Has The Management Accounting Information in Malaysia

Losing Its Relevancy?

Siti Fatimah Bte Razak

Universiti Teknologi Mara, Malaysia

Abstract

Without knowing the management accounting history, changing in prior times, the growth may
be not able to understand in details. Prior to the Fall and Rise of Management Accounting, the
research on Management Accounting history, the fall and the rise of management accounting
have be explores. The research done by reviewing the article, thesis, journals, books that get
from library database system. The declining of management accounting have be found.

Keywords : Management Accounting History, Declining of Management Accounting, Production Cost,

Strategic Positioning, Activity Based Cost System,

Introduction

The author of Relevance Lost, Johnson Thomas and Kaplan Robert, have describe and
precisely talk about the history and the evolution of management accounting system during 19th
century. There are 11 chapters that story precisely the introduction, the history, evolution, the
obsolescence, and the future of management accounting in rapid modernization environmental
changes. The author hopes that the all the chapter will give the pictures of the history,
changing, and the idea of management accounting development. The author express the
organization financial reporting are drives by the procedure and cycle that provide by
management accounting information. Initially at early progression show the negative effect. It’s
too late, too aggregated and too distorted to be relevant for manager’s planning control
decision. The information given to the manager are not timely and detailed of information on
process efficiencies or by focusing on inputs such as direct labour that relatively are not
significantly in today’s’ development environment. Management accounting system fails provide
relevant information to manager and also distract the attention from factor that are critical for
production efficiency. The lack of accuracy product cost provide to manager also give big affect,
and finally its cause the cost are wrongly calculate. But, nowadays this can be overcome with

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the great advance in technology. The organization are able to design their own management
accounting system that give best cost effective and relevant with the need of the manager.

The book also pictures the history of nineteenth- century cost management system, which is
about the development of the cost accounting process and operating efficiency measure on the
single economic activity enterprise, such as manufacturing, transportation or distribution
whereby they converted their resources into products or services. Entrepreneur linked process
of the business in single activity organization because of believing, that the greater value will be
achieved by manage the process in centrally that are controlled by itself rather than exchanging
their output from the process in the market. It’s also tell, how the owner create entirely new
managerial accounting process to monitor and evaluate the output of internally directed towards
the process. It’s also discussed on demand of the new management information that wasn’t
provided by conversion cost systems which are needed by manufacturing to factory
productivity. The study of scientific management and efficiency will led to standard cost systems
and product costing system that could helps managers focus on important issues and make a
better decision.

It’s also discusses the management accounting developing are critically needed during early
1990s, due to multi activity organizations such manufacturing, purchasing, transportation, and
distribution were involved from independent firms became integrated. To overcome this
problem, the new solution comes with two new development in management accounting, which
is devising the budget to coordinate and balance internal resource flow from raw material to final
customer, the other solution is by developing a new measure, return on investment, to compare
performance in the firms’ diverse part per performance of the whole. This chapter also illustrates
the early uses of management accounting by Du Pont in vertically integrated organizational
environment. Beside that author focus on new organizational innovation which is transforming
the unitary, or centralized, organization into new structure , the multidivisional structure to
overcome the obstacle. The organizational if General Motor and accounting system that develop
to assist management in operating. The books also illustrated about the lost in relevance of
management accounting from 1920s, and the companies who are using the same cost system
that existed 20 or 30 years ago. The discussion of sequences use of direct labor as a base for
allocating overhead. It’s argues the new global competition facing many obstacle, during 1980s,
has demonstrated cost accounting and management control systems of most companies lead to
inaccurate product cost and to poor accounting system. Authors also give suggestion f0r the
functioning and design of cost system.

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Literature view

The literature review is designed with six purposes to be review. The first is the declining of
management accounting and rise of financial accounting. The second is the recommendation
for changing management accounting practice due to solving of failure of management
accounting and other problem induced by current management accounting. The third is the
relevance lost induces a renaissance. The forth is the area of organizational performance
measurement and management. Fifth is critical perspective on the promise of management
accounting. Finally is the different cost accounting principle in connection with decision making
for both short and long term production scheduling.

Declining of Management Accounting and the Rise of Financial Accounting

The argument by Johnson and Kaplan regarding the relevance of the accounting as a
managerial tool declined after about 1925 because of the inaccuracy of product cost
information. The roots of product costing are initially pioneered by the engineer manager of
metal- working shops. Johnson and Kaplan surmise that estimating the accuracy of product cost
with availability of technology are not worth the effort, and the external reporting demand are
thrive. The demand of financial accountant for integrated financial statement based upon on
completed transaction at face value, the practice of valuing inventories using from market price
was abandoned. Results, the accountant allocating the face value between cost of sales and
inventory. But Johnson and Kaplan are not agree of that method, because the accountants
arbitrarily allocate cost that can not be traced, and not accurate enough for managerial use. In
1920s, managers are consistently relied on information about the underlying process,
transactions, and event that produce profit. However in 1960 and 1970s the manager frequently
relied on financial number itself. Johnson and Kaplan believe that university department of
accounting should be blame on deterioration in management skill. We believe that university
department of accounting may be the major force in convincing modern managers to
“manage by the numbers. University accounting education has parallel the development
of financial reporting un this country. Accounting was virtually unknown in college
curricula before 1990; its subsequent development was shaped large by demand to train
students for public accounting. (p. 134). In 1950s, the managerial used accounting
information, but Johnson and Kaplan argue that the vision of academic was inadequacy. The
academics are tried to characterize management a decision in term of decision models which is
derived from economist neoclassical theory of firms. Johnson and Kaplan also put the blame on

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academic cost accountants; more than auditor or manager is play big contributions of relevance
for cost management, especially since World War II.

Recommendations for Changing Management Accounting Practice

Johnson and Kaplan distinguish between process control, short-term product costing and long
term product costing. Process control and long term product costing are two utmost. They
against all allocation of cost to cost centers because of the process control purpose. Johnson
and Kaplan able to maintain the most effective of product costing system is to estimate the long
run cost of production and selling for each product. In estimating long run cost, they upholder
that all cost are be assigned to product line.

Relevance Lost Induce a Renaissance

Inside of The Rise and Fall Of Management Accounting has been catalyst for change in
management accounting, it’s highlighted the growth different of extant manufacturing practice.
The Relevance Lost Paradigm can be to Kaplan analysis of the state of management practice
and its role of North America competitiveness in early 1980s. From his examination of
management accounting practice, he concludes that:

“Virtually all of the practices employed by firm today had been developed by 1925. Despite
considerable change in nature of organizations and dimensions of competition during past 60
years, there has been little innovation in the design and implementation of cost accounting

Johnson challenge traditional accounting history research which explain the development of
cost accounting as feedback to allocation problem that evolve due to the to increase in fixed
asset late 1800s. He was so glad that cost accounting developed due to the “need to evaluate
and control internally administered production process” that accompanied “new methods for
organize economic activities.

Johnson and Kaplan join a group to provide more complete picture of development of
management accounting. They do a research about cost accounting as a replacement for
market information, management accounting and changing economic condition, and relevance
lost. The paradigm provide an explanation on reason why cost accounting emerge and faltered
in the twentieth century

Beside that, the development of cost accounting that use assumption of economic rationalism
made the traditional historian to be re-examine due to publication of Relevance Lost. Based on

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Fleischman and Tyson, the cost accounting archives have to re –examined too. It’s to provide
the evidence growths of techniques are developed. They have contributed on economic
rationalist historian to that particular debate which is management accounting in textile mill and
management accounting in the Armoires.

The accounting historian are rely on Marxist perspective which is Marxist view if management
accounting history, the critique of the assumptions of relevance lost paradigm and the labour
process history of management accounting. he critique that management accounting evolved in
a wider context that include economic, political, cultural and institutional forces. Compare to
Marxist perspective the Foucauldian perspective on management accounting history which is
also adopting a broader context, he claims that managerialism was “one particular expression of
new kind of knowledge based disciplinary”. Foucauldian assuming that the set of knowledge
around which a society is organized at any point of time is essentially arbitrary.

Critical Perspectives on the Promise of Management Accounting

The questioning on the relevance of management accounting is due of the limited evidence of
technical development within management accounting practice in response to the major
changes in manufacturing technology. The changes give greatly impact on increasing of
productivity, flexibility and quality, together decreasing with time lead, inventory, none of these
are been interested by management accounting and be report. The conflict arrives when
management accounting was only interested on financial reporting. Its result, damage in short
term of business outlook, together with problem of cost allocation technique that are not support
with stock valuation and over reliance on historical information for process control. The desire
with single cost system was claim to provide information too distorted, too aggregate and too
late to be much value to management.

Accounting for strategic positioning lead the generation of accounting information, which buoy
up the management to achieve, and sustain, a strategic, in order to commanding, position in
market place relative to competitor. It’s also closely associated with the determination and
exploitation of competitive advantage. In addition, it is a development that extends the
prospectus of management accounting knowledge, worthy to complement the existing sub
branch of accounting to management, cost accounting, management accounting and
management control. The development can be shown in term of a succession of phase. The
emergence of critical accounting is played by the development of accounting for strategic of
positioning from management accounting. Even though, misleading declares that management

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accounting has been the sole proving ground for the project, it’s a principal one. Critical
accounting did not produce a singular perspective on accountancy, but as regulation of
sociology which gives a major underpinning critical accounting enfold a range of ways of seeing.
Constructionism continue serve many critical accounting research too in a creating a critical
accounting project, its involved significant number that interested. In mid 1960s, Weberian
interpreter the alternative to the dominant positivistic structural functionalism associate with
Parson which challenged itself sociologist who take Marx as their model. However there is a
critical commentary on accounting for strategic positioning because there is perimeter critical
literature on accounting for positioning has emerged to date. Randomly, most of the theoretical
perspective identifies the previous section represent here, with contribution being outstanding
level of accounting scholarship.

The Differentiation Cost Accounting Principle in Connection with Decision Making for
Both Short and Long Term Production Scheduling

Today, product line and marketing channel have reproduce increase. The direct labour
represent only a small amount of corporate cost, while the expenses cover factory support
operation, marketing, distribution, engineering and other overhead function have burst. Although
those costs only play small part in production volume, most companies still allocate these rising
overhead and bear the cost by volume oriented base. Some activities as marketing and
distribution cost allocation are often not made at all. A significant new contribution acquire from
the ABC philosophy is the growth of procedures for detailed analysis of overhead cost to identify
the real cost drivers. There are different approaches to figure out the cost accounting. For the
traditional cost accounting, the broad majority of that current particular accounting system is
based on principle established in the first half of century. The Relevance Lost: The Rise and Fall
Management Accounting give an excellent presentation of origin and growth of current cost
accounting. It does uncover some illustrating inherent problem in paradigm, the controversy
between full cost and variable cost accounting approaches. Some how, after decades pass, the
disagreement exist whether about the product cost should be treated as full or by variable cost.
In order to ranking the product profitability from an OPT point of view, they have to use term
“return per factory hours, “cost per factory hour” and throughput accounting ratio”. The return
per factory hour can be define as the amount of money earned through sales of particular
product per hour of critical factory time spent making the product. The product can develop the
following formula:

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 return per factory hour = sales price - material cost
time on the key resources

That formula will support a ranking of products making it possible to identify the most profitable
product mix to be manufactured by the bottleneck resources.

Compare to the ranking profitability that follows to the activity based cost accounting method;
the cost will vary with its unit produced or in a varied, multiproduct environment with equivalent
measurement such as labour hours, machine hours, material cost and quantities, or time
elapsed for producing. Other cost that arise from overhead support and marketing department,
vary with the diversity and difficulty in the product line. ABC system, incorporate the long term
variable cost of manufacture and marketing to each product, should provide a much bettor
basis for managerial decision on price, introduction, discontinue, and re-engineer product line
than systems base on the traditional. Essentially all company activities existed are to support
the production and delivery of today’s good or services, as a result they should evaluate the
product cost. The analysis should result in detailed information about the activities, cost and the
relations to specific product or product lines come.

The limit in use of OPT accounting philosophies has been found are:

a) OPT Philosophy is mainly useful under conditions of capacity constraints,

b) The identification of bottleneck relies on pragmatic criteria.
c) The OPT accounting principles are likely to have their greatest prospective influence for
companies with fairly homogenous product and activity spectrum
d) The present use of OPT principle is vulnerable due to its reliance on possible mishap od
process time information from existing PPC system.
e) Decision made by using the OPT accounting philosophy should be flexible to strategic
priorities.

The possible critical factors in the use of ABC accounting philosophies have been found are:

a) An ABC analysis presents no obvious or noncontroversial action alternative

b) There could have danger those ABC analysis drive traditional techniques that are
possible damage in light of the future competitive environment.
c) In some recent ABC case studies from Sweden the cost of WIP and other inventory cost
are neglected

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 d) The possible influence if ABC philosophy is not limited to tong term strategies.

Research Method

The study was conducted by article review that can be finding in library database. Mostly all the
article using the book, other article, journals and paper for reviewing and give their opinion.
There graph was given to show the relationship between changing in amount or anything. The
diagrams usually show the relationship between numbers or amount. The diagram will attract
the reader, and much easier to understand compare to large table. There is some equitation
that explains the detail how to get the proper answer of question.

Findings

Factor declining of Management Accounting

The result of obtaining the article review on the Rise and Fall Management Accounting are:

1. We believe that university departments of accounting may been major force in

convincing modern manager to “manage by the number” University accounting
education has parallel the development of financial reporting in this country.
Accounting virtually unknown in college curricula before 1900, it subsequent
development was shaped largely by the demand to train students for public
accounting (p, 134)

Base on the above statement , the declining of Management Accounting are because of the
management accounting are focusing on the financial figure not the production or
management figure which is more important, on tracing the cost to avoid spend the money
in something what they can reduce or spend more money on the thing are more important.

2. I am agreeing that university department can be blame on deterioration in management skill

because some of university are too focus on the financial reporting and ignore some other
subject that relate on management which the company are tremendously need for reducing
their overhead cost and make their operation going smoothly.
3. There is uncertainty of accuracy of management information that might be effect to the
production cost. Because the information given to the manager are not timely and detailed
of information on process efficiencies or by focusing on inputs such as direct labour that
relatively are not significantly in today’s’ development environment. Management accounting
system fails provide relevant information to manager and also distract the attention from

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 factor that is critical for production efficiency. The lack of accuracy product cost provides to
manager also give big impact to their total cost production.
4. The limited evidence of technical development within management accounting itself to
response to the major changes in manufacturing technology. Because of the limited
evidence, any changes or will give greatly impact on increasing of productivity, flexibility and
quality, together decreasing with time lead, inventory, none of these are been interested by
management accounting and be report.

Critics

The result of reviewed and analysis of obtaining respondents on critics’ of management

accounting.

a) The responsibility of management accounting as host to a second substantial project,

the critical accounting project. The management accounting should know the process of
the project rather than structure, from the process he will more understand deeply not on
the surface of the process.
b) Marxist view of management accounting are criticism focus on the micro economic and
transaction cost theories and second criticism is from the labour point of view, that focus
on changing shop floor management practices and adopts an empirical approach. The
theory is not only focus on specific research but cumulatively and reflectively. How ever
Marxist theory are false on a measure of analysis, and have potential of damage on
trend towards formulating critiques of postmodern rather than accounting issue itself.
c) The limited critical literature on accounting strategic positioning has been turn out. The
literatures have a tendency to be in negative tone, possible to be understand.
d) The critical factor when using the ABC accounting philosophy when to bring out a correct
analysis of overhead cost into the product mix decision the information of ABC is not
give prescriptions in details.

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The Current Management Accounting Practice

Base on the studies I found that there 28 listed management accounting techniques from 4
stages of management accounting evolution that were done by questionnaire by researcher.
The studies ask the respondents to rank the various the techniques that are currently utilised in
their organization using 5 – point liker scale ranged from “5 = always use techniques” and “ 1 =
never used techniques”

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It’s have shows that the top 18 of management accounting techniques are the techniques that
had mean score above 2.00. So there are 18 management accounting techniques are being
adopted and practice. The rest of 10 techniques (rank from 19 to 28) has mean score less that
2.00, it implicate or non utilization of the techniques from the studies.

Summary and Conclusion

To summarize, the objective of Relevance Lost are know the history, the growth of management
accounting. Management accounting system is crucial nowadays especially with the rapid
technological changes and the global market competition. There is no doubt that at earlier, the
management accounting doesn’t is no relevance, because of the failing of the accuracy of the
information that given to manager, it’s due to lack of attention from factor that are critical to the
productivity efficiency. With the lack of accuracy the information given, will give the big impact
towards the cost product. But with the now days technology advance the organization are able
to design their own management accounting that give the best cost effective and relevant with
the need of the manager. Based on the research paper, I found that out of 156 companies that
participate on the questionnaire that done by the researcher, majority of the selected Malaysian
Company which is 101 companies were the non listed companies, and another 42 companies
were public listed companies. Futhermore, about the same ratio of the studies by researcher are
shown that the existence of separate management accounting in the company. 41 companies
have a separate management accounting unit and 101 companies are not practice the separate
management unit in its organization. Studies found that 46.5% were SME companies, while
53.5% of the ratio is from large companies. The improvement and new technique from
management accounting are successfully attract the most companies to apply and practices to
their production. This also shown from the distribution of companies according to their type of
industry, which are 41.1% companies were classified under manufacturing, while the non
manufacturing shows that they are interested which is 58.9%. the management accounting have
to come out with the new techniques which can help the companies to improve their productivity
efficiency with the rapid modernization environmental changes due the technology
development.

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