Following the mid-1980s, the beginning of evolution in the field of management accounting, a question has arisen between academics and practitioners regarding the scope of the efficiency of traditional management accounting techniques. It is expressed that professionals prefer management accounting methods, which are transparent, pragmatic and economically applicable. It has also been argued that traditional management accounting techniques are obsolete and insufficient for management decision-making purposes. As stated by an author, 'most of the traditional management accounting techniques are too late, too aggregated, and too distorted to be relevant for decision-making purposes.'
In the current era of the business environment, markets and the corporate world in developed, as well as developing countries, are faced with intense national and global competition. The owners of large corporations want to be not only first-rate but also to achieve a higher position in the market of their business in every aspect of the firm. By focussing on the quality of products and processes, and improvement of productivity, companies have made lean manufacturing a crucial component in their strategy to be world-class competitors. The responsibilities of the directors, therefore, will increase in organisations; chiefly management accounting tasks that are critical to control cost, productivity and pricing decisions.
Management accounting practices are essential to the success of an organisation and the information, primarily financial data, are critical to decision-making, which provides the firm a competitive edge. Although the foundation of management accounting has remained unchanged over the last century; advancements in manufacturing and production processes have promoted an update in management accounting practices.
The integration of technological progress into the accounting department has made it easier and more cost-effective for small-business owners to make a data-driven decision about their companies. Modern accounting techniques include standard costing, balanced scorecards, real-time inventory management and process control.
Standard costing is the practice of recording accounting transactions at their expected costs for an actual cost in the financial records and then, analysing any variances between the expected and actual costs. This is not a contemporary technique, but the speed at which this information can now be examined has evolved considerably. The usage of modern accounting information systems has allowed small-business owners to analyse variances between actual and standard costs in real time as materials are acquired, and products are manufactured.
Previously, these techniques would require calculations by an accountant. Now, this component is built into modern software packages, making it widely accessible. This is certainly more convenient, but owners should remain cautious. The interpretation of standard costing variances still requires an understanding of how the process works. This will involve additional training of employees, which could yield extra costs for a small firm; however, in the long run, it may be considered an investment into the betterment of the business.
Activity-based costing (ABC) is a traditional accounting technique that was implemented to tackle problems faced with traditional absorption costing. Full absorption costing was unable to recognise the actual cost of processes for reliable management decisions and was reasonably accurate when direct labour was variable; overhead was minimal and a narrow range of products was manufactured. Hitherto, the costs of direct labour and materials could be traced and efficiently allocated to individual products. Now, however, labour is largely fixed and overheads are a significant part of total cost.
ABC was widely used in the manufacturing industry where technological development and capacity gain reduced the rate of direct, labour and material costs. Despite initial enthusiasm, ABC lost ground in the 1990s when balanced scorecards and economic value added were introduced as alternatives. An independent 2008 report concluded that a manually driven ABC was an insufficient use of resources: 'it was inexpensive and difficult to implement for small gains, and a poor value and that alternative methods should be employed.'
The balanced scorecard is a strategic planning and performance management tool that is extensively used by businesses in recent years. It combines financial and non-financial data to give a more comprehensive snapshot of the enterprise or individual performance. Balanced scorecards encourage productivity and business performance if compensation is available as a premium for their efforts.
The utilization of the balanced scorecard technique has proved popular in the last few decades; however, it does have its limitations. Bonuses are powerful motivators, but, if a small-business owner is not entirely confident about the metrics being used in the balanced scorecard, they may be more cautious using the scorecard to award benefits. Affirming erroneous conduct could hinder efficiency and performance than help improve it.
Traditional management accounting techniques, on the other hand, track business performance based on long-established standard and systems. While accounting practices should be a close operation of the firm they measure, they sometimes fail to respond quickly to a dynamic business environment.
New business practices could render particular accounting practices unfit. The predominant issue with traditional accounting methods is the incomplete and impotent performance measurement on businesses operating in eccentric ways. Ostensibly, traditional accounting practices ought to be able to accommodate the vigorously developing characteristics of the firm they measure.
Traditional accounting practices remain favourable for companies that offer a restricted range of products or services and do not depend upon custom designs. The focus on cost reporting and fixed asset utilization to reflect the many essential traits of conventional businesses, such as incremental labour and machine usage, obligates the demand for traditional accounting methods.
In traditional mass production, the better the business performance as measured by increased product or service sales, the more demand on labour utilization and asset investment. Thus, increases shown in accounting records on labour costs and asset value indicate augmented business enforcement. Within the conventional business environment, synchroneity often exists between accounting measurements and actual business performance.
Years of labour efficiency and machine utilization reporting conditioned everyone to a system where the apparent objective was to keep everyone and machine busy consistently. Modern businesses, however, have become less dependent on manual labour usage and do not rely on continuous machine work to deliver better business results. The outsourcing of factories to locations where labour is cheaper and more cost effective is a benchmark for many multi-national corporations in recent years. Rather, companies may focus more on technological innovation and research and development.
Faster inventory turnover and high-quality customer service are favoured more, as to boost business performance while maintaining fixed usage in labour and machines. This, in turn, drives company profits. Rapid modernization in a business environment may compel complications for traditional accounting practices if an accounting process is inadequate to track business performance or provides misleading measures of data for a business no longer involved in mass production of a single product or offering undistinguished service.
In conclusion, management accounting focuses on making future decisions with the help of past financial data; it is forward-looking and, therefore, progressive in nature. The most significant obstacle to the effort of revitalising manufacturing operations is that most businesses use the same accounting systems that were developed and implemented many years ago in an environment that does not compare to the modern day manufacturing.
Traditional methods of accounting become a hindrance as conventional 'accounting measures that are long on variance reports and short on measures that drive the business' remain the focus.
Despite the considerable criticisms to the traditional techniques and increasing interest in developing new management accounting models in recent years, the traditional management techniques are still widely used by many practitioners.
...(download the rest of the essay above)