In any business enterprise or organization, there are two broad categories of accounting information that are produced. That is financial and management accounts. Financial accounts are majorly produced for the external business environments who are mainly the shareholders, investors, creditors, and the general public. On the other hand, the management accounts are aimed at providing information to the internal business environment majorly made up of the business directors and managers (Leslie, 1999, p78). Therefore management accounting entails the preparation and analysis of accounts that assist in controlling and planning the activities of the business. The information provided by management accountants gives the managers the ability to make timely and key business decisions on a day-to-day basis or rather in the short term. This is because management accounting gives reports that depict the enterprise’s cash at hand, debtors and creditors lists, revenue generated from the sales among other reports (Hopwood, Leuz and Pfaff, 2004, p.89). Unlike financial accounting which in most cases generates annual management accounting gives monthly and weekly reports (Leslie, 1999, p.32). However, the rapid change in the business world has led to the shift of management accounting from traditional transaction-based financial information to non-financial and futuristic information (Amernic and Robb, 2003, p.5). This paper analyses this statement while highlighting the new roles assigned to management accountants and the shape of management in modern business enterprises.
Movement of Management accounting from traditional transaction-based financial information to non-financial and futuristic information
Management accounting has changed its shape and image as a result of modern technology and the simultaneous rapid rate of globalization. The current issues facing management accounting have come about as a result of this shift in its operations policies (Bhimani, 2003, p.78). Despite the fact that financial measures of performance are inevitable especially in the top management of the business organization, there are other factors that are important in the captivation of the business performance. For example, in the past twenty years, there has been a development and the application of non-financial steps in performance appraisals. This has been used as a way of motivating as well as giving the account of the business enterprises. The application of non-financial measures such as specified performance indicators that show how the business is progressing has become very rampant in the current business era.
The old financial-based information limited the utility of such information to financial issues only. The non-financial measures on the other hand have created the ability of accountability on issues such as financial, social, and operational issues that were not applicable before (Amernic and Robb, 2003, p.5). The old system comprised of the traditional manufacturing system which was applied in cases where there is less variation in the products. This is because the overall costs incurred are allocated on the volume produced hence it will be easier if the products are of the same variety since the cost of direct labor and other requirements is the same. Despite the fact that the process of allocating costs is made easier since the requirements needed are of similar type and proportion this system is no longer applicable at present. The main reason for this is that business entrepreneurs produce products with many variations so that they can gain a competitive advantage.
The traditional manufacturing system has been replaced by contemporary manufacturing which is a process of significant complexity and diversity (Bhimani, 2003, p.78). Contemporary manufacturing is characterized by many activities, operations, and a wide variety of products produced with different designs. Unlike traditional manufacturing methods, contemporary manufacturing is automated hence increasing the proportion of the overall costs such as machine hours. The automatization, therefore, leads to problems of cost allocation as most of these processes are not directly linked to the physical volume of the product (Leslie, 1999, p.67). The main difference between contemporary manufacturing and traditional manufacturing is that in contemporary manufacturing the cost allocation is done based on the process while in traditional manufacturing it is done on the basis of the product volume. To further improve on contemporary manufacturing, management accountants apply the new models of activity-based costing and a Just-in-time system.
The Activity-Based Costing (ABC) method allocates costs using all the activities that are involved in production for example machinery, salaries, and orders among others (West, 2003, p.50). It is a method used by firms whose overheads are high and have a wide variety of products. In the activity-based costing method, allocation of overhead costs is based on the real performance and expenditures sourced from the firm’s information records and also from the staff who are connected directly with the delivery of those products. Additionally, in activity-based costing costs are apportioned to cost pools. Costs are given to services and products alike by the use of drivers of cost. The shift to activity-based costing comes in hand with many benefits to the organizations which include:
- Allocation of costs in activity-based costing is more accurate especially in the circumstances where there are no similar rates of direct labor hours. That’s why it is advisable to use it when making decisions concerning pricing and management (West, 2003, p.57).
- The activity-based accounting approach is more recommendable because it captures all the costs at the activity centers thus it gives a fair cost to each product. Besides, the activity-based costing approach enables decision-makers to figure out how they can improve their productivity and also how to maximize shareholder value.
- The activity-based costing method gives better results because it is highly involved. It incorporates all cost drivers thus ensuring that every cost is captured. Therefore firms are supposed to rely on the activity-based costing method in determining the actual prices and costs (Leslie, 1999, p34).
- ABC is also instrumental in improving organizational performance.
In addition to the activity-based system is the just-in-time policy used by management accountants (Hopwood, Leuz and Pfaff, 2004, p.96). This is a manufacturing system aimed at lowering the cost of production through the minimization of the in-process stock levels. This, therefore, means that products are only produced when needed hence eliminating costs of storage among others. Another advantage of this system is that customer satisfaction and quality assurance are assured as the products are produced on specific orders. As a matter of fact, the two processes are aimed at total quality management which entails producing high-quality products that suit the customers’ requirements.
The application of the new costing methods by management accountants is a clear indication that management accounting is no longer transaction-based but instead looks at the future progress of the organization (West, 2003, p.54). However, this shift does not mean that the enterprise no longer looks at the financial information of the organization. It only means that the management does not only rely on the financial information but looks at other non-financial measures in addition.
New Roles of management accountants
The change of management accounting from transaction-based financial information to non-financial and futuristic information has led to a simultaneous change in the roles of the management accountants (Hopwood, Leuz and Pfaff, 2004, p.98). This is because they have to respond to change and be able to meet the new requirements which prove challenging especially in this competitive business era. The evolution of management accounting also calls for the active participation of management accountants within cross-functional teams. Therefore the new roles of management accountants that have come in hand with the change in management accounting include
To advise managers about the financial implications of projects
Modern management accountants are accorded the duty of giving advice to the managers and directors of an enterprise on the projects to be undertaken. Due to the present competition, all organizations are indulging in projects that could upgrade their reputation (Amernic and Robb, 2003, p.5). Since projects are some of the enterprises’’ financial expenses it calls for proper choice and fund allocation so as to ensure that the enterprise does not suffer financial constraints in the future. The management accountants are therefore endowed with much information concerning the enterprises’ planning activities such that they are aware of the appropriate projects to be undertaken by the enterprise.
Explain the financial consequences of business decisions
The financial accountants have the duty of preparing and analyzing financial statements which indicate the financial position of the enterprise. The report from the financial statements is used in making decisions of the enterprise (Amernic and Robb, 2003, p.5). Due to the shift to non-financial and futuristic information the management accountants have been assigned the new role of explaining financial consequences that result from decisions of the enterprise. This role is very sensitive in that, the management accountants have to make sure that the business makes the right decisions. They should also be able to formulate the possible aftermaths of different decisions sought. That way, the directors and managers will be in a position to select the best option.
Formulate business strategy
In the modern business world where competition is high, enterprises have to put in place strategic plans to gain a competitive advantage over the others. Each business enterprise has to have strategic plans that come to the aid of the business in constraint situations (Amernic and Robb, 2003, p.5). Strategic management involves various key players of the business enterprise including the senior management and other stakeholders. However, the formulation of the business strategy is entirely the role of the management accountants. This is because they have the information required in the formulation of a business strategy. Strategic planning usually calls for frequent checkups on the system and since the management accountants prepare their reports on a daily and weekly basis they thus become the appropriate personnel to handle the business strategy.
Monitor spending and financial control
The assets and finances of any enterprise ought to be decently used to seize the organization from suffering financial strains. This, therefore, calls for close monitoring of how the enterprise is spending its funds (Hopwood, Leuz, and Pfaff, 2004, p.98). Since management accounting is now concerned with futuristic information, the management accountants have been assigned the new role of monitoring and controlling the finances of the enterprise so as to ensure it does not suffer from financial hiccups in the future. Management accountants achieve this through budgeting which is one of their core functions. The different types of budgets prepared including; flexible budgets, capital budgets, fixed budgets among others are ways of ensuring that the enterprise has control of its finances.
Conduct internal business audits
Auditing procedures of an enterprise entail a detailed and independent examination of the financial statements, policies, procedures, and records of the company to find out if it is running in accordance with the laid down standards (West, 2003, p.54). The audit report is very important to both the internal and external business environment. An audit ensures that the company accounts have met the required accounting standards so as to give a true and fair view of the company at the same time helping the management gain more reliance on the accounts once an audit has been performed. The management accountants are therefore part and parcel of the internal audit team of the enterprise since they have all that is required to conduct the audit and also because the management accounting department is a focus point during auditing.
Explain the impact of the competitive landscape
The rapid globalization rate has brought about competition among business enterprises. However, not all competition is healthy competition therefore the organization should be aware of the resulting outcome of any competition in the market (Bhimani, 2003, p78). The management accountants come in since they are able to forecast and be able to explain the possible outcomes of indulging in any type of competition in the market. This role comes about as a result of the shift of transaction-based information to futuristic information of the business enterprise.
Management accounting in modern business enterprises
The look of management accounting has greatly changed through the application of both the technical model in combination with the sociological or behavioral perspectives (Amernic and Robb, 2003, p.5). These two are aimed at improving the value of management accounting. The technical control system is a requirement in modern business enterprises as it helps in the control of the management system. Among the control system is strategic planning where the management is able to develop long-term courses of action in a bid to attain its objectives. Other technical control programs include the operational plans which aim at customer satisfaction through designing plans that are aimed at total quality management. The budget is also another technical control as it projects the financial plans of the business enterprise both in the long run and short run.
The sociological or behavioral control system is another key aspect in modern business enterprises. They achieve this by linking socialization practices to the business strategy (Atrill and McLaney, 2006, p.102). Corporate social responsibility and sustainable development are some examples of socialization practices of a business enterprise. Corporate social responsibility is whereby the enterprise gives back to society (Birchard and Epstein, 2000, p123). This way the organization makes decisions and plans that favor the people of the society for example through issuing fair prices and high-quality products. On the other hand sustainable development entails making decisions that take care of the environment having in mind the future generations (Birchard and Epstein, 2000, p126). Both corporate social responsibility and sustainable development have become issues of concern, especially in the current business era. However, the making of such decisions involves the management of the enterprise where in most instances the management accountants have an upper hand in such decisions (Birchard and Epstein, 2000, p123). This is because of the mare reason that they are responsible for planning and controlling the enterprises’ endeavors.
To fit in the modern business environment, management accounting has also taken a new direction in its system by introducing techniques such as contemporary costing, activity-based systems, and just-in-time policy among others.
Management accounting has greatly transformed to be what it is in the modern business world. This transformation begins from the daily duties of bookkeeping and account preparation to the most sophisticated duties of decision making (Atrill and McLaney, 2006, p.102). All these are what result in the movement of management accounting from being the traditional transaction-based and financial mode of information to the modern non-financial and futuristic mode of information. This shift is of importance in this era because of the rapid changes in the global world that have brought about competition among the business enterprise. However, this is not the end as management accounting keeps evolving given the new trends in the market. This, therefore, requires that management accountants should be individuals who have the know-how of the modern trends and their impacts, be prepared to adapt to new changes in the business environment, and last but not least be pro activists.
Amernic, J & Robb, S. Quality of earnings as a framing device and unifying theme in intermediate financial accounting– Journal on Issues in Accounting Education.2003. vol. 18, no. 1, p. 5.
Atrill, P. & McLaney, E. Management accounting for decision makers. U.K. McMillan Publishing, 2006. Print.
Bhimani, A, Management accounting in the digital economy, 2003. Oxford University Press, Oxford.
Birchard, B & Epstein, M. Counting what counts: turning corporate accountability to competitive advantage, 2000.Perseus Books, Cambridge, MA
Hopwood, A, Leuz, C & Pfaff, D (eds.) 2004, The economics and politics of accounting: international perspectives on research trends, policy, and practice, Oxford University Press, Oxford
Leslie, Chadwick. Management Accounting. Britain. Bell & Bain, 1999. Print.
West, BP, Professionalism and accounting rules, Routledge, 2003.New York.