost reduction and efficiency, enhanced technology integration, diverse talent pool facilitate exploration and growth

Cons of Globalization for Management Accounting

Complex regulatory environment, currency exchange risks, ethical and social challenges, and data security and privacy concerns.

Roles of Management Accountants in the Aviation Industry

Cost Management, Budgeting and Forecasting, Financial Analysis, Compliance and Regulations, Strategic Decision Support.

Challenges Facing Management Accountants in Technology-Intensive Companies

Rapid technological changes, Data security and privacy, Financial forecasting and uncertainty, Talent recruitment and retention.

Skills Needed by Management Accountants in Technology-Intensive Companies

Financial Acumen, Data Analytics, Technology Competence, Communication and Soft Skills.

Reasons Management Accounting Lost Relevance

The changes in management accounting systems techniques and practices. Changes in the business environment. The establishment of global markets and increase the level of competition between organizations. Management accountants must be less concerned with ‘number crunching’.

Responses to Changing Business Environment in Management Accounting

Creating separate systems, incorporate nonfinancial indicators, Measuring profits over the life of a product, Creating good cost systems.

Criticisms of Traditional Management Accounting

Limited evidence of technical developments, system was seen to be subservient to financial accounting, accounting academics’ failure to innovate, slowed down, causing management accounting to lose its relevance in the new millennium.

Response to Changes in Business Environment

Develop new performance measures, Learn new analytical skills, Be able to unravel the meaning of data.

Evolution of Management Accounting

1965 – 1985 the focus shift to the provision of information for management planning and control. 1985 – 1995 attention was focused on the reduction of waste in resources used in business processes. 1995 – 2000 attention had shifted to the generation or creation of value. 2000 onwards due to increasing accountability focus is on the strategic resource management.

Factors contributing to the evolution of management accounting

Increased global competitiveness, Growth of service sectors, Increased focus on customer’s satisfaction and value, Shifted to automated manufacturing process from labour intensive process, Rapid growth in e-business and new technology based production

Main roles of management accounting in formulating and implementing strategies

Providing information to help managers to formulate strategies and to implement these strategies. Planning and controlling the MA information. Assessing and evaluating the performance measurement system. Involving in critical decision-making process, Motivating managers and other employees towards organization’s goals