Managerial Accounting Online Tutoring

1.       Introduction

A lot of management accounting systems (MAS) or techniques have existed since the late 20th century, such as Standard Cost Variances (SCV), Activity Based Costing (ABC), Marginal and Absorption Costing (MAC), Just in Time Inventory Analysis (JIT), Value Chain Analysis (VCA) and Total Quality Management (TQM). Management uses these systems to generate useful financial and non-financial information that would assist in effective management of costs as well as efficient allocation of resources to activities through relationships based on volume and non-volume related drivers (Cooper and Kaplan, 1987). This eventually results in better informed decisions for the organization and lead to strategic excellence in the long term.

However, in the recent past the advent of e-commerce, internet of things, use of mobile devices and instantaneously available information form almost infinite resources have made business faster and more dynamic than before. The businesses respond by seeking to adopt a more, efficient and modern IT-based accounting systems to harness the competitive advantage and remain viable by persistently changing and improving the organizational performance (Langfield-Smith et al., 2000). This poses the threat of being unable to cope with change in MAS and the people and organizational challenges that ensure with it. In the following sections two case studies that are focused on implementation of a new MAS in a real-life organization are discussed with the perspective of how they are relevant in the currently prevailing dynamic and competitive business environment.

 

2.       Types of Management Accounting Methods from the primary case study

The first study is focused on implementation of SAP R/3 bundled MAS package in a multinational manufacturer with rather simple process of production with fewer inputs as raw materials. The subject company operates manufacturing facilities in 27 countries with sales to more than 100 countries throughout the world. The Company wishes to have a centralized control over its management decisions from its headquarter on the East Coast of the US so as to eliminate the regional bias and attain greater focus on globalized decision-making excellence (Watts et al, 2014). The management accounting techniques utilized by the company in the case study are briefly discussed hereunder.

2.1       Activity Based Costing (ABC)

This is a technique which involves tracing resource consumption and costing the final outputs. First resources are assigned to certain activities, and later these activities to cost objects (products or finished article). Cost drivers are identified which attach costs related to activities performed to the final output / product. It results in more accurate method of product/service costing, and therefore a clear understanding of the product pricing, enables better understanding of cost drivers and overheads being incurred, and allows better product profitability analysis (Kaplan and Norton, 2016).

The case study suggests that whilst a number of firms implement the ABC technique, they have also been seen to subsequently abandon them because of its high cost of implementation and monitoring. Furthermore, the selection of cost drivers is not as simple a task as it seems and it makes interpretation of results very difficult for user employees. The Company in case study utilizes ABC through Scorecards representing activity-based management (ABM). However, investigation of these activity drivers is done very rarely which makes ABC a seldom used technique with little relevance to activities within the organization (Watts et al, 2014).

2.2       Internal Benchmarking

Benchmarking involves the identification of optimum performance and then adoption of the identified best practices to improve the performance. Internal benchmarking compares one operational unit within the manufacturing concern with another one within the same manufacturing facility. This ultimately results in process improvement, efficiency in production line, achievement of optimum performance targets, generating an understanding of the world class performance (Kaplan and Norton, 2016).

The subject company in case study utilizes internal benchmarking by comparing its various regional and global manufacturing facilities of similar products, identifying the variances, scrutinizing them and seeking explanations. The effect of variances outside the control of operational managers such as authority over supply chain purchases are eliminated to relieve the pressure from operational managers. This results in calibration of performance gaps in various processes / manufacturing units and developing a culture for maintaining stimulus for continuous improvement (Watts et al, 2014).

 

2.3       Use of Key Performance Indicators (KPIs)

These are a measure of company’s success or failures towards the fulfilment of a particular goal. These are goods means monitoring progress towards accomplishing the set strategic objectives (Kaplan and Norton, 2016). In the subject Company, manager responsible for tactical decision-making assist in the generation of useful KPIs for assessing the performance of plants and manufacturing facilities. The information used in computing these measures is extracted from MAS or acquired externally (such as supply chain-based information, customer expectations and technological developments affecting the company’s operations) (Watts et al, 2014).

 

3.       Relevance of Management Accounting Systems to contemporary organizations

A contemporary organization is mostly managed at three hierarchical levels: operational, tactical and strategic. The information needs of line managers and staff at each level depends on their functions and the intended outcome of their efforts. The type of information could be found either internally in the organization or available in some way outside / externally. The primary case study discusses in details how MAS are involved at varying degrees at three different levels within a contemporary organization. Each division of the subject company is autonomous in its operational decisions, whereas strategic decisions are made for the broader organization and are centralized with the head office. The involvement of MAS for each type of decision is briefly discussed as follows with the help of examples:

 

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Much of the functionality of the MAS is utilized in making operational decisions. These may include for example taking a decision to produce further or to halt a production facility based on computed levels of the optimum production levels. Taking decisions about other issues relating to production, most of which have short-time frame and need to be error free. The case study finds that the reliance on internally generated information for these types of decisions is therefore highest.

In case of subject company, KPIs are set at operational level for each production facility of the company. Historical precedents, performance evaluations and internal benchmarking form the basis of these KPIs. Incremental improvement is constantly sought in these KPIs to achieve production efficiency / best practice. Since decisions taken are base don KPIs which in turn are derived from the information obtained from management accounting systems, their reliance thereon is absolute and unconditional.

 

3.2       Tactical decision making

This rests with the middle level line managers. Tactical plans are developed for each area of production, marketing, personnel and finances and involve tasks that should be done by each function to achieve the goals over a medium term (say 6 months to 1 year). Tactical managers in the subject case study company utilize variances as well as external information pertaining to supply chain and customer relationship management (Riskope, 2014). This means that they necessarily have to include external information from the environment to make informed decisions. This may include for example inputs from PESTEL analysis or SWOT analysis. However, even at this level it does not undermine the importance of MAS as a key source for decision making.

3.3       Strategic decision making

This involves setting the overall organizational direction and making resource allocation decisions to pursue the long-term strategy of the company. For example, acquisition of high-technology firms in the industry and divesting mature divisions by the subject company in the case study, was its growth strategy. Strategic decision makers or chief operating decision makers tend to focus more on externally supplied information or setting the strategic direction of the organization rather than information that is available generally internally. They need an evaluation of macro and micro economic factors, competitor actions, potential for new products in current and new markets, significant global event – information pertaining to all of which is available only in the external environment.

This is the reason why strategic decision makers at subject company regard MAS irrelevant for their roles. They define the purpose and use of internal information as follows:

“Our main use of internal information is for historical checks and balances against globally expected trends. Most of this internal information is financial in nature and is generally similar to information made available to [external] stakeholders.” (Watts et al, 2014, pp.11)

 

This is true because by the time decisions reach strategic level most of the information generated by MAS has already been utilized in producing the results for the company. The strategic decision makers than evaluate the external information to decision how the organization should go ahead.

In view of above, the importance of MAS is particularly relevant in a contemporary organization for operational and tactical levels than for strategic level decisions.

 

 

4.       Comparison with Secondary case study

The second case study examines the adoption, acceptance, and use of a new management accounting system in a pharmaceutical company headquartered in Asia that shifted from a standard costing and activity-based costing system to a Theory of Constraints System (TOC). The case study is more focused on the human element in the event of change to a new system. This is so because the case study uses the structuration theory as a framework to understand the changeover dynamics, which is more concerned with the relationship between structure of the social systems and activities of the human actors. The purpose of the change was to shift the focus from cost-minimization to maximization of output and inventory turnover (Krishnan et al, 2012).

The findings of this case study somewhat coincide with the primary case study, but the secondary study is more focused on the change phase of the MAS rather than going into the details of its relevance for management information needs. It states that MAS assists the organization in making sense of all the activities that it undertakes. That is a good way of putting it as without any information producing system an organization would not have any input into its analysis process, no KPIs would be available and consequently performance could not be measured or assessed against the targets.

The findings with regard to failure of the changeover process indicates that a change in MAS that is not supported with change in organization structure and premeditation can cause confusion among the users and result in inferior outcomes for the company. For example, when the new MAS is inconsistent or misfit with the existing organizational structures. This is exactly what happened with the company in primary case study wherein the Company decided to roll-back the implementation of MAS (SAP R/3) owing to the complexity of information retrieval and realizing that much of the functions and modules of the system are not needed by the company. The roll-back was later followed with developing in-house system that utilizes the “multi-level variance distribution system” (Watts et al, 2014).

The secondary case study states that employee’s acceptability of the new MAS is influences by how the new MAS can fit into their existing working structures, signification and domination. Users use MAS as a mediation mechanism in order to gain and develop understanding of the organization. This can result in high buy-in of the system (such as in case of supply chain and IT departments where technology intensive TOC system was perfect to cater to their information intensive environment and the analysis orientation), or rejection of the system if it is inconsistent with their work spheres and results in their inferior significance in organization (for example HR department where resistance arose due to high automation and highly technology driven nature of the new TOC based system) (Krishnan et al, 2012). The findings in the primary case study relating to acceptability of new system was more focused on its usefulness in management decision making rather than the human element as considered in this case study.

 

5.       Relevance of Management Accounting Systems in today’s dynamic, fast-changing and competitive business environment

The MAS are very much relevant in today’s business environment specially when the dynamic and varied financial and non-financial information needs of the various users / stakeholders are considered. The environment in which businesses operate are highly regulated in today’s world with general as well as industry specific regulation on the organizations. Further, anti-money laundering and countering terrorism financing laws have put an additional responsibility on the companies to manage their operations and have certain information relating to it always available. Whether it is reporting to the local regulators under the domestic legislation or reporting of financial information using IFRS or other information using another, say integrated reporting framework, without sufficiently adequate and detailed information none of that is possible.

With the Company in primary case study the manufacturing processes were rather simple, and consequently they perceived ABC/ABM techniques to be too detailed and complex for their needs, so was considered BSC and JIT to a certain extent. This resulted in most of the function available in the SAP/R3 package being redundant in the circumstances of the company and warranted a modification to the MAS. This is evident from the following statement made by the MD while stressing the need for a modified system:

“We are clear in our minds that only a modified management accounting system would suit the demands of our business model. Without some modification the system would be too unwieldy and rapidly render itself impractical.” (Watts et al, 2014, pp.12)

 

Therefore, changes are inevitable sooner or later and realizing this early in the installation process could save quite a lot of time and expenses.

The system in the current environment also needs to be capable of capturing data through wide range of latest IT-enabled techniques. For example, through the use of sensors data can be captured instantly and in large amounts for later evaluation using the Big Data Analysis technique. This can otherwise prove to be very fruitful to achieve efficiency in production and marketing. Additionally, increasing investment in IT has often been described as providing a strong leverage to the organization for achieving flexible production processes, to improve on a global level and constantly keep on learning and improving (Chenhall, 2003).

IT is now foundation of many areas that are traditionally the domain of management accounting. Learning the mean of utilizing the IT-based MAS in developing a value chain to support organization strategy is the key to success (Watts et al, 2014).

 

6.       Conclusion – Research Findings from primary and secondary case studies

The two key lessons learnt from each of the case study are discussed hereunder:

 

6.1       System modification is a necessity, not a choice

This is true because very organization is different in terms of its operations, structure and work methodologies and stakeholder preferences. An off-the-shelf solution for MAS is not going to help contribute in the long-term and would have to be eventually replaced when it fails to deliver. Hence just like Company in the primary case study generalized their processes and utilized some key aspects of several management accounting techniques, every organization needs to find out its best fit (Watts et al, 2014). This might include a combination of one or more of the following:

  • Identifying and using activity drivers to allocate overheads
  • Running some scorecards and identifying the best practices
  • Internal and external benchmarking of various systems
  • Utilizing JIT for certain supplies and deliveries
  • Develop own iteration of the TQM incorporating safety measures

 

6.2       MAS cater differently to each level of management

As discussed earlier, operational decisions are internally information intensive and take most of their inputs from MAS. Therefore, the system should be designed to cater to the information needs of operational decision makers at the outset. Information should be captured, recorded, delivered, and reported at operational level as and when required. Whilst an implemented system may include a functionality that is often considered very useful, if it does not provide the information in the desired format at the right time, then it is not useful.

Development of a system that is built around multiple contemporary management accounting systems is a big challenge for many organizations today (Watts et al, 2014).

6.3       Installation / modification of MAS required premeditation

An inappropriately selected or installed MAS could have detrimental effect on the otherwise sound profitability and strategic and operational positioning of the firm. Therefore, it needs to be premeditated and followed by an appropriate change in the signification structure to prevent the inferior outcomes. The roots of resistance are different in each functional department of the organization and it needs to be managed consultative persuasion, culture of safeguarding collective interests of all stakeholders, and through training of the employees responsible for executing the functions (Krishnan et al, 2012).

 

6.4       Consider social aspects in implementing MAS

Social systems are a part of organization just as accounting and control systems. Hence, apart from material aspects of implementing the change in MAS, an organization should also consider the social aspect thereof. A new management accounting system entails a fundamental shift in the social order of the organization which in turn affects peoples reactions and attitudes to work (Krishnan et al, 2012).

 

List of References

Chenhall, R.H. (2003), ‘Management control systems design within its organizational context: findings from contingency-based research and directions for the future’, Accounting, Organisations and Society, 28(2-3), 127-168. http://dx.doi.org/10.1016/S0361-3682(01)00027-7

Cooper, R., & Kaplan, R.S., 1987. ‘How cost accounting systematically distorts product costs’. in W.J. Bruns & R.S Kaplan (eds). Accounting & management: field study perspectives, Harvard Business School Press, Boston, Massachusetts, pp. 204-28.

Langfield-Smith, K., Thorne, H. & Hilton, R., 2000. “Management Accounting: An Australian Perspective”. Second Edition. Irwin/McGraw Hill, Roseville, Australia. http://dx.doi.org/10.1016/S0361-3682(95)00040-2

Kaplan, R.S. and Norton, D.P., 2016. The Activity-Based Costing System: an excerpt from the CGMA book ‘Essential Tools for Management Accountants’. Journal of Accountancy, 221(5), pp.90-93.

Kaplan, R.S. and Norton, D.P., 2016. Benchmarking: an excerpt from the CGMA book ‘Essential Tools for Management Accountants’. Journal of Accountancy, 221(5), pp.60-62.

Kaplan, R.S. and Norton, D.P., 2016. Key Performance Indicators (KPIs): an excerpt from the CGMA book ‘Essential Tools for Management Accountants’. Journal of Accountancy, 221(5), pp.54-57.

Krishnan, R., Mistry, J.J. and Narayanan, V.G., 2012. A field study on the acceptance and use of a new accounting system. Journal of Management Accounting Research, 24(1), pp.103-133.

Riskope. 2014. Let’s define Strategic, Tactical and Operational planning. – Riskope. [online] Available at: https://www.riskope.com/2014/04/03/lets-define-strategic-tactical-and-operational-planning/ [Accessed 29 Sep. 2019].

Watts, D., Yapa, P.W. and Dellaportas, S., 2014. The case of a newly implemented modern management accounting system in a multinational manufacturing company. Australasian Accounting, Business and Finance Journal, 8(2), pp.121-137.