Evolution of Management

Accounting- Part 1

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 Lecture outline:

• Management accounting scope

• The evolution of management
accounting
• Management accounting change
• The gap between theory and practice

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 Management Accounting
• Management accounting is the branch of accounting, which is concerned
with supplying relevant information to managers at appropriate time to
enable them to take decisions in organization.
• It is the process of accounting, which generates accounting information
from both financial accounting and cost accounting and provides
essential accounting information to all departments concerned.
• Management accounting is the process of identifying, measuring,
analyzing, interpreting and communicating accounting information to
internal department concerns to meet organizational goals and
objectives.

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 Objectives of Management Accounting
• Providing information to the managers the for decision making and
planning in revenue and cost projection of organization
• Assisting managers in interpretation of financial data that are not
understand by internal users
• Management accountants are crucial in the most of the case that they
become an integral part of management team in the overall
management providing necessary information.
• Assisting managers in directing and controlling operations through its
attention in their function
• Motivating managers toward the achievement of organization's goals
• Measuring the performance of managers, subunits and employees
within organization
• Assessing the organizations competitive position, and working with the
other managers to ensure organization's long term competitiveness

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 Role of Managerial Accounting

• In pursuing its goals, an organization acquires

resources, hires people, and then engages in an
organized set of activities.
• It is up to the management team to make the best
use of the organization's resources, activities, and
people in achieving the organization's goals.
• Planning
• Directing operational activities
• Controlling
• Decision Making

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 Differences Between Management And Cost Accounting

Basis Management accounting Cost Accounting

Objectives Its objective is to assist managers Its objective is to determine and record
providing accounting information for the cost of production of goods and
decision-making. services.
Scope It has broad scope, and includes Its scope is limited in cost determination
financial and cost accounting. and record.
Sources of It uses both quantitative and It uses the quantitative data only.
data qualitative data
Accounting No specific principles like Certain principles and procedures are
principles accounting and cost accounting. followed in cost determination and
allocation.
Nature It uses past and present data in the It uses both past and present data and
projection of future. figure.

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 Management Accounting Vs. Financial Accounting
Basis Management accounting Financial Accounting
Objectives Assist managers at all levels i.e. Make periodical report Outsiders like
internal users by providing necessary shareholders, government, customers,
accounting information. suppliers, managers
Sources of data It uses data, which are subjective, It uses data, which are historical, quantitative
descriptive and related with future. , and related with past.
Accounting No such principles for preparation and Governed by GAAPs. Therefore, all
principles presentation of reports. Therefore, organizations prepare the financial reports in
reports differ from one organization to the same manner.
another.
Reporting Reports are prepared in certain time Financial reports are generally prepared at
interval according to need of the end of the fiscal year to report
management. stakeholders.
Legal It is voluntary. It is applied to increase It is compulsory in every business
compulsion management efficiency for attaining organization.
organizational objectives.
Performance It measures the efficiency and It measures the overall efficiency and
measurements performance performance of organization.
of various departments and divisions.
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 BKAM 3033 – Topic 1

Evolution of the Focus of MA

Stage

4 Ongoing
Transformation

3
Transformation
Transformation
2
Transformation
1
Source: IFAC, 1998

Stage 1 Stage 2 Stage 3 Stage 4 Focus

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Management Accounting Change
• Cost determination
Stage 1 • Financial control (Financial Ratio
Before 1950 Analysis, FIFO, Budgeting)

• Management planning and

Stage 2 control (Std Costing, CVP, Trans Pricing,
1965-85 Responsibility Accounting)

Stage 3 • Reduction of waste (EOQ, JIT, ABC)

1985-95
Stage 4 • Value creation (TQM, ABM,
1995 after Reengineering, Bench Marking)
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Change in the Profession

Scorekeepers Bean counters

Change Change

Internal consultant
-business partner
-business analyst

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 Change in the Profession
“Accounting is changing. You are no longer sitting behind a desk
just working on a computer, just crunching the numbers. You
are actually getting to be part of the day-to-day functions of
the business.” (Abbott Laboratories)

“We are looked upon as more business advisors than just

accountants, which has a lot to do with the additional analysis
and forward-looking goals that we are setting. We spend
more of our time analyzing and understanding our margins,
our prices, and the markets in which we business. People
have a sense of purpose, have a sense of “I am adding value
to the company.” (Caterpillar, Inc)

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 Change in Profession

The Prior Business The Contemporary

Environment Business Environment
Financial reporting and View of cost Act as a
cost tool for the development
Common emphasis on and implementation of
standardization & Std business strategy
cost The accountant as a
The accountants as business partner
functional expert and Blocher, Chen, Lin

financial scorekeeper

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 Change in Profession
• Today’s management accountants need the
following skills:
– Solid knowledge of both financial and
management accounting
– Analytical skills
– Knowledge of how a business functions
– Ability to work in a team
– Oral and written communication skills

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 Evolution and Adaptation in
Managerial Accounting
Service Vs. Manufacturing Computer-Integrated
Firms Manufacturing

Information and
Emergence of New Communication
Industries Technology
Change
Global Competition Product Life Cycles

Total Quality
Focus on the Customer Management

Cross-Functional Teams Time-Based Competition

Continuous Improvement Just-in-Time Inventory

WHAT FACTORS DRIVE CHANGE OF
MA
External
•Customer oriented (competition)
•Technology
•Globalization

Customer-oriented (competition)
Internal

Organizational

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 WHAT FACTORS DRIVE CHANGE OF MA -
External
Focus on customer satisfaction

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BKAM 3033 – Topic 1
 WHAT FACTORS DRIVE CHANGE OF MA -
Internal
• Core competencies and work characteristics
of the organisation
– Modern production technologies  changes in
product costing practices
– IT  capital budgeting
– E-commerce  new ways of operating
• Design of MA systems
– Style of management
– Existence of TQM programmes

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 WHAT FACTORS DRIVE CHANGE OF MA -
Organizational
• Merger and acquisition
• Organizational restructuring
• Corporate failures  enhanced corporate
governance

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 The Gap between Theory and
Practices
• Management accounting practices can be
observed at the macro or micro levels
(Drury, 2008):
 Macro refers to concepts and techniques
 Micro refers to the behavioural patterns of
use.
• Tendency towards globalization at the
macro level.

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 The Gap between Theory and
Practices
• Drivers of convergence include:
 Global competition
 Information technology (e.g. ERP systems)
 Standardization by transnational companies
 Global consultancy
 Use of global textbooks
• At the micro level accounting information may be
used in different ways due to influence of different
national and local cultures.
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 The Gap between Theory and
Practices
• Professional bodies play an important role to bridge
the gap between MA theory and practice.
• For example, CIMA stated its first objective as “to
promote and develop the science of management
accountancy”.
• CIMA established the Technical Committee to
oversee a rigorous technical development agenda.
– Review developing practices and highlight what’s working
and what’s not.

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 The Gap between Theory and
Practices
• CIMA also worked with IFAC to develop the concept
of enterprise governance, focusing on the balance
between regulatory conformance and business
performance.
• In Malaysia, NAfMA awards is introduced by CIMA
and MIA to promote best practices of MA.
• The NAfMA awards recognize the best practices in
MA that lead to value creation and excellent business
performance based on the MA concepts of IFAC.

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 The Gap between Theory and
Practices
• NAfMA award is a response to the criticism by
accounting practitioners and educators on the
ground that MA practices had changed little over for
almost 60 years (e.g Johnson & Kaplan,1987), despite
radical changes in the business environment.
• The awards also reflects the shift from ‘number
cruncher’ and ‘corporate cop’ to decision-support
specialists and reflects what it takes to compete in
today’s lean, global, technologically-driven
environment.

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