Top Managers are increasingly and intensely focusing on strategic directions and trying to manage organizations to gain and sustain competitive advantage. Discuss and critically evaluate the role of management accountants in providing relevant information to managers to manage strategies effectively.
The core purpose of this report is to introducing to management accounting, modern management accounting techniques, as well as formulates strategic directions to manage, to gain and sustain competitive advantages. Hence, coming along in the report, we would describe and explain the different modern management accounting techniques such as activity based costing, just in time and total quantity management. By which, in doing so, the organizations would immediately evaluate the impact on change through the strategic directions and benefits.
Often, the role of management accountants entail providing relevant and reliable information about the sources of competitive advantages for example the cost, productivity and etc. Management accountants analysis and evaluate records submit by the bookkeepers as a result to investigate any losses, leakages or changes in value. That is, this role requires the management accountants to consider several alternatives and then decide which one is the best. To the same degree management accountants requires knowledge and expertise in system design, change management, strategic to cost management and much more.
Importantly, under IMA’s overarching a practitioner of management accountants shall behave ethically and shall act in accordance with these principles which include honestly, fairness, objectivity, and responsibility. Therefore, each practitioner of management accountants has a responsibility to maintain an appropriate level of professional expertise by continually developing knowledge and other standards set by the institute of management accountants.
Management accounting measure analyzes, and reports financial and no financial information that helps managers make decisions to fulfill the goals of an organization. Thru process of preparing management accounts, accurate and relevant information is developed to coordinate production design, as well as marketing decisions. Nevertheless, evaluate performance is reported by managers to make dad-to-day, short-term and long-term decisions.
Brief understanding major differences between financial accounting VS management accounting that is financial accounting focuses on reporting to external parties such as investors, government agencies and so on. Unlike financial accounting, management accounting focuses emphasis internal measures and repots which do not have to follow GAAP yet are based on cost-benefit analysis. By doing so, organization have broad focus on how will and accurate the information help managers in different levels example sales managers, production managers, human resources managers, etc. to do a better job and determinate what substitute products to consider in decision making.
Organizations are increasingly applying the key success factors from the decision-making to implement strategies regardless of promote sustainability. Main elements of the development and implementation of strategies are to achieve long-term financial, social, and environmental performance. In other words, strategies specify how organizations match their own capabilities with the opportunities in the marketplace to accomplish their objectives.
In mid 20th century, management accounting methods of performance have been mortified and have been many improvements in theories as well as modern accounting techniques are developed. As a consequence, many organizations have adopted the modern management accounting techniques to achieve and sustain competitive advantages. With the growth in field of modern management accounting techniques, strategic managements become dramatically important within the group of organizations’ activities.
Strategic management accounting also known as one of a fewer new system, is the series of modern management accounting practices to provide a direction to the strategic of an organization. Other famous modern management accounting techniques such as ABC, ABM, JIT, and FMS are so effectively implementing a new level of organizes strategic goals.
Another useful tool and method of modern management accounting are studies in the cost of products which include design, development, research and marketing costs, well known as product life-cycle cost. Under this method, costs of different areas are covered example R&D and disposal costs unlike the traditional management accounting system. By doing so, managers prevent mislead of product pricing while evaluating mix product decisions and approach a better pricing decisions.
ABC method is a refined cost system by identifying individual activities as the fundamental cost objects such as allocation cost using smaller cost pools known as activities. (Wegmann, 2008) Using cost drivers, the costs of these activities such as administration and production departments; these are the cost drive to assigning to other cost objects for a product or service. It was first deployed in complex, manufacturing firms, it then increasingly gained acceptance in organizations ranging from manufacturing to retailing, and from profit-oriented organization to government institution. The implementation of ABC shows unexpected good result especially for those firms with substantial overhead costs.
The development of ABC is a replacement costing method to the traditional cost accounting method. The traditional cost accounting emerged towards the end of 19 century in where industries were still labor intensive. While traditional cost is still used in small companies that produced small variety of products, and low overhead costs is consumed.
In 1980s, development of ABC is due to the dramatic changes in production method and need of improvements because of inaccurate method used in traditional cost accounting system of indirect or overhead costs. For example, some products take longer and more time compares another products. Since the same amount of direct material and direct labor being recognized as a result same broad of cost is not added to all products. Consequently, when multiple products share common costs, there is a danger of one product subsidizing another.
As a result, ABC has grown in importance to meet the production concepts on cost saving and sustain competitive advantage. A few factors to be explain why ABC has become in importance: – an increase of manufacturing overhead costs nowadays, overhead costs no longer correlate with the productive machine hours or direct labor hours, grown in customer demands, and the diversity of the products which produced in larger batches.
ABC has several benefits. It is a business process improvement (BPI) tool regard of flow analysis, and performance management. That is companies practice an ongoing evaluation of improvement initiatives, and the ABC management endeavors. Secondly, ABC helps assists in identifying the right contributors to and detractors from financial performance, and identifying products, channels and profitable customers. Moreover, ABC equips managers with cost intelligence to drive improvements.
ABC assigns costs to cost object like products and services based on the number of records and transactions involved, which is identifying cost pools or an activity centers.This helps to avoid products cost cross-subsidization between high-volume, low complexity outputs and low-volume, high-complexity outputs (Cooper R.a.,1988; Cohen,2005).This allows management accountant to generate accurate cost estimation and identify the profitability of various products/services, thus aiding them to work out how to maximize shareholder value and improve performance.
Other benefits on ABC which include decisions making about pricing and product mix, cost reduction, process improvement, and product and process design. The ABC system gives managers information about the costs, by so, managers then make pricing, and product mix decisions. ABC give managers guide and focus on cost reduction as well as design decisions when evaluate how its current product and process design affect activities and costs.
One of the major limitations of ABC is that it requires high time and recourse commitment because of the requirement of periodically data gathering, validation and insertion into the system (Innes, 2000; Kaplan R.S., 2004: Cohen, 2005).
Another limitation of ABC arise is when performing on estimation of plans and budgets. It is next to impossible and difficult to have an accurate estimation of the costs for some critical activities such as R&D. Associated problem when in proper estimation of the costs in activities as consequences in breakdown in the whole chain of activities.
Some overhead costs are difficult to assign even happen in ABC method as an overhead costs such as the directors’ salary. These costs refined as business sustaining and do not mean to assigned to department because there is no meaningful method by doing so. If do so, the allocation might eventually result in inaccurate cost estimation and causes wrong decisions.
In general, ABC has more advantages than limitations. When implemented properly, ABC can bring about constructive changes in financial control systems of an organization.
However, there is no such thing as the best costing method in an organization. There is only the most suitable costing method. As such, the management should evaluate the pros and cons of each of the costing method to identify the most appropriate costing method for their organization