The main problem at Air Force Command was to reduce costs and improve quality. For this, powers of chief operating officers were broadened, without appropriate reorganization of the system. Such patchwork solutions led to organizational inefficiency and conflicts. The design of rigid structures, such as existing in the case under consideration, is characterized by the use of formal rules and procedures, centralized decision making, narrowly defined job responsibilities, and a rigid hierarchy of power in the organization. With these characteristics, the organization can operate effectively in an environment where routine technology is used (low uncertainty about when, where, and how to do the work) and there is an uncomplicated and non-dynamic external environment.
The over-rigid structure and duplication of authority led to inconsistency between accounting and management accounting. Moreover, General George Babbitt, with his engineering background, evidently lacked soft skills in management and management accounting. Such a situation can be seen not only in the military establishment but also in business; it is very difficult, unfortunately for most managers, to look at the accounting report and immediately see the state of affairs in the company. Accounting is just a continuous recording and accounting of all business transactions; only 30% of CEOs use financial management reports (Adler, 2018). The remaining majority avoids this important tool because they do not understand the structure, do not understand its significance, or simply do not see the difference with accounting.
The first and main difference between accounting and management accounting is practical application. Tax reporting is also based on accounting, that is, what is provided in regulatory bodies, and management reports. However, additional non-financial information is added to the management information. Management accounting is a document for internal use only; based on its results, one can make operational decisions and control risks, but without it, there is difficulty in seeing the real picture, which can be veiled behind “dry” accounting figures. At first glance, financial management accounting seems to be completely independent of accounting; however, actually it is not. Indeed, when compiling the first one, the data of the second are used. In management accounting, these data become deeper and more detailed. So, not only the total flow of funds in the company is indicated, but also individual indicators for each department and even an employee. With the help of management accounting, one can not only see the current state of affairs, but also trace the dynamics of development. Analysis of previous periods of work allows, for example, to see seasonal factors of influence and predict the level of costs for the next similar period.
Accounting is a strictly verified system that allows controlling all business operations. At the same time, all information is presented in a certain form and exclusively in monetary terms, and the data is systematized in chronological order, which is observed in the case under consideration. Management accounting allows creating a holistic picture that characterizes the work of the organization from various angles, since it considers not only financial, but also all other significant indicators. Based on them, the management can assess the situation, make certain predictions and, as a result, make the right decisions. Management accounting makes it possible to establish effective management of financial flows, helps to carry out short-term and long-term planning, predict the consequences of concluding transactions, etc. It allows giving a correct assessment of the state of the organization and its units, its potential capabilities, identify positive and negative aspects of work, strengths and weaknesses in its field of activity. This information enables the management to timely adjust certain indicators and optimize business processes.
Management tasks require new types of information generated by the accounting and financial subsystem of each organization. The quality of analytical processing of initial data, and, consequently, the quality of specific management decisions made on their basis, the success of the functioning of the economic entity as a whole, and, ultimately, the degree of achievement of goals, depends on how effective this system is. In particular, it is important how skillfully the information exchange is built. As it is stated in the case, General Babbitt considered that AFMC’s command-wide organization structure and lack of relevant accounting information would make it very difficult to pursue the goal of increasing efficiency. However, instead of increasing efficiency of organizational structure, he broaden powers of chief executive officers, calling them ‘cost managers.’ He was too concerned with budgeting activity, and “did not see the forest for the trees.”
In addition to cost management, today management tasks began to include strategic planning, budgeting, project management, sales management, quality management, etc. Therefore, management accounting, in addition to collecting and analyzing financial information related to costs, now means a management system for almost all aspects of the organization’ activity, which requires a full range of financial and non-financial information structured in a certain way. Management accounting is closely related to the systems of strategic and operational management of the company and includes various models and tools that management uses to achieve goals. Two main approaches to the essence of management accounting can be distinguished: traditional models and modern concepts. In traditional models, the main goals and objectives of using management accounting are to ensure the calculation of production costs and the implementation of the planning and control function. Accordingly, the main object of management accounting in the traditional model is the accounting system of financial indicators – income and costs. Currently, the most advanced methods for calculating the cost are the methods of accounting for the full cost (standard costing) or differential accounting (including direct costing); for the implementation of the planning and control function – methods of accounting for income by profit and cost centers – by cost centers.
In turn, modern management accounting concepts include the following models (Adler, 2018):
- ABC (Activity-Based Costing) – it allows solving the problem of distribution of management costs by determining the costs of the organization in accordance with the resources required for the implementation of operations;
- Life cycle costing, based on the position that the cost of a product (service) (or activity, as in the case under consideration) should take into account the costs at all stages of its life cycle;
- Target costing, which allows determining directions for optimizing the cost of goods, taking into account the target values of indicators that determine the desired ratio “price-quality.”;
- BSC (Balanced Scorecard) – it is based on the management of key business processes assigned to the centers of responsibility of the organization in accordance with the organizational goals, quantitatively and qualitatively expressed in target values of performance indicators or KPI in the context of four projections – finance, customers (in the considered case, stakeholders), internal business processes, training and growth.
In addition, other models are widely used, such as SWOT analysis, benchmarking, various quality management systems, and other. At the same time, the financial data of IFRS can be quite flexibly integrated into the management system, since IFRS is a set of principles, and not strictly regulated rules. At the earliest stages of building management accounting, it is necessary to determine what financial data the organization plans to use as the basis for management information. When defining a management accounting system based on IFRS at the “as needed” stage, the following points should be taken into account (Adler, 2018):
- Identification of management objectives, operational and strategic objectives, highlighting and minimizing conflicts of interest of various groups of users of IFRS and management reporting;
- The relationship of the management reporting methodology with the methodological foundations of IFRS. It includes the selection of that part of the regulations that fully comply with IFRS requirements, as well as the choice of the methodology which will be used only for management purposes or that may not comply with IFRS requirements. Methodological issues may be reflected in the relevant accounting policies;
- Choice of cost accounting model;
- Report formats and built-in financial analytics, chart of accounts and other technical tools for generating reports;
- Synchronization of the collection and processing of financial information to minimize the time required for preparing IFRS statements and operational management reports;
- Organization of effective use of management accounting information for the formation of IFRS reporting;
- Software with the ability to synchronize the IFRS accounting systems and the management system;
- Collection and processing of non-financial information.
It would be a big mistake to build organization’ management accounting system in reverse order – first the methodology, then reporting, and only in the final it turns out that some reporting forms are not needed by management, and the developed reports lack data. As a result, the effectiveness of management accounting leaves much to be desired, and managers have to spend time on obtaining additional information to the detriment of their direct responsibilities.
When determining the types of analytics and their depth on the accounting registers, it is necessary to analyze the need of each company manager to receive analytical reports grouped by one or another criterion. The more profound the analytics on the accounting accounts, the greater the potential of useful and necessary information will be realized in the system. There is no need to overload the accounting registers with additional analytics that are not significant in the process of making management decisions. If the share of some expenses in the total cost structure is 1- 3%, and the time spending to take them into account are great, in practice it is more rational to ‘sacrifice’ information transparency than the efficiency of system operation.
The creation of an effective management accounting system requires a corresponding modification of the organizational structure and communication system. Of course, the introduction of flat structures in the armed forces is impossible, but the elements of matrix structures can be successfully applied, which will relieve chief executive officers and avoid duplication of powers. A dynamic environment requires a high speed of processing extensive information and a prompt response to external influences. In these conditions, a leadership style with the involvement of subordinates in the decision-making process becomes appropriate. The decision center moves to where the problem arises and where the information comes from. Effective managers, learning from the transformations taking place in modern organizations, use delegation of authority as a means of individual and organizational learning, which is important for quick decision-making. The matrix structure is a combination of two types of separation: it is created by combining linear and program-target structures. The collection of cost-information at the levels of the matrix structure and the appropriate processing of it by the designated departments will allow getting a complete picture of the real state of affairs, “organizational performance,” and provide an understanding of the “culture of cost management” at all levels, without the fruitless efforts of total training of employees on accounting.
Adler, R. W. (2018). Strategic performance management: Accounting for organizational control. Routledge.