Management Accounting Systems In Contemporary Organizations
Abstract
This paper discusses the importance of contemporary management accounting techniques in the today’s business enterprises realizing the fact that they operate in highly dynamic, fast-changing, technology intensive and highly demanding environment. The need for information generated by the management accounting systems (MAS) is different for each level of management in the organization, therefore information produced should be tailored to those needs. The paper also discussed how modification of the MAS is necessary to meet the information needs of the organization and to drive it to optimum operational efficiency. The importance of managing the social aspects and reactions of those affected by the MAS change is equally important and recorded.
Introduction
A lot of management accounting systems (MAS) or techniques have existed since the late 20th century, such as Standard Cost Variances (SCV), Activity Based Costing (ABC), Marginal and Absorption Costing (MAC), Just in Time Inventory Analysis (JIT), Value Chain Analysis (VCA) and Total Quality Management (TQM). Management uses these systems to generate useful financial and non-financial information that would assist in effective management of costs as well as efficient allocation of resources to activities through relationships based on volume and non-volume related drivers (Cooper and Kaplan, 1987). This eventually results in better informed decisions for the organization and lead to strategic excellence in the long term.
However, in the recent past the advent of e-commerce, internet of things, use of mobile devices and instantaneously available information form almost infinite resources have made business faster and more dynamic than before. The businesses respond by seeking to adopt a more, efficient and modern IT-based accounting systems to harness the competitive advantage and remain viable by persistently changing and improving the organizational performance (Langfield-Smith et al., 2000). This poses the threat of being unable to cope with change in MAS and the people and organizational challenges that ensure with it. In the following sections two case studies that are focused on implementation of a new MAS in a real-life organization are discussed with the perspective of how they are relevant in the currently prevailing dynamic and competitive business environment.
Types of Management Accounting Methods from the primary case study
The first study is focused on implementation of SAP R/3 bundled MAS package in a multinational manufacturer with rather simple process of production with fewer inputs as raw materials. The subject company operates manufacturing facilities in 27 countries with sales to more than 100 countries throughout the world. The Company wishes to have a centralized control over its management decisions from its headquarter on the East Coast of the US so as to eliminate the regional bias and attain greater focus on globalized decision-making excellence (Watts et al, 2014). The management accounting techniques utilized by the company in the case study are briefly discussed hereunder.
Activity Based Costing (ABC)
This is a technique which involves tracing resource consumption and costing the final outputs. First resources are assigned to certain activities, and later these activities to cost objects (products or finished article). Cost drivers are identified which attach costs related to activities performed to the final output / product. It results in more accurate method of product/service costing, and therefore a clear understanding of the product pricing, enables better understanding of cost drivers and overheads being incurred, and allows better product profitability analysis (Kaplan and Norton, 2016).
The case study suggests that whilst a number of firms implement the ABC technique, they have also been seen to subsequently abandon them because of its high cost of implementation and monitoring. Furthermore, the selection of cost drivers is not as simple a task as it seems and it makes interpretation of results very difficult for user employees. The Company in case study utilizes ABC through Scorecards representing activity-based management (ABM). However, investigation of these activity drivers is done very rarely which makes ABC a seldom used technique with little relevance to activities within the organization (Watts et al, 2014).
Internal Benchmarking
Benchmarking involves the identification of optimum performance and then adoption of the identified best practices to improve the performance. Internal benchmarking compares one operational unit within the manufacturing concern with another one within the same manufacturing facility. This ultimately results in process improvement, efficiency in production line, achievement of optimum performance targets, generating an understanding of the world class performance (Kaplan and Norton, 2016).
The subject company in case study utilizes internal benchmarking by comparing its various regional and global manufacturing facilities of similar products, identifying the variances, scrutinizing them and seeking explanations. The effect of variances outside the control of operational managers such as authority over supply chain purchases are eliminated to relieve the pressure from operational managers. This results in calibration of performance gaps in various processes / manufacturing units and developing a culture for maintaining stimulus for continuous improvement (Watts et al, 2014).
Use of Key Performance Indicators (KPIs)
These are a measure of company’s success or failures towards the fulfilment of a particular goal. These are goods means monitoring progress towards accomplishing the set strategic objectives (Kaplan and Norton, 2016). In the subject Company, manager responsible for tactical decision-making assist in the generation of useful KPIs for assessing the performance of plants and manufacturing facilities. The information used in computing these measures is extracted from MAS or acquired externally (such as supply chain-based information, customer expectations and technological developments affecting the company’s operations) (Watts et al, 2014).
Relevance of Management Accounting Systems to contemporary organizations
A contemporary organization is mostly managed at three hierarchical levels: operational, tactical and strategic. The information needs of line managers and staff at each level depends on their functions and the intended outcome of their efforts. The type of information could be found either internally in the organization or available in some way outside / externally. The primary case study discusses in details how MAS are involved at varying degrees at three different levels within a contemporary organization. Each division of the subject company is autonomous in its operational decisions, whereas strategic decisions are made for the broader organization and are centralized with the head office. The involvement of MAS for each type of decision is briefly discussed as follows with the help of examples:
Operational level decisions
Much of the functionality of the MAS is utilized in making operational decisions. These may include for example taking a decision to produce further or to halt a production facility based on computed levels of the optimum production levels. Taking decisions about other issues relating to production, most of which have short-time frame and need to be error free. The case study finds that the reliance on internally generated information for these types of decisions is therefore highest.
In case of subject company, KPIs are set at operational level for each production facility of the company. Historical precedents, performance evaluations and internal benchmarking form the basis of these KPIs. Incremental improvement is constantly sought in these KPIs to achieve production efficiency / best practice. Since decisions taken are base don KPIs which in turn are derived from the information obtained from management accounting systems, their reliance thereon is absolute and unconditional.
