Emerging Trends and Concepts in Management Accounting

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Emerging Trends and Concepts in Management Accounting:

Emerging Trends and Concepts in Management Accounting Submitted By: Aarshiya Chaudhry(259) Vandana Mirchandani(186) I-52 B.Com(H), III year


Contents Introduction Need and Emergence Evolution Criticism of old techniques New trends and concepts : Lean Accounting-JIT Strategic Cost Management Resource Consumption Accounting Throughput Accounting Conclusion


Introduction Management accounting or managerial accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions According to the Chartered Institute of Management Accountants (CIMA), Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" The American Institute of Certified Public Accountants(AICPA) states that management accounting as practice extends to the following three areas: Strategic Management—Advancing the role of the management accountant as a strategic partner in the organization. Performance Management—Developing the practice of business decision-making and managing the performance of the organization. Risk Management—Contributing to frameworks and practices for identifying, measuring, managing and reporting risks to the achievement of the objectives of the organization. The Institute of Management Accountants(IMA) recently updated its definition as follows: "management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems,and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy."

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The Institute of Certified Management Accountants(ICMA), states "A management accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented information in such a way as to assist management in the formulation of policies and in the planning and control of the operation of the undertaking." "value-creators" amongst the accountants. more interested in forward looking and taking decisions that will affect the future of the organization, than in the historical recording and compliance (score keeping) aspects of the profession.

Need and Emergence:

Need and Emergence Management accounting first emerged as a significant activity during the early industrial revolution, in the leading industries and enterprises of the day. As such, management accounting arose after financial accounting, which can trace its origins to its stewardship role in European merchant trading ventures beginning in the Italian Renaissance Two leading industries of the industrial revolution that played important roles in the early history of management accounting were textiles and railroads. Textile mills used raw materials and labour to make fabrics and associated products, and the mills developed methods to track the efficiency with which they used these inputs. Railroads required significant investments of capital over long periods of time for the construction of roadbed and track. Once operational, railroads handled large volumes of cash receipts from numerous customers, and developed both financial and operational measures of efficiency for moving passengers and freight.

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Management accounting concepts and techniques continued to evolve rapidly throughout the rest of the first half of the 20th century, and by 1950 most of the key elements of management accounting as practiced today were well established. Companies that business historians have identified as innovators in management accounting practice during this period include DuPont, General Motors and General Electric The economic, business and technological developments that have probably had the greatest impact on management accounting over the last 50 years are the following: The information revolution: Before the second half of the 20th century, companies faced the enormous hurdle that the collection and processing of information posed to management accounting systems, and the impact that the cost of information had on management in general. Today, information technology makes possible sophisticated database accounting systems that are both powerful and flexible in terms of the accounting information that they can collect, organize and report. Even today, however, the cost of designing, implementing, and running cost accounting systems is a substantial obstacle in many organizations

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Proliferation of product lines: If a company makes only one product, many cost accounting issues are moot. When companies significantly expanded their product lines beginning in the 1950s, to gain market share and increase profits, the difficulty and importance of obtaining accurate cost information on individual products increased. In the 1970s and 1980s, some U.S. companies were allocating costs among products in a manner that led to poor production and marketing decisions. A management accounting tool called activity-based costing was developed to help correct this problem, by improving the accuracy with which costs are allocated among products. Globalization of the economy Globalization has resulted in a more competitive environment, which encourages the implementation of accounting systems that provide the most accurate, relevant, and timely information possible. The growth of multinational corporations has increased the importance of transfer pricing. A transfer price is the amount one division of a company charges another division for an intermediate product. Transfer pricing plays a role in taxation, international trade negotiations, and production and marketing decisions within decentralized firms. Increased the pace of change within the management accounting profession. Many recent innovations in management accounting, as well as in the fields of strategy and operations management, originated in Japan. Direct competition between Japanese and U.S. companies has led many U.S. companies to adopt these Japanese management practices.


Evolution To compete successfully in today's highly competitive global environment companies have made customer satisfaction an overriding priority. They have also adopted new management approaches, changed their manufacturing systems and invested in new technologies.These change have had a significant influence on management accounting systems. The usefulness of the traditional management accounting information system has been challenged by a changing economic environment coupled with increased global competition and the emergence of new manufacturing technologies. The past five years have been characterised by the criticism and reeaxmination of management accounting practices and techniques. Critics view management accounting as contributing to the loss of competitiveness of the United States in the global economy.Much of the criticism has led to a strong impetus in adopting "cutting edge" management accounting techniques by manufacturers as well as academics.

Criticism of Old techniques:

Criticism of Old techniques Over the last decade, critics of management accounting have questioned the relevance of many traditional techniques and practices. For example, Goldratt contended that traditional management accounting undermines production and is the number one enemy of productivity. Cooper and Kaplan have argued that the traditional accounting techniques may no longer be valid as the production process changes. These techniques fail to provide relevant, useful, and timely information about processing activities that management needs for planning and control purposes. Traditional management accounting systems are often considered incompatible with modern production systems. Also, traditional systems have typically used direct labour as an allocation base, often inappropriately.

New Trends & Concepts:

New Trends & Concepts The following innovations in the fields of strategy and operations management have influenced management accounting systems and practices recently:

Lean Production and Lean Enterprise:

Lean Production and Lean Enterprise In recent years, the term “lean” has been adopted by some organizations to describe the organization’s comprehensive effort to apply state-of-the-art management practices to improve quality and customer satisfaction, reduce costs and production lead-times, and increase value-creation. “Lean” is an umbrella term that includes such techniques as JIT and TQM as component elements. Some accountants credit Toyota as the originator of lean production. The term “lean” was originally applied to manufacturing settings, such as in the phrases “lean production” or “lean manufacturing.”

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But the term is now used more broadly, and sometimes describes lean initiatives in the distribution and support functions of a manufacturing company, lean initiatives in service-sector companies, and even initiatives in other types of organizations such as governmental entities. The term lean accounting has been coined to describe accounting systems that either support lean production, or that are, themselves, “lean.” The movement reached a tipping point during the 2005 Lean Accounting Summit in Dearborn, MI. 320 individuals attended and discussed the merits of a new approach to accounting in the lean enterprise. 520 individuals attended the 2nd annual conference in 2006.

Example Case: Toyota Production Systems:

Example Case: Toyota Production Systems The Toyota Production System (TPS) is an integrated socio-technical system, developed by Toyota, that comprises its management philosophy and practices. The TPS organizes manufacturing and logistics for the automobile manufacturer, including interaction with suppliers and customers. The system is a major precursor of the more generic "Lean manufacturing." Taiichi Ohno, Shigeo Shingo and Eiji Toyoda developed the system between 1948 and 1975 The main objectives of the TPS are to design out overburden and inconsistency, and to eliminate waste.

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Toyota was able to greatly reduce lead time and cost using the TPS, while improving quality. This enabled it to become one of the ten largest companies in the world. It is currently as profitable as all the other car companies combined and became the largest car manufacturer in 2007. It has been proposed that the TPS is the most prominent example of the 'correlation', or middle, stage in a science, with material requirements planning and other data gathering systems representing the 'classification' or first stage. Also, many companies in different sectors of work (other than manufacturing) have attempted to adapt some or all of the principles of the Toyota Production System to their company. These sectors include construction and health care.

Strategic Cost Management:

Strategic Cost Management Strategic management accounting (SMA) is the merging of strategic business objectives with management accounting information to provide a forward looking model that assists management in making business decisions. Unlike management accounting -- which focuses on internal accounting metrics -- SMA strategy evaluates external information regarding trends in costs, prices, market share and cash flow, and their impacts on resources, to determine the appropriate tactical response. The strategic element of management accounting requires enhanced intelligence about competitors, suppliers and technologies.

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Management Accounting Triangular Structure According to a study released by Houghton Mifflin Company there are three primary attributes of SMA: technical, behavioral and cultural. Technical analysis enhances understanding and provides information on the event measured. The behavioral metric promotes actions to achieve the organization's strategic objectives. The cultural element of the triangle establishes a shared set of beliefs within the organization. These three tenets comprise the elements of an effective SMA program.

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Strategic Triangulation of Management Accounting The primary strategic elements of organizations are based on quality, cost and time (QCT). An enterprise uses these factors to differentiate itself from competitors. Each firm evaluates the relative importance of QCT factors predicated on its customer base and the preferences or demands made by its market. In some instances, firms will demand products subject to primary issues of time and cost. Other customers demand quality and are indifferent to cost factors.

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Illustrating Strategic Management Accounting According to research from McGraw-Hill, a study of London-based retail store Tesco determined that the company's primary fixed asset base was its stores. Based on this factor management created strategic partnerships with construction companies to lower costs and maintain quality. In addition, Tesco monitored competitor product pricing to reduce customer prices and gain market share. Tesco also enhanced its technology by offering store cards that track customer purchase patterns.

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SMA Focus on Organization Environment Awareness of competitive conditions is the primary difference between strategic management accounting and traditional management accounting systems. SMA focuses on the company's environment. One environment a firm focuses on revolves around its relationship with suppliers and customers. Another environment involves a company's current and potential competitors. Hence, a firm's intelligence may indicate a need to reduce prices to compete. SMA would evaluate the organization's up-stream (suppliers) cost structure to determine if it can renegotiate with suppliers, or if it must seek suppliers with lower price points.

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Strategic management accounting merges strategic business planning with forward looking accounting intelligence.

Resource Consumption Accounting:

Resource Consumption Accounting a dynamic, fully integrated, principle-based, and comprehensive management accounting approach that provides managers with decision support information for enterprise optimization. RCA is a relatively new, flexible, comprehensive management accounting approach based largely on the German management accounting approach Grenzplankostenrechnung (GPK) and also allows for the use of activity-based drivers.

Costing Continuum::

Costing Continuum:

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Distinguishing Concepts: Germany’s GPK method of quantity-based operational modeling using fixed and proportional costs established at the resource level in a company (i.e., cost center/resource pools or value streams Gordon Shillinglaw’s concept of attributable cost Flexible use of activity-based drivers (only where needed) based on specific, and restrictive rules; Value chain integration of management accounting into operational systems; Use of fundamental operations transactions as the primary source for financial and quantitative data (rather than the general ledger); Replacing the principle of variability with the principle of responsiveness for operational modeling Support for a multi-level, contribution margin-based profit & loss statement that supports managerial decision making without the cost distortions and complexity of inappropriate (not based on the principle of causality ) allocations of cost.

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Core Elements: There are three core elements that enable RCA to lay a very different foundation for its cost model. The view of resources – resources and their costs are considered foundational to proper cost modeling and decision support. An organization’s cost and revenues are all a function of the resources that produce them. Quantity-based modeling – the entire model is constructed using operational quantities. Operational data is the foundation of value creation and the leading indicator of economic outcomes. Cost behavior – value is added as a veneer to the quantity-based model and costs/dollars behavior is determined by the behavior of resource quantities as they are applied to value creating operations within an organization.

Throughput Accounting:

Throughput Accounting Throughput Accounting (TA) is a principle-based and comprehensive management accounting approach that provides managers with decision support information for enterprise profitability improvement. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting.

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Throughput(T) is the rate at which the system produces "goal units.“ When the goal units are money (in for-profit businesses), throughput is net sales (S) less totally variable cost (TVC), generally the cost of the raw materials: (T = S - TVC) T only exists when there is a sale of the product or service. Producing materials that sit in a warehouse does not form part of throughput but rather investment.

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The chart illustrates a typical throughput structure of income (sales) and expenses (TVC and OE). T=Sales less TVC and NP=T less OE.

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As such, Throughput Accountingis neither cost accounting nor costing because it is cash focused and does not allocate all costs (variable and fixed expenses, including overheads) to products and services sold or provided by an enterprise. Considering the laws of variation, only costs that vary totally with units of output (see definition of T below for TVC) e.g. raw materials, are allocated to products and services which are deducted from sales to determine Throughput. Throughput Accounting is a management accounting technique used as the performance measures in the Theory of Constraints (TOC). It is the business intelligence used for maximizing profits, however, unlike cost accounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, Throughput Accounting primarily focuses on generating more throughput. Conceptually, Throughput Accounting seeks to increase the velocity or speed at which throughput (see definition of T below) is generated by products and services with respect to an organization's constraint, whether the constraint is internal or external to the organization. Throughput Accounting is the only management accounting methodology that considers constraints as factors limiting the performance of organizations.


Conclusion Management accounting has gone through a significant evolutionary process during its life span Earlier, while management accounting did provide other functions in business, cost accounting was perhaps the most common function. Throughout the past several decades, management accounting has undergone a major evolution. Many companies have begun to use management accountants in a decision/support capacity rather than just straight accounting functions. Management accountants provide business owners and managers with various financial information regarding current production processes and new potential business opportunities.

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Management accountants often prepare budgets, create production variance reports and production or sales forecasts in addition to the historical cost accounting function. Business owners can also use management accountants to prepare financial reports and other internal documents for management review. Management accounting does not usually follow any specific national accounting standards. This allows business owners to tailor management accounting operations to their specific purpose. Companies often improve production output and profitability through the use of management accounting. For instance, management accounting can help business owners discover where improvements are needed in their company. Improvements may require business owners to find new suppliers for business inputs or develop new production techniques to reduce waste. Hiring management accountants with backgrounds outside of accounting can provide business owners with additional insight into improving business operations.

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