Topic 1 (Part 1)

RECENT DEVELOPMENTS IN MANAGEMENT ACCOUNTING

1BKAM 3033 - Topic 1(a)

Lecture outline:

• Management accounting scope• The evolution of management

accounting• Management accounting change• The gap between theory and practice


Management Accounting

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• Management accounting is the branch of accounting, which is concerned with supplying relevant information to managers at appropriate time to enable them to take decisions in organization.

• It is the process of accounting, which generates accounting information from both financial accounting and cost accounting and provides essential accounting information to all departments concerned.

• Management accounting is the process of identifying, measuring, analyzing, interpreting and communicating accounting information to department concerns to meet organizational goals and objectives.

BKAM 3033 - Topic 1(a)

Objectives of Management Accounting

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• Providing information for decision making and planning in revenue and cost projection of organization

• Helps managers to interpret financial data that are not understand by internal users.

• Management accountants are crucial in an organization that they become an integral part of management team who provides necessary information.

• Helps managers in directing and controlling operations through its attention in their function.

• Motivating managers to achieve organization's goals• Measures the performance of managers, subunits and

employees within organization.• Assess organizations’ competitive position, and working

with the other managers to ensure organization's long term competitiveness


Role of Managerial Accounting

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• To achieve its’ goals, organization acquires resources, hires people, and then engages in an organized set of activities.

• It is up to the management team to make the best use of the organization's resources, activities, and people in achieving the organization's goals.

• Planning• Directing operational activities• Controlling• Decision Making


Differences Between Management And Cost Accounting

Basis Management accounting Cost Accounting

Objectives Its objective is to assist managers providing accounting information for decision-making.

Its objective is to determine and record the cost of production of goods and services.

Scope It has broad scope, and includes financial and cost accounting.

Its scope is limited in cost determination and record.

Sources of data

It uses both quantitative and qualitative data

It uses the quantitative data only.

Accounting principles

No specific principles like accounting and cost accounting.

Certain principles and procedures are followed in cost determination and allocation.

Nature It uses past and present data in the projection of future.

It uses both past and present data and figure.


Management Accounting Vs. Financial AccountingBasis Management accounting Financial Accounting

Objectives Assist managers at all levels i.e. internal users by providing necessary accounting information.

Make periodical report Outsiders like shareholders, government, customers, suppliers, managers

Sources of data It uses data, which are subjective, descriptive and related with future.

It uses data, which are historical, quantitative , and related with past.

Accounting principles

No such principles for preparation and presentation of reports. Therefore, reports differ from one organization to another.

Governed by GAAPs. Therefore, all organizations prepare the financial reports in the same manner.

Reporting Reports are prepared in certain time interval according to need of management.

Financial reports are generally prepared at the end of the fiscal year to report stakeholders.

Legal compulsion

It is voluntary. It is applied to increase management efficiency for attaining organizational objectives.

It is compulsory in every business organization.

Performance measurements

It measures the efficiency and performance

of various departments and divisions.

It measures the overall efficiency and performance of organization.


Evolution of the Focus of MAStage

Transformation

TransformationTransformation

OngoingTransformation

1

2

3

4

FocusStage 1 Stage 2 Stage 3 Stage 4

Source: IFAC, 1998

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Management Accounting Change

Stage 1

Stage 2

Stage 3

Stage 4

• Cost determination• Financial control

• Management planning and control

• Reduction of waste

• Value creation


Change in the Profession

Scorekeepers Bean counters

ChangeChange

Internal consultant-business partner-business analyst


Change in the Profession“Accounting is changing. You are no longer sitting behind a desk

just working on a computer, just crunching the numbers. You are actually getting to be part of the day-to-day functions of the business.” (Abbott Laboratories)

“We are looked upon as more business advisors than just accountants, which has a lot to do with the additional analysis and forward-looking goals that we are setting. We spend more of our time analyzing and understanding our margins, our prices, and the markets in which we business. People have a sense of purpose, have a sense of “I am adding value to the company.” (Caterpillar, Inc)


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Change in Profession

The Prior Business Environment

Financial reporting and costCommon emphasis on standardization & Std costThe accountants as functional expert and financial scorekeeper

The Contemporary Business

EnvironmentView of cost Act as a tool for the development and implementation of business strategyThe accountant as a business partner

Blocher, Chen, Lin


Change in Profession

• Today’s management accountants need the following skills:– Solid knowledge of both financial and

management accounting– Analytical skills– Knowledge of how a business functions– Ability to work on a team– Oral and written communication skills


Evolution and Adaptation in Managerial Accounting

Continuous Improvement

Service Vs. ManufacturingFirms

Emergence of NewIndustries

Global Competition

Focus on the Customer

Cross-Functional Teams

Computer-IntegratedManufacturing

Product Life Cycles

Time-Based Competition

Information andCommunication

Technology

Just-in-Time Inventory

Total QualityManagement

Change

BKAM 3033 - Topic 1(a) 14

WHAT FACTORS DRIVE CHANGE OF MA

External•Customer oriented (competition)•Technology•Globalization

Customer-oriented (competition)Internal

Organizational


WHAT FACTORS DRIVE CHANGE OF MA –External

Focus on customer satisfaction


WHAT FACTORS DRIVE CHANGE OF MA - Internal

• Core competencies and work characteristics of the organization.– Modern production technologies changes in

product costing practices– IT capital budgeting– E-commerce new ways of operating

• Design of MA systems– Style of management– Existence of TQM programmes


WHAT FACTORS DRIVE CHANGE OF MA - Organizational

• Merger and acquisition• Organizational restructuring• Corporate failures enhanced corporate

governance


The Gap between Theory and Practices

• Management accounting practices can be observed at the macro or micro levels (Drury, 2008): Macro refers to concepts and techniques Micro refers to the behavioral patterns of use.

• Tendency towards globalization at the macro level.



• Drivers of convergence include: Global competition Information technology (e.g. ERP systems) Standardization by transnational companies Global consultancy Use of global textbooks

• At the micro level accounting information may be used in different ways due to influence of different national and local cultures.



• Professional bodies play an important role to bridge the gap between MA theory and practice.

• For example, CIMA stated its first objective as “to promote and develop the science of management accountancy”.

• CIMA established the Technical Committee to oversee a rigorous technical development agenda.– Review developing practices and highlight what’s working

and what’s not.



• CIMA also worked with IFAC to develop the concept of enterprise governance, focusing on the balance between regulatory conformance and business performance.

• In Malaysia, NAfMA awards is introduced by CIMA and MIA to promote best practices of MA.

• The NAfMA awards recognize the best practices in MA that lead to value creation and excellent business performance based on the MA concepts of IFAC.


The Gap between Theory and Practices• NAfMA award is a response to the criticism by

accounting practitioners and educators on the ground that MA practices had changed little over for almost 60 years (e.g. Johnson & Kaplan,1987), despite radical changes in the business environment.

• The awards also reflects the shift from ‘number cruncher’ and ‘corporate cop’ to decision-support specialists and reflects what it takes to compete in today’s lean, global, technologically-driven environment.


Documents

Topic 1 (Part 1)