Management Accounting and the Modern Business Environment Essay Example

to pollution and other hazardous effects of the operation of the said organization. As such, today all business organizations are trying to minimize the pollution level by implementing state of the art technologies Intense competition is one of most important features of modern business environment. Each and every firm is adopting and implementing innovative strategies in order to stay much ahead of its competitors.

Competition has become more intense due to the presence of large number of companies, fast change in technology and consumers’ tastes etc. In such competitive environment product life cycle has been shortened. Today a product reaches to its maturity phase very fast and one of the main reasons behind this is the launch of new technology. A technology which is heavily used today might be completely obsolete tomorrow and the products that are dependent on that technology also become irrelevant to the consumers. Sound management accounting control system is another important feature of modern business environment.

Accounting researchers are found to be heavily interested in investigating the relationship between the change in management accounting control system and organizational performance (Seaman, 2006). Management Accounting and the Modern Business Environment Part-II Advanced technologies and intense competition forced business organizations to come up with more efficient and effective processes. Concepts like Six Sigma, TQM, BPR etc. are found to be dominating the today’s business environment. Six Sigma can be considered as a philosophy, a vision, a metric, a symbol, a methodology and a goal (Tennant, 2001).

Today almost all the organizations try to take their business processes at the six sigma level. All the steps to enhance the efficiency and effectiveness

of the processes are taken with the ultimate objective of satisfying customers. Today, organizations have realized that customers are the king of the business. All the strategies they adopt, all the products they launch are the actually the result of the focus on customer delight. In the present environment quality of the products and services is a major concern for the organizations. TQM (Total Quality Management) is the result of this concern regarding quality.

There are several organizations that have practiced the concepts of total quality management with the objective of improving the quality of their products and services. In Total Quality Management organizations practically aim to minimize the number of defects to zero. Proper application of TQM results in less variation in outputs and innovation of new processes and procedures in both service as well as manufacturing industries (Tennant, 2001). All these above mentioned terms, aspects and factors are integral parts of modern business environment.

Management accounting is one of the most important aspects in the modern business scenario. It is different from traditional financial accounting. Management accounting deals with information within the organization in order to help people to improve the effectiveness and efficiency of existing operations and take better decisions (Drury, 2008, pp 387-407). Control is a crucial process in the management accounting process. Control refers to the process of making sure that an organization’s activities are in accordance to the plans so that its objectives can be achieved successfully.

In management accounting various terms are used regarding control. Some of these are accounting control system, management accounting control system, management control system etc. However, all these terms are

almost synonymous. Both accounting control systems and management accounting refer to the practices like standard costing, periodic performance reporting and budgeting. Management control systems however is a broad concept that not only includes the above mentioned aspects, but also includes various other controls like action, social and personnel controls.

There are two main elements in management accounting control systems. The first one is “the formal planning processes” like long term planning and budgeting (Drury, 2008). The second one is responsibility accounting; it involves the formation of responsibility centers that initiate the process of allocating the answerability for financial outcomes and results to the individuals in the entire organization (Drury, 2008). While designing effective management control systems it is very important to take into account the current circumstances.

Management Accounting and the Modern Business Environment Part-III Modern business environment is very much complicated as there are large number actors who are involved in larger number of activities. The strength of management accounting control system is that it is based on strong fundamentals. It is true that in the modern business environment problems are more critical than they were in older business environment. However since the basics of management accounting control systems are build upon strong fundamental concepts, it is expected that most of the complicated problems can be solved through this system.

However, there is weakness like the system might lacks adaptability. Current business scenario is changing at a fast pace; as a result such change new concepts accounting control must be developed in order to cope up with the changes. In the traditional management accounting control system technology is not given proper

importance, but in case of modern business environment it is very important to focus more on various technological aspects as today all the crucial processes involve extensive use of high end technology. In he modern business environment there are several important management accounting techniques. Some of them are discussed below. According to David K. Narong, activity based costing is basically a quality management tool to measure the performance and cost of resources, activities, products and services (Narong, 2009, pp-). It is capable of providing fact-based insight into profitability and spending of products and services, distribution lines, customers etc. ABC is more correct cost management technology (Anderson, 1995, Volume 7).

In order to put into practice activity based costing, it is important to identify each activity first. Then the cost of resources that are involved in each of the activities needs to be estimated. Once this is done, cost driver in case of each activity needs to be identified and then activity cost rate needs to be calculated. Finally costs are needed to be assigned to cost objects on the basis of level of activity that is required for making the product or providing the service (Needles, 2007, pp-997). The basic concept of target costing is all about bringing the market under the costing system (Smith, 2007).

It is found that most of the organizations implement target costing with the objective of reducing costs (Smith, 2007). In addition to this there are other objectives like improving quality, satisfying customers more effectively and introducing new products on time (Smith, 2007). Some experts believe that it is nothing but procurement engineering. The concept is getting more

and more popular as companies like Olympus, Boeing, Komatsu are practicing the concept in order to enhance the efficiency of their supply chain.

According to Ed Blocher of University of North Carolina, target costing provides purchasing system the opportunity of looking at each and every piece of a product. It identifies the costs and decides whether the end customers are really benefitted or not (Teague, 2009). Management Accounting and the Modern Business Environment Part-IV According to Hui-Liang Tsai, business process re-engineering refers to the basic rethinking and essential redesign of business process with the objective of achieving dramatic improvements in contemporary and critical measures of performance like cost, service, quality, and speed (Tsai, 2003, pp-39, 40).

The main objective of business process reengineering is redesigning and changing the existing practices or processes in the business in order to attain significant improvement in the performance of the organization (Adeyemi et al. 2008). As such there is no concrete conceptual framework explaining what SMA (Strategic management accounting) is all about and its relation with corporate strategy, different experts have defined and explained the term and the concept differently.

According to Wilson, strategic management accounting is such an approach of management accounting that clearly highlights strategic concerns and issues (Open University Course Team, n. d. ). It is a broad concept where financial information is utilized for developing superior strategies which are further used for gaining sustainable competitive advantages. Strategic management accounting, the term was first proposed by Simmonds in the year 1981. According to Simmonds, strategic management accounting is the analysis of data regarding management accounting relating to a particular business as well as

its competitors.

The findings of this analysis is then used development and control of strategies adopted by that business (Sharma, 2009, pp 45-47). Bromwich suggested that strategic management accounting need to consider the factors like benefits of a product, the cost of giving such benefits and the relation of these two with the price of the product. Lord opined that there are certain characteristics that are unique in case of strategic management accounting (Sharma, 2009, pp 45-47). According to Lord, it takes into account the all the information of a competitor regarding its pricing strategies, market share, costs etc.

It focuses on the non-financial performance measures and continuous improvement (Sharma, 2009, pp 45-47). The systems of traditional cost accounting track the series of raw materials and other goods that are moving throughout the production system. As a result these systems are known as ‘sequential tracking systems’ (Scarlett, 2008, pp 363-366). JIT is a totally different system; hence it needs unique cost accounting system. Stock valuation systems become needless at the absence of stocks and ‘rapid conversion of direct materials into cost of goods sold simplifies the cost accounting system’ (Scarlett, 2008, pp 363-366).

The approach is recognized as backflush accounting. In backflush accounting, the recording of costs gets delayed till the next events take place. Then manufacturing costs get flushed out. In backflush accounting, two important events are considered very important. The first one is purchasing of raw materials. In an actual JIT system, there is no stock of raw materials. The second one is the transferring of goods to the stock of finished goods and in case of JIT, since there

is no stock of raw materials he process of transfer of goods that starts with receiving of raw materials, ends up with sale of goods. One important fact is that any organization can not use the system of backflush accounting. Organizations that practice JIT system, can use backflush accounting. However it is very much beneficial if it is properly used. Significant amount of time can be saved by the proper use of backflush accounting (Scarlett, 2008, pp 363-366). Zero based budgeting come into picture when an organization decides to make the budget from scratch by identifying each and every activity that is needed to be funded.

In simple words zero based budgeting is referred “to a system for budgeting large organizations, developed in the 1970s. ” (Maddox, 1999). In zero based budgeting it is important to identify all the major activities and determine their significance in the mission of the organization. It is true that the concept of zero based budgeting is a theoretically sound concept, but organizations have found it unwieldy. Some organizations have implemented it for few years, but could not continue to do that for long period of time (Maddox, 1999).

Throughput accounting is an extraordinary way to view an organization’s finances. It mainly emphasizes on revenue generation rather on product costing. The concept of throughput accounting focuses on the company’s positive potentials. Moreover system effectiveness rather than local efficiencies are given more emphasis in this accounting system. Throughput accounting helps operational managers in making quick and excellent business decisions. An important feature of this accounting system is that the same data are used for the derivation of metrics as

it is done in the present cost accounting system.

Benchmarking refers to the process of methodically identifying, examining and adapting others best practices with the purpose of improving the performance of an organization. In benchmarking focus remain on the most successful achievements of the other organizations and this is where it is different from competitive analysis (Schollaert, 2000). Management Accounting and the Modern Business Environment Conclusion One of the most popular performance measurement tools is balanced scorecard. Balanced Scorecard is first proposed by David Norton and Robert S.

Kaplan in the year 1992 (Kaplan & Norton, 1996, pp-44). The scorecard includes four perspectives namely financial perspective, learning and growth perspective, customer perspective and internal business process perspective. Any organization can be observed and analyzed from these four angles or perspectives (Kaplan & Norton, 1996). All the above explained management accounting techniques are heavily used by various organizations throughout the world. Some of these techniques have given great results, whereas some of them are not used for long time due to certain disadvantages of them.

Examples of using some of these techniques are provided here. In whirlpool, recently purchasing staffs have joined with people who are involved with sales, marketing, production, quality and engineering. The main objective behind this is closing gap between the designed cost and target cost that is associated with an aesthetics module of a product. It was a gap of 30%. A cost model was developed by the team. The cost drivers that were the reasons behind the gap were also identified by the team. Finally they agreed to build an alternative design so that the target cost is

achieved.

The ultimate objective was to achieve the target profit which they achieved in reality. This is a classic example of target costing (Teague, 2009). Balanced scorecard is another heavily used tool in the modern business environment. The usefulness of Balanced Scorecard can be analyzed by explaining an example of Metro Bank which was retail division of a large money center bank. It captured almost 30% market share (Kaplan & Norton, 1996). It was found to be having good results in case of deposit accounts. However the bank could not retain its market share for a long time (Kaplan & Norton, 1996).

The main reasons were lower inertest rate, increased competition and deregulation. It was observed from a strategic analysis that the Metro bank was excessive dependent on the segment of deposit accounts. Moreover the cost structure on which Metro was operating was becoming unable to serve most of its retail customers (Kaplan & Norton, 1996). In order to deal with such problems specific financial objective was identified and it was revenue mix broadening. This objective was likely to be achieved by focusing more on bank’s existing customers (Kaplan & Norton, 1996).

Benchmarking is also practiced heavily in different organizations. At Xerox, it is an important part of the process regarding quality improvement. The company has been practicing the process since 1970s (Smith, 1995). Modern business environment is unique in various aspects. It can be described by the nature of competition, power of consumers, dominance of technology, arrival of new processes etc. However one of the most important characteristics that can be used to describe modern business environment is the management accounting

control system.

It is a broad concept that includes several techniques like activity based costing, zero based costing, backflush accounting, strategic management accounting, target costing, benchmarking, balanced scorecard etc. Some of these techniques are widely accepted by the industry and some are not, but whatever technique is adopted, the main purpose remain same, making the system more efficient and effective.

Used: ABC and Beginning Globalization-market/competitive rivals---production reduced life cycle/better quality/less cost/ To serve for customers---customers satisfaction focus Eg: JIT and AMTs/ TQM-total quality management. Technology--