DEVELOPMENT AND

CONTEMPORARY ISSUES IN
MANAGEMENT ACCOUNTING

Learning Outcomes
At the end of this lecture students should be able to:
Describe the evolution of management accounting
Discuss the criticism of the traditional management
accounting practice

Analyse the contemporary development of management

accounting

Origins of Cost Management Systems

Before 19th century:

Individual function of manufacturing process is performed by external
independent entities.
Only financial accounting system were used to assess the efficiency and
profitability of the enterprise.
19th century:
Industrial revolution started modern management accounting when enterprises
were formed to conduct an entire multi-stage production process.
Information is required to assess the efficiency of internal production process as
well as to motivate and assess the managers and workers e.g. cost per unit.
Rapid growth of railroads i.e. more demand & complex processes required new
measures to assess the efficiency of the operating process e.g. cost per gross
ton mile, cost per passenger mile and operating ratio.
the measures developed were specific to the type of product and process i.e.
measuring efficiency of input resources converted to finished products/ sales

The Scientific Management Movement

Emergence of complex metal-machining companies with variety of finished
products and the products consumed resources at widely different rate
made info of cost per unit insufficient.

A group of mechanical engineers headed by Frederick Taylor, founded the

scientific management movement.

They studied work processes closely to simplify them into more controllable
processes and able to determine detailed and accurate standard costs.

Originally when the industries were still labour intensive, overheads were
charged on the basis of labour hours. However for process industries such
as petroleum, glass and chemicals, machine hours were extensively used

Management Control of
Diversified Organisations
Early 20th century:
growth of multi-activity and diversified corporation. The emergence of big and
successful industrial enterprise such as DuPont, General Motors or United States
Steel have produced a variety of new management accounting practices to provide
information on the efficiency and effectiveness of their decentralised operations.

Example:
DuPont Powder Co. established in 1903 as a combination of separate family-run independent
companies faced the problems to co-ordinate the vertically integrated (manufacturing to
marketing) activities and allocating resources to their many operating groups.
o The senior managers of DuPont created return-on-investment (ROI)
o to evaluate the success of each operating unit and the entire organization & results were
used to direct the allocation of capital to the most profitable divisions.

From Cost Management To Cost

Accounting
Between 1925 to 1985, the development of management accounting practices
was slow. Part of the reasons was due to the demand of cost information for
external financial accounting reports. For stock valuation purpose, the
overheads were allocated based on plant-wide (single) rate e.g. labour hours.

However the costs information for external reporting purpose was too simplistic
and not sufficiently accurate for decision-making purposes and for
distinguishing profitable and non-profitable products.

The high costs of collecting, processing and reporting information coupled with
homogenous (similar) product lines led companies to keep same record of cost
information for internal and external used

Recent Developments in Manufacturing &

Service Companies
All of the manufacturing innovations and service industries stressed on
continuous improvement activities in the 1980s
Measures of individual worker efficiency or machine utilisation conflicted with
factory goals to improve quality, increase throughput and reduce inventory.
Absorbing fixed production overhead into inventory
increase in reported profit
undermine the effort to reduce inventory, eliminate manufacturing defects,
speed throughput times and improve responsiveness to customers.
End of 20th century & 21st century:
Environmental management accounting (EMA) where physical information on
the use, flows and destinies of energy, water and materials (including waste) as
well as monetary information on environment-related cost, earnings and savings
The global profile of environmental issues has risen significantly during the past
two decades, triggered in part by major incidents such as the Bhopal chemical
leak (1984) and the Exxon Valdez oil spill (1989).

Major Criticisms of Current Management

Accounting Practices
Refer to:
Johnson, H. T. & Kaplan, R. S. The Rise and Fall of Management
Accounting (2); Management Accounting. Jan 1987. 68 (7), p.
22.

> GROUP VIDEO ASSIGNMENT (refer requirement handout)

Contemporary Management Accounting

Developments

To compete successfully in todays environment companies are:

Making customer satisfaction an overriding priority.
Adopting new management approaches.
Changing their manufacturing systems.
Investing in Advanced Manufacturing Technologies.

Focus on Customer Satisfaction

Key success factors
1. Cost efficiency keeping costs low and being cost effective, increased emphasis
on accurate product costs and cost management.
.Quality focus on TQM, quality measures.
.Time as a competitive weapon emphasis on time-based measure (reduced
cycle time), focus on non-value-added activities.
.Innovation responsiveness in meeting customer requirements

Product comparisons.
Feedback on customer satisfaction.

2. Continuous improvement
Identify opportunity for change
Static historical standards no longer appropriate.
Benchmarking is more relevant - involved external focus on the latest
.

developments and best practices

Focus on Customer Satisfaction

Key success factors
3. Employee empowerment
. Delegate more responsibility to people closest to operating processes
and customers.

4. Value chain analysis

Suppliers, R&D, design, production, marketing, distribution, customer

service, customers.
Internal customer perspective

5. Social responsibility and corporate ethics

Proactive in social responsibility, safety and environmental issues

New management accounting

approaches

A few examples of new management accounting techniques and

approaches:
Total Quality Management (TQM)
Just In Time (JIT)
Activity based costing (ABC) & Activity-based management
Strategic Management Accounting Balance Score Card
Life cycle costing
Kaizen costing
Target costing
Benchmarking
Resource Planning System
oMaterial requirement planning (MRP)
Enterprise resource planning (ERP)

Gap Between Theory And Practices Of MA

Examples:
1. Edwards and Emmanuel (1990) ranked topics in Management Accounting

according to the responses of 44 CIMA in Scotland and compared this rank with
one based on the frequencies of publication in two academic journals during
period of 1984-1987. The result are as follows :-

Practitioners ranked budgeting highly (but not zero base budgets)

whilst the academic ranking for budget was low.
The first four academic topics; Application of computers, Cash flow
accounting, Capital budgeting and Current costing were ranked 5, 9, 8
and 14 by practitioners.

2. Drury and Dugdale (1992) stated that practitioners make very little use of

sophisticated quantitative technique such as multiple regression analysis for

cost and sales estimation, linear programming techniques and statistical
probably analysis to estimates payoffs from alternatives.

Possible reasons for the differences

Some theories or models may seem over simplistic to practitioners.

Innovative theoretical models may be difficult to translate into practice.
It may be difficult to introduce a new management accounting technique
- the existing one may have already been instutionalised as a norm.
a new management accounting technique or system may not be adopted
if its underlying assumptions are at odds with those of the prevailing
institutions and assumptions.
Factors such as size of the firm, intensity of market competition;
commitment of owner/manager of firm and advanced manufacturing
technology (AMT), commitment of owner/manager, affecting the
management accounting practice may influence the use of MA
techniques.