Lecture 1: Evolution of Management Accounting

Question 1

According to the National Association of Accountants (NAA, 1981), what is Management Accounting?

Answer 1

It is the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of financial info used by management to plan, evaluate and control within an org. and to assure appropriate use of & accountability for its resources. (internal management use only)
Also, it involves the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities.

Question 2

According to Institute of Management Accountants (IMA, 2008), what is Management Accounting?

Answer 2

It is a profession that involves partnering in management decision making, devising planning and performance management systems as well as providing expertise in financial reporting and control to assist management in the formulation & implementation of an org. strategy.

Question 3

What are the 3 scopes of MA mentioned by the American Institute of Certified Public Accountants (AICPA)?

Answer 3

1. Strategic Management - advancing the role of management accountant as a strategic partner in the org.
2. Performance Management - develop the practice of business decision-making & managing the performance of the org as a whole.
3. Risk management - contribute to frameworks & practices for identifying, measuring, managing & reporting risks to the achievement of objectives of the org. (not main priority)

Question 4

What are the new roles of Management Accountants aka controller?

Answer 4

1. Information provider towards the org.
2. Act as a strategic partner by participating in key decision making (part of the management team) unlike previously
3. More diverse across value chain (liaise & entertain insiders as well as outsiders like suppliers or even customers), looks at a broader perspective beyond the org.
4. Provides conceptual framework for converting data -> information
5. Act as the role of enabler & strategic business partner along the entire info value chain (crucial)!! ; makes decision and deal w/ people

Question 5

What is information value chain?

Answer 5

It is the aspect of collecting data and information (real/ estimates) and gaining a knowledge out of it in order to make a strategic decision. Currently, the main focus of management accountants is really about their knowledge in making a decision as a part of the top management.

Question 6

International Federation of Accountants (IFAC)’s evolution of management accounting (1998)

Answer 6

4 stages in total:
Stage 1: Prior to 1950 (1920-1950): cost determination and financial control
Stage 2: 1950-1965: information for management planning and control
Stage 3: 1980s: reduction of resources waste in business process
Stage 4: 1990s: creation of firm value via effective resources used

Question 6

International Federation of Accountants (IFAC)’s evolution of management accounting (1998)

Answer 6

4 stages in total:
Stage 1: Prior to 1950 (1920-1950): cost determination and financial control
Stage 2: 1950-1965: information for management planning and control
Stage 3: 1980s: reduction of resources waste in business process
Stage 4: 1990s: creation of firm value via effective resources used

Question 7

IFAC evolution (Stage 1): Cost determination and financial control

Answer 7

• main focus was to determine the product costing
• direct labor was the most common basis for assigning overheads to individual products
• the use of budgeting, cost accounting techniques and financial control of production processes
• management was concerned about internal matters, especially production capacity
• management accounting was seen as a technical activity to achieve organizational objectives
• main sources of data: income statement, balance sheet
• methods frequently used: ratio analysis, financial statement analysis, budgeting
• lowest level of competition
• compete in terms of price and quality
• the use of technology was rather low
• the use of manual labor force was more common
• high volume of products were manufactured at one time
• most frequently used stage in the UK w/ a mean of 8.467
• the most traditional way (costs is low)

Question 8

IFAC evolution (Stage 2): Information for management planning and control

Answer 8

• main focus here is the provision of information for planning and control purposes
• management accounting is now seen as a management activity which involved staffs support to line management
• cost accounting now consists of managerial accounting, management control system, investment appraisal, decision analysis and responsibility accounting
• allows management team to plan, control and take the best course of action in decision-making
• identify problems and actions only when there are deviations from business plan
• some of the techniques used: standard costing, cost-volume profit, break-even analysis, transfer pricing
• 2nd most frequent stage used in the UK w/ mean of 7.366

Question 9

IFAC evolution (Stage 3): Reduction of resource waste in business processes

Answer 9

• main focus was to reduce waste in resources used in business processes
• to meet the global competition, new management and production techniques were introduced & at the same time controlling costs
• eliminate non-value added activities to enhance efficiency and effectiveness
• some of the techniques used: ABC costing, Just-in-time, strategic cost management, target costing, economic order quantity (EOQ), last in first out (LIFO), first in first out (FIFO), management resource planning (MRP)
• competition increases
• introduced new manufacturing processes

Question 10

IFAC evolution (Stage 4): Creation of value through effective resources used

Answer 10

• focus on the generation or creation of value through the effective use of resources & technologies
• use of technologies which examine the drivers of customer value, shareholder value and organization innovation
• the use of resources to create value is seen as an integral part of the management process in contemporary org.
• some of the modern techniques used: balanced scorecard, value chain analysis and strategic management accounting

Question 11

In early 1990s - 2000, what were the focus of management accountants? (Prof.’s POV)

Answer 11

• focusing on environmental & sustainability issues & risk management
• Environmental Management Accounting (EMA) was created which later enlarged to Sustainability Management Accounting (SMA)
• EMA focuses mainly on stage 1 & 2 of cost determination, financial control and information

Question 12

In 2000s - present, what are the evolution of management accounting & what are its main focuses now? (Prof’s POV)

Answer 12

• focuses on big data & digitalization

- digital marketing & technologies impact on management accounting is still vague

Question 13

What is IFAC proposal in Management Accounting concept?

Answer 13

It says that inattention to environmental or social concerns are likely to be ineffective.
Resource use is judged effective IF it optimizes the value generation over the long run, w/ regards to the externalities associated w/ an org. activities.

Question 14

Does the evolution/ transformation of Management Accounting totally ignores the prior stages?

Answer 14

NO! Eventho the evolution can be distinguished into 4 recognizable stages, the techniques used in previous phases continued to be used in later stages. It’s just a transformation and innovation.

Question 15

What is Kaplan’s view on the evolution of management accounting?

Answer 15

It provides historical developments of cost & management accounting since early 20th century.

Question 16

The 5 parts of Kaplan consists of?

Answer 16

1. Summary of historical developments in cost accounting
2. Historical development of managerial control
3. Development since 1925 in cost accounting & managerial accounting
4. New challenges for cost and managerial accounting
5. New directors for management control research

Question 17

Part 1 of Kaplan’s view: Summary of historical developments in cost accounting

Answer 17

• info needed for planning & control started during the first half of the 19th century in textile mills & railroads (industries) and later on in tobacco co. & metal-making industries.
• management accounting was spilt from cost accounting in the 1950s
• this was mainly due to the depression after the WW1 or it could also be due to industrial revolution (IR) - unsure/vague

Question 18

Part 2 of Kaplan’s view: Historical development of managerial control

Answer 18

• Dupont was the first to develop the return on investment (ROI) measurement & at that time was used as a “true test” of profitability
• responsibility accounting & investment center concepts were introduced
• techniques: transfer pricing and make or buy decisions
• these concepts & techniques were developed by engineers & managers. It wasn’t accountants who developed it initially

Question 19

Part 3 of Kaplan’s view: Developments since 1925 in cost accounting & managerial control

Answer 19

• capital budgeting, residual income were then developed during this phase.
• residual income method came only after the ROI method

Question 20

Part 4 of Kaplan’s view: New challenges for cost and managerial accounting

Answer 20

• traditional cost accounting model developed for mass production of standardized products must now be updated in this phase to support new operating concepts
• some new concepts formed: JIT, zero defects, zero inventory, cooperative workforce, flexible manufacturing system, computer/IT aided design and manufacturing, the innovation of using robotics in the process of manufacturing

Question 21

Part 5 of Kaplan’s view: New directions for management control research

Answer 21

• management accounting MUST serve the strategic objectives of a co.
• emphasizes on financial measurements, which include explicit recognition of the need for info & measurements in soft (non-financial) areas such as product quality, innovation, employee morale and customers satisfaction

Question 22

Criticisms of Traditional Management Accounting based on Johnson & Kaplan (1987): The rise and fall of Management Accounting

Answer 22

• traditional management accounting techniques were developed during industrial revolution are no longer relevant to the current use.

Question 23

3 criticisms of traditional management accounting

Answer 23

1. Management accounting info, driven by financial reporting cycle is too late, too aggregated, too distorted and too narrow to be relevant for the management needs
2. Direct labor allocation systems
3. Provide short-term financial measures that are invalid indicators of performance

Question 24

Criticism 1: Management accounting info, driven by financial reporting cycle is too late, aggregated, distorted and narrow to be relevant for management needs.

Answer 24

1. Too late - no timely info (out-dated), isn’t useful for control purposes because financial statements are usually only provided at the end of a cycle. We cannot get it whenever we need it.

2. Too aggregated - in terms of functional areas and time
Indirect costs (overhead) are combined in plant wide or departmental overhead. Manufacturing costs are aggregated by months or quarters instead of on a daily or weekly basis

3. Too distorted - relate to volume-based allocation of overhead costs (inaccurate allocation)
4. Too narrow - focus on financial measures, short-term and internally focused (don’t look externally and overall; only focuses internally)

Question 25

Criticism 2: Direct labor allocation systems

Answer 25

• inaccurate & may lead to cost distortion

- volume-based overhead always uses direct labor as its denominator, this might not be exactly accurate

Question 26

Criticism 3: Provide short-term financial measures that are invalid indicators of performance

Answer 26

• short-term oriented & ex-post evaluation in nature (ex-post: based on past historical data that had occur); normally refers to financial data
• focus only on efficiency
• promotes data manipulation
• not adequate for ex-ante evaluation, controlling & decision-making processes. (ex-ante: forward looking data, before the event occur); normally for non-financial data

Question 27

What are other criticisms of traditional management accounting laid out by Maskell (1991)

Answer 27

1. Lack of relevance
2. Cost distortion
3. Inflexibility
4. Impediment to progress in manufacturing excellence

Question 28

Other criticism 1: Lack of relevance

Answer 28

Today’s manufacturing strategic goals are non-financial such a customer satisfaction, quality & flexibility cannot be monitored by traditional reports because those methods are mainly financial based measures. Thus, they’re irrelevant for operational control

Question 29

Other criticism 2: Cost distortion

Answer 29

Allocation of overhead costs based on direct labor content will lead to a major cost distortion when it only represents < 10% of total costs.

Question 30

Other criticism 3: Inflexibility

Answer 30

Accounting reports (financial based) are inflexible for manufacturing management as managers aren’t able to modify the measures as the needs of performance measures vary among plants, products, processes & departments.

Question 31

Other criticism 4: Impediment to progress in manufacturing excellence

Answer 31

High emphasis on machine & labor efficiency results in production in large batch size w/ the focus on production quantities. This is totally opposite from the modern manufacturing which focuses on small lot sizes.