Introduction
Traditional Management Accounting System was designed with the purpose to support traditional mass-production, with relation to target setting, motivation etc. (Mouritsen & Hansen,2006) Even with the criticism and the development of a new managerial/cost accounting models recently, Traditional management accounting technique are will widely used. The requirement of development in modern management accounting technique however should not be overseen. By 1925 ‘all management accounting used today have been developed’[Johnson and Kaplan(1987), Kaplan(1984)] This statement was supported by many studies that have been done to criticism that traditional management accounting aren’t able to keep up with recent years with the development throughout this year, one of the main driver for the failure of traditional management accounting is globalisation. This led to a shift in favour of the use modern managerial/cost accounting.
Contribution of Traditional Management Accounting
Traditional accounting can be trace way back in time where in the early 19th century where the needs of efficient production were realised, the improvements of factory and workers was due to the emergence of managed and hierarchical enterprise in that era. (Johnson and Kaplan (1987). Before the 19th century virtually all transactions between owner and individuals were not part of the organization, further studies led to the claim “The cost accounting practice in the late 1800s didn’t include the allocation of fixed cost to products or to periods” (Kaplan, 1984). Improvement was gradually seen after 1900s, Johnson in 1978 described the innovative of managerial accounting system established at the General Motors in the early 1920s. GM’s system established centralized control with decentralized responsibility, it provided an annual operating forecast, sales reports and a flexible budget that indicated promptly when there is deviation. It also allows management to assign recourses and managerial compensation among divisions on the basis of uniform performance criteria. This is where the baseline and importance of management account started to be drawn. Boer (2000) identified the period between 1953 and 1960 where standard costing was viewed as key accounting tool in cost control and the reliabilities of standard costing providing effective managerial control was the least to be worried. These studies let us understand that the traditional method starting to gain attention in the 19th century and was further developed throughout the era however there is simply not enough experience and knowledge to create a perfect system and also as the technology development over the century have improved significantly therefore in some cases it might not be as applicable nowadays compare to 100 years ago.
Traditional management accountant has a role to organizational cost keeping and budgeting and on delights of process costing and budgetary variance analysis. To be more specific is cost analysis, cost estimation, cost behaviour and standard costing. These are able to reflect many essential traits of conventional businesses such as incremental labour and machine usage. Traditional management accounting measures operating performance by looking at traditional cost-based accounting data such may include increase in product and service sales, demand on labour usage and asset investment. These measure priorities the end-results of the system instead of the performance of activities. It focuses seeking maximizing capacity utilization. Standard cost accounting was developed 100 years ago where labour was one of the most important cost in manufacturing goods. According to Anita (2000) both academic and professional organization promoted standard costing prior to the 70s. Historical costs are costs where materials and labour to be allocated on past experience, these costs are cost occurred in the past therefore in the earlier days a time book was used to register working time and to determine historical costs. These traditional methods allocate indirect cost to the items manufactured on the basis of volume such as number of unites produced, direct labour hours or the production machine hours. Variance analysis breaks down the variation between actual cost and standard costs into various components, this will let the managers understand why costs might deviate from what was expected therefore action can be taken.
However, these methods have problems where nowadays it appeared that the machine hours are not the only underlying cause of the factory overheard. B. Lord have stated that traditional management accounting is backward-looking, focusing on past results. He also points out the traditional method tends to be programmed or reactive, dealing with regular events or one-off decisions. One of the studies done by Normah Omar and Rokiah Muda in 2002. They examined the nature and characteristics of management accounting practices of Japanese company in Malaysia. They used the survey including face-to-face interview and questionnaire technique which leads to a conclusion that the two traditional managerial/cost accounting techniques, Standard/variance analysis and Budgeting. Both were very common by these companies. Budgeting is even used by all of the company although some modern techniques are used as well but the contribution of traditional method can not be ignored. The International Federation of Accountants in 1998 identified four stages of the evolving management accounting, each stage is a combination of the old and new. Where the old will usually be reshaped to hit the new in addressing a new set of conditions in management environment. As a result, there is a high possibility that in the future that the method we are using now will be considered as ‘out-of-date’ but it is important to note that any method that have been or will be developed always track back to the traditional method used in the 19th century. Overall the traditional method can be used as it aligns with the General Accepted Accounting Principles and also it provides an easy implementation however the downside of traditional method could be more than what it contributes.
Traditional techniques may no longer cope with the global competition
Traditional management accounting technique aimed to provide internal information to workers and managers who would use this information to affect the future of the organization (Raiborn et al 1999). Nowadays with the introduction of global competition, they require the business to be more timely in both current and future information. Before they would not care about what other similar firm were producing and doing, this is due to the fact that their markets were divided geographically. Globalisation have been emerged from both government policy, development of transportation and communication, it is fair to say that management accounting is no longer “short-sighted’ to intercompany. One of the most common example could be China, where they are able to produce at a much lower prices while keeping the quality at the same time. This is one of the reason that “Made In China” is so common around the world.
Johnson and Kaplan (1984) suggest that traditional management accounting has been unable to grow with the development of technology and changes within the competitive environment. They specifically used the term “lost relevance” in the report as well which indicate the seriousness of the situation. Traditional method may have lost relevance due to the costing system doesn’t provide enough information to allow the manager to choose correct strategies, improve design and remove waste from operation activities. In fact R. Cooper have found that product costs generated by conventional system were so inaccurate that they led the management to adopt strategies that would inhibit the improvement of manufacturing. This was supported by Sulaiman et al (2004) who point out that currently corporation opt to compete globally. In order to be successful in this dynamic business environment, the use of Just In Time strategy, Activity Based Costing, Total Quality Management, life cycle assessment and target costing should be replacing the traditional method.
Nowadays organisations are more likely to deploy accountants in a more strategic sides. This means that as globalisation and increased competition are view as an important driver, companies will require the accountant to become a role that provide direct support of the organisation’s activities, future development of cost-efficient information. Traditional accountant’s role has also been reduced in transaction processing and financial report preparation. The traditional techniques have defined competitiveness as beating competitors on cost, however the new global environment are a lot different. The main two stage involved is listen to the voice of customer and continuously eliminate waste, these are area that traditional accounting unable consider. Along with the new information and communication technology and production techniques that allow suppliers to sell at a low and competitive price that only modern management accounting would consider. To summarize traditional product costing led to misleading information for decision making and it fail to meet the need of today manufacturing and competitive environment with the introduction of globalisation.
Necessities for the service of modern management accountants equipped with modern management account techniques.
Most management accounting system today places priority on product cost and profitability by department or geographic location. Which would indicate that management accountants are now required knowledge in the area of product development, profitability analysis, quality improvements and company performance evaluation. These requirements can not be matched when using the traditional method, where it just merely provide internal information. One of the many techniques required is Activities Base Costing(ABC). According to Peter Armstrong (2002) ABC is more accurate than the traditional absorption costing where they improve the control of overheads and that the system is able to relate costs to customers, processors, management responsibility and not just the products. Where ABC provide a better understanding of cost, it will provide more information to the hierarchy which allow them to take adequate action. Turney (1989) supported this when he mentions that the ABC provide a more accurate cost information with three purposes. They are focusing manufacturing strategy, designing products to increase customer value and continuously improving operating activities throughout the organization. Another technique is Target Costing (TC), this would encourage managers to understand the overall cost impact of product designs over it’s life cycle at the same time it allow the manager to identify activities that do not add value and take action on them reducing the overall life cycle cost. The third technique is the Total Quality Management (TQM). Manufacturing excellence strive to have continuous improvement and eliminate wastes, these are the fundamental variable to survive in such dynamic global competitive environment. TQM allow corporation to create defect-free products and services system, the view of acceptable quality have also been replaced. There have been many successful cases of the TQM, one more them is the Boeing Aerospace Support (AS) they provide maintenance services and training support for their aircraft. They improve their services between 19th and 20th century. The satisfaction of customer have increase by 23% along with 95% on-time delivery. For one specific programme they are able to outperform competitors on turn around time by over 35 days. These TQM action led to revenue to double and become award winning corporation. Adapting these strategies are able to create above-average benefits due to information obtained on quality related activities and quality costs. Manages are require to acknowledge the activities that would add value and identify the one that doesn’t, they also have to bare in mind what quality costs are and how they develop in the future. There are many other techniques that would allow the management accountant to improve the corporate performance.
The techniques above would help the managers in planning, decision making, controlling and continuous improvement. These are the vital component in modern management accounting, there it is necessary for modern management accountant to be equipped with the modern account techniques. Planning is where firm setting objectives to increase profitability by improvement in its product’s quality, resulting in decrease of complaints and reduction of scrap and rework. These plan have to be realistic and able to match with the actual condition within the company. Controlling refer to monitoring a plan’s implementation and act accordingly. Control can be achieved with feedbacks to evaluate and correct procedures undertaken within the plan. Feedbacks may include the difference between planned budget and actual consumption. These feedbacks could be positive or negative, manager could then take actions on these feedbacks. In a global competitive market if corporation does improve they will be left behind and eventually fail. Continuous improvement therefore is a important aspect in management accounting. Turney and Anderson defined it as “relentless pursuit of improvement in the delivery of value to customers”. Continuous improvement may include ways to reduce waste and cost. ABC is one of the technique that could be used in this situation. Continuous improvement is an integral part in development of control system that realize improvement. The last is decision making, generally better information would result in better decision making, the whole modern management accounting system exist because the target to improve decision making. One of the example is when there is a mutually exclusive plans, only one can be chosen, here the information about all the plans are required by the manager.
Conclusion
Overall the traditional method is relatively useful in the past due to the lack of technology development and geographic differences. However, with the introduction of global competition and new technology coming in, information is able to flow much faster then before. In many case cheap production can be done with globalisation. Where the traditional method fails to foresee these developments, it become clear that modern management accounting techniques is needed. It also gives the management accountant a more important role within the company, these responsibilities have to be supported by the some of the modern techniques that have been developed to allow managers to plan, control, improvement and make decisions.