An Essay On The Role of Modern Management Accountants

1. Introduction:

The Management Accountant provides business data and analysis to top management within organisation in order to assist in the day-to-day business decision-making and control. They are also involve in the provision of the monthly management accounts, and budgets and forecasts to aid business planning, standard costing and variance analysis; all in an attempt to profitability and growth to the organisation. Over the years, due to rapid changes and advancement that has occurred in the business environment, information technology (IT) and global competition, the role of the Management Accountant has evolved. These current developments has to do with the changes in perception; of which, companies, in order to be successful, must not only stay abreast of current trends, but be proactive, anticipating and implementing changes before they occur. Amongst these changes is the shift in emphasis from profitability to customer satisfaction; as a determinant of growth, success and securing competitive advantage and hence the realisation that the conventional or traditional management accounting methods and techniques were not suitable to cope with modern business terrain. The traditional Management Accountant, with his emphasis on profitability, as a means of achieving growth and competitive advantage, appeared to be inward-looking rather than outward-looking; more associated with the tactical domain than strategic; more short-term focussed rather than long-term. The traditional management accounting practices also emphasizes more on the use of financial performance indicators like the Gross Profit Margin, Net Profit Margin, Return On Capital Employed in its performance appraisal; non-financial performance indicators like Staff Turnover, Customers Complaints, Response Time were not taken into cognisance; the modern management accounting techniques with the use of the balanced score card, on the other hand combine both the financial and non-financial indicators in appraising performance. Also, in order to compete in todays competitive environment, companies have had to become more customer-driven and make customer satisfaction an overriding priority as the customers are ever demanding improved level of service in cost, quality, reliability, delivery and the choice of innovative new products. In providing customer satisfaction therefore, organisations must concentrate on those key success factors that directly affect it. These factors are cost efficiency, quality, time and innovation. There is also the need of achieving continuous improvement, employee empowerment and the provision of value-added (value for money) products and services. As the traditional management accounting tools and techniques are no longer suitable for the provision of reliable, timely and accurate management information, the use of modern strategic management accounting tools has made possible the achievement of the aforementioned factors and the survival of a business entity in the current competitive global business environment in its quest to attain growth and competitive advantage. This essay is thus, a thorough evaluation of the contributions these modern management accounting (Strategic Management Accounting) tools and techniques in helping the organisation to not only survive in the modern competitive business environment, but also in enhancing their chances of achieving growth and competitive advantage. The role of some of the Strategic Management Accounting tools and techniques are enumerated below.

2.8. The Balanced Score Card (BSC):

The Balanced Score Card is an improvement of the conventional or traditional budgeting process which used for planning and control. It translates an organisations mission and strategy into a comprehensive set of performance measures. Unlike the typical budgets that focus on financial objectives, the Balanced Score Card combines both financial and non-financial performance objectives. Thus, the BSC gets its name from the attempt to balance financial and non-financial performance measures to evaluate both short-run and long-run performance in a single report. In this process, it makes sure that performance measurement is adequately provided in order to achieve high standard performance. In assessing performance, comparison has to be made between individual units in the organisation and between, the organisation and its competitors. That is where benchmarking comes into play.

2.7. Benchmarking:

This is a technique where the products or services of an organisation is continuously compared with those of its competitors or other best performing products or services in the industry in order to improve the standard of the products and services and thereby ensuring that the products and services achieve a higher performance that leads to customer satisfaction and profitability. One of the comparison normally carried out is comparing the total cost of producing the product or services with that of the completion; and in ascertaining the real cost of producing a product right from its research and design stage to the stage it is sold out, one term always come to mind; Life-cycle Costing.

2. 2. Life-cycle Costing:

In the modern manufacturing environment, production is less labour intensive and products are designed to make use of standard components and also minimise wastage, rectification and warranty costs. A very high percentage of the overall product cost will be in the form of the initial development cost, design and production set-up cost, and also the fixed cost committed at development and design stage. The commitment of a very high proportion of the products life cycle costs at the very early stage of the production cycle has led to the need for an accounting system that compares revenue from a product with all the cost incurred over the entire products life cycle - life cycle costing, (Foulks Lynch, 2002). On the other hand, the traditional management accounting control procedures focusses only on the manufacturing stage of the products life cycle, the pre-manufacturing costs (research, design and development costs) and the post-manufacturing, abandonment and disposal costs are not included in the overall product cost calculations as they are regarded as period costs. The use of life cycle costing technique enables the true cost of the product to be ascertained; which is then compared with the revenue obtained from the sale in order to highlight the profitability or otherwise of the product. Life cycle costing is a costing technique that tracks and accumulates the actual costs and revenue attributable to each product from inception to abandonment in such a way that the final profitability at the end of the products life can be determined. It is used for the purposes of planning

and control, the accumulated costs at any stage can be compared with the life cycle budgeted costs of such product. In ascertaining the true cost of a product, it should be paramount that the price ascertained is the market price customers are willing to pay and the price that can earn the organisation profits in spite of the competition

2.1. Target Costing:

The main theme with target costing is not finding what the product does cost, but what the product should cost. With target costing there is more pressure to find ways to reduce costs: pressurise suppliers, focusing on improving product design and production methods. Target costing represents one of the most important areas where marketing and accounting overlap. With target costing, marketing and design functions identify a products desired features and its likely selling price. Target Costing is a customer-oriented technique of determining the price at which the companys product will be able to compete in the market in order to achieve sustainable profits. Unlike the traditional management accounting cost estimation technique that is based on the cost mark-up or profit margin which is mostly regarded as inward-looking, that is, the customer and the competition is not taken into reckoning in determining the price of the product or service; The target costing process involves the following stages: Stage 1: It begins by establishing a selling price, based on market research, for the new product by determining the price which customers will be willing to pay for the product and the price offered by competitors in the same industry Stage 2: From this target selling price, the desired (target) profit is subtracted to determine the target cost. Stage 3: Estimate the actual cost of the product; that is, the companys current manufacturing cost. Stage 4: If the estimated actual cost exceeds the target cost, intensive efforts are made to close the gap and drive down the actual cost to meet the target cost.

In all likelihood, this target cost is below the companys current manufacturing cost. Teams from many departments then perform functional cost analysis in an attempt to reach the target cost. If the current cost estimate is at the target, the firm must decide whether or not to introduce the new product. The advantage of using the target costing technique is that the price arrived at is more customerdriven and capable of achieving profitability than that arrived at using the traditional cost estimation technique. The traditional cost estimation technique with its absorption costing methods of allocating overheads to product cost does not suit the modern manufacturing environment as production is now less labour intensive.

2.3. Activity Based Costing:

In the days when the manufacturing processes were predominantly labour or machine intensive, the conventional or traditional absorption costing method was considered adequate for the allocation of indirect costs which consist of factory supervision, machine running cost, as they were thought to be closely related to labour or machine hours of production. The total production cost was made up of a high proportion of direct cost, and even though the allocation of overheads was more or less arbitrary, indirect costs or overheads was an insignificant part of the product cost and its impact was minimal. But with the advancement in technology and most of the production processes being computerised, production moving away from continuous mass production to the production in smaller and customised batches coupled with the higher accumulation of indirect costs incurred in activities live, quality control. Supervision, production scheduling, marketing; the conventional or traditional absorption method is no longer seen as the suitable method of allocating overheads. For a more accurate allocation of overheads and a more reliable cost estimation technique, the Activity Based Costing (ABC) method was introduced. This system recognises that it is the activities that consume resources, and the products or services consume activities; it also recognises that machine and direct labour hours are not suitable cost drivers for allocating most of the overheads in the modern manufacturing environment

Activity Based Costing involves the allocation of overheads cost into the production cost units with the use of cost drivers, which consists of the activities that consumes the resources and thereby making sure that a more accurate and improved product cost is derived which would enable the company to concentrate on a more profitable mix of products. The technique can also be used to identify customers that are unprofitable. Activity Based Costing also stresses on the elimination of waste; that is, activities or processes that does not add value to the products are eliminated, thereby ensuring that the end product or service is of high quality that meets customers approval

2.4. Total Quality Management (TQM)

A product that meets or exceeds design specifications and is free of defects can be said to have quality of conformance. In the modern manufacturing environment companies strive to attract and retain customers by perfecting on the production of high quality products and services, hence the idea behind TQM. It is a structured attempt to re-focus the organizations behaviour, planning and working practices towards a culture which is employee-driven, problem-solving, customer oriented. These practices are based on continuous improvement, devolution of decision making, removal of sources of errors, team working. (Horngren, 2003). The idea behind TQM is synonymous with wanting to be the best through connecting everyone in the organization with the ultimate customer. Everyone becomes committed to learning all there is to know about everything that affects the ability of the organization to continually improve and innovate thereby improving effectiveness in the Workplace. The features of Total Quality Management includes the technique considers both internal and external factors (looking outwards rather than inwards) in relation to its products and services, focussing and

directing the organisations effort towards meeting the customers needs, emphasizing on employee empowerment through training programmes, team working and the use of problem solving tools and techniques. The benefits accruing to an organisation in adopting TQM comprises the changes in Attitude, improvement in the Product/service Quality, lower costs, higher Customers Satisfaction and increase in Profits. The change in attitude can also mean a change in their production habit like massproduction to producing only when it is needed (Just In Time).

2.5. Just In Time (JIT):

This technique is an alternative to the conventional Inventory Routine system which strives to manufacture goods at the exact quantity required by the organisation and at the right time, thereby minimising as much as possible, a situation where inventory is held in warehouses as much as possible thereby reducing the cost incurred in inventory management. Just-in-Time changes the approach of traditional manufacturing. Rather than the constant production of stock or inventory, JIT means that raw materials received Just-in-Time for production, manufactured part (Work-In-Progress) completed Just-In-Time for assembly, and finished Goods completed Just-In-Time for shipment or delivery. The purpose of implementing JIT is to increase efficiency, improve quality of product which will enhance the achievement of customer satisfaction, leading to profitability and growth of the organisation. The combination of TQM and JIT techniques is geared towards the elimination of waste, increasing efficiency and the production high quality, value-added products for customers, which is what the Value Chain Analysis is all about.

2.6. The Value-Chain Analysis:

In recent times, there has continuously been the increase in attention being given to the use of the value-chain analysis as a means of effectively managing cost and increasing customer satisfaction. The value-chain refers to the linked set of value-creating activities involved in the production of goods and services, all the way from the suppliers of the raw materials through the ultimate endproduct or service that is delivered to the final consumer. This is the process of examining each stage or link in the value chain in order to identify those activities that does not add value to the product or service so that they can be eliminated. This process makes the process more efficient, reducing cost and time spent in the production of goods and services.

3. Conclusion:

It can be seen from the above enumerated points that due to the advancement and innovations in current production environment, the traditional management accounting tools and techniques are no longer suitable for the provision of reliable and accurate information top manager need for important decision making. On the other hand, the application of the modern management accounting tools and techniques in the day-to-day management of an organisation can certainly ensure survival, and enhances the chances of the organisation achieving customer satisfaction; and to a great extent, the attainment of competitive advantage.

http://www.oxbridgegraduates.com/essays/accounting/critically-discuss-modern-managementaccounting-development.php#ixzz2NdGBXVvH

http://bizcovering.com/management/importance-of-modern-management-accounting-practices-inmodern-business-organizations/#ixzz2Nd6k5TBZ Wilson R. M. S., (1995), Strategic Management Accounting, in Ashton et al (eds), Issues in Management Accounting, 2nd edition, PHI Englewood Cliffs (NJ). Management and Cost Accounting, Sixth Edition, By Colin Drury, Published by Thomsom, 2004

Management and Cost Accounting By Bhimani, Horngren, Datar and Foster, 4th edition, December 2007, Pretice-Hall