ACC 2204 Group Assignment 2010

INTRODUCTION The definition by Colin Drury in Management & Cost Accounting, management accounting is concerned with the provision of information to people within the organization to help them make better decisions and improve the efficiently and effectiveness of existing operations. Generally, management accountants are employed for cost accounting, financial management, direct and indirect taxation and etc. They collect and analyze information from all the area of an organization and supply future oriented information which reflect economic realities unfettered by accounting conventions to support decision making for the manager. As we know, management accountants task can be considered into two key elements scorekeeping and decisions support. However, two decades ago, scorekeeping seems to occupy the management information provided by accountants due to the information provided were inaccurate estimates of product cost, falling in their function of helping management make product-related decisions. Nevertheless, the development of the Information Technology (IT) over the past twenty years has dramatically resulted in the formation of globalization and competitive business environment. Therefore, in this globalization and competitive environment of business today, organization has to change their structure and managerial approach to gain some competitive advantage. Kaplan (1995) had also argued that, management accountants should move away from being scorekeepers of the past to become the designers of the organizations critical management information system. So, it caused the new formation of management accountant today. The advance technology has allowed management accountant to analyze the information easier, faster and more accurate. Moreover, the expectation to the management accountant is become higher. The management accountants today have to update themselves frequently to meet the requirement by the management official of the organization and help them face the competitive business environment. The study of changing in role of the management accountant has become a hot topic among the academic and professional literature. In the following part, our group would like to show the role and the differences between management accountants twenty years ago and today, including the challenges faced by management accountants these days in carrying out their duties.

ACC 2204 Group Assignment 2010

The Role Of Management Accountants Twenty Years Ago Twenty years ago, management accounting was still using the concepts, techniques, and measurement principles that were firmly established by 1960. It had only a few basic elements: 1. Standard costing and flexible budgeting for cost control information in the manufacturing sector. 2. Incremental analysis for decisions with various time horizons. 3. Present value analysis for interperiod-interdependent decisions. 4. Full absorption and variable costing for product cost measurement, with overhead assigned to products by volume-based apportionment rates. 5. Profit contribution and return on investment reporting for monitoring internal segment performance. 6. Full integration of internal cost accumulation and reporting systems with the general ledger system used for external financial reporting. (Shilinglaw,G. 1989) On the other hand, management accountants basically acted as an advisory capacity and did not work together with management or cooperate with a team two decades ago. At that time, their tasks were focused on the cutback of waste in resources used in business processes, through the use of process analysis and cost management technologies. Since they worked separately from the managers, and did not focus their tasks on decision support, they could not know the situation of management clearly and provide a well suggestion to managers for making decisions. Besides, tracking cost and revenue within a business, providing information for planning and controlling operations are another tasks of management accountants. However, the traceability of cost was low. The low traceability of cost was resulted in scorekeeping (is concerned with transactions processing resulting in financial reports and monthly management accounts used to manage budgets) became the major task of management accountants which we had mentioned before. There are several principal arguments: 1. Costing systems in job order production require excessive tracing of costs to individual jobs. 2. Overhead apportionment rates are too broad, covering wide bands of the operating cost spectrum.

ACC 2204 Group Assignment 2010

3. Costs that are driven by variables other than production volume are apportioned to products by volume-based rates. 4. The numerator of the apportionment rate is almost always direct labor hours or direct labor cost, even though direct labor is the driver of few overhead costs. 5. Apportionment rates generally reflect the assumption that all productive resources are expected to operate at the same level of intensity (percentage of peak operation capacity). 6. Costs of product-related activities outside the main manufacturing or serviceproviding centers- mainly R&D, marketing, selling distribution, and warranty costsare not identified with the products they support. 7. Accounting textbooks have focused too strongly on short-term variable costs, overlooking the impact of capacity costs on strategically oriented product decisions. (Shilinglaw,G. 1989) The existing systems and existing textbooks (at that time) failed to implement the causality principle correctly is the heart of all these criticisms. Causality is the core concept in product costing which has both short-term and long-term dimensions. Long-term causality includes short-term causality which refers to the effect of the use of capacity on cost, but also applies to the costs of providing capacity. If this principle is not measured accurately then product costing will be incorrect and any managerial use will be digressed. Moreover, according to the research done by Robert W. Scapens and Michael Bromwich (2001), it shows that a wide ranges of topics had been studied by those management accountants during 1990 till 1994 included Activity-Based Costing (ABC), and other advanced techniques (which include target costing, time-based management, quality management, world class manufacturing) and the studies more emphasized on traditional areas such as budgeting, standard coating & variance analysis and cost accounting systems and techniques. However, the companies popularly implemented Just in Time (JIT) and ABC techniques during that time. It seems like the studies done by the management accountants did not relevant to what they actually need. These are the roles of management accountants twenty years ago,

ACC 2204 Group Assignment 2010

The Role of Management Accountants Today Management accountant today are experiencing significant change in the organization structure, competitive environment and information technology. The competitive environment has result in the increasing focus on shareholder value creation and this makes management accounting become increasingly relevant in recent years. Furthermore, in order to provide multidimensional information required by the business manager in the rapid changing environment today, management accountants have improved themselves to adapt to the new management accounting system. Management accountants role in many organizations has transformed from controller or score-keeper to business support or internal business consultant (IMA, 1999; Coad, 1999). In other words, the role of management accountant today is business unit orientation. The role of management accountant today is performed in the area such as strategy, information systems implementation and change management. A detailed illustration of the role and the area involved by the management accountant today will be showed in the following paragraph. Strategy Strategy management accounting (SMA) has made management accountant have broader view than traditional management accountant. Management accountant today is not enough just to control and manage cost and revenue within the organization. They must focus on external and collect data that is related to competitor, market and customer information. So, management accountant are required to provide valuable information to management in determination of business strategy. Since the management accountants role today has changed from score-keeper to business support, the strategy management accounting is very useful for them. They are required to determine the competitors product or process costs and thus identify some ideas for improving the companys own products or process. Once they are capable to collect or measure the cost data of the competitors, then the company will be able to evaluate the competitors likely reaction both in the long run and short run and so gain competitive advantage.

ACC 2204 Group Assignment 2010

The strategy management accounting will only be successful when accountant and management work together with the clear understanding of competitors information such as product cost level. In other words, management accountant should update the information about their competitors steadily to help the management to make timely decision.

Information Systems Implementation Innovation of information system today enables organization to adapt and survive in the competitive business environment. By using those innovations, management accountant can be able to ensure that managers are provided with information that is relevant and useful in decision making. Many organizations obtain their competitiveness by adopting new information technology such as Enterprise Resource Planning (ERP) systems. Enterprise Resource Planning systems are software modules for different business functions linked by a common database to produce an integrated enterprise wide system (Newman.M, Westrup.C). The ERP system has influence the work of management accountant. It has resulted in accountant have to spend less time on data collection but more forward looking analyses. It means that management accountants is required to control and interpret information held on ERP systems The implementation of ERP system has resulted in changing role of management accountant. It required management accountants to possess an excellent understanding of the business operation. Also, management accountants is expected to be good communicators and skillful in interpreting accounting information. So, a training program is needed to help management accountant to improve the understanding and application of information system. Besides that, management accountant must control over the design and development of ERP system. If they do not concern in these, the system will limit them to become a subordinate role in management.

Change in Management

ACC 2204 Group Assignment 2010

Management accountant today are called to spend less time working within the accounting function and more time working with the user of management accounting information such as manager. They work alongside with managers will be more familiar with the sort of decision that manager will make and more likely to understand which information is needed to make that decision. Furthermore, the opinions and information given by management accountant are more likely accepted by manager because trust will have developed between each other as a result of working together in the past. On the other hands, companies today are focusing on customer satisfaction and shareholder wealth maximization to gain a competitive advantage. Therefore, management accountant are focusing on creation of value rather than focusing on cost determination and financial control. Value creation is identified as the core variable by the National Awards for Management Accounting Best Practice (NAfMA) framework (Normah et. al., 2004). The role of management accountant in this area is conduct value creation through four activities: efficient and effective use of resources in organizations; optimization of value generation over the long run; continuous evaluation of organizational value chain and the formation of strategic teams. Value creation is created only if all the following four conditions are met (Harris & Delbaere, 2004, pg 30): I. II. III. IV. To make profit and generate value for shareholders To focus on asset productivity To earn a return on capital that is higher than the companys cost of capital To focus on improving the business by investing in assets that returns more than their cost of capital Once the management accountants have adopted and conducted the value creation on the organizations products and services, the organizations profit can be increased. This can also result in increase shareholder value. By increasing shareholder value, the long term success of a company can be ensured as investors always invest to those companies that offer a high return.

CHALLENGES In this rapid changing business environment, management accountants are facing a lot of challenges. The increasing expectation from top management to management accountants

ACC 2204 Group Assignment 2010

will make them facing bigger pressure than before. They are expected to fulfill the role such as illustrate complex business and managerial skill. So, the capabilities of management accountant should be re-orienting in order to prevent the overtaken by other professional. Instead of provide current or historical information to the management, management accountant today are facing the challenges to have the foresight of planning for future uncertainties. For example, when management accountant doing cost management during product design, they are required to estimate the future production cost. In this case, it also brings another challenge to management accountant since the traditional cost accounting system does not provide any data for this. The specific cost information systems are needed to support estimating the future product costs. Such systems are often called as cost table which is used in combination with target costing. So the management accountant used to fully understand about this system and use it efficiently to support the management.

CONCLUSION REFERENCES 1. Beaman and Richardson. 2007. Information Technology, Decision Support and Management Accounting Roles. Journal of Management Accounting Research, 5(1): 59-68. 2. Burns and Vaivio. 2001. Management Accounting Change. Journal of Management Accounting Research, 12: 389-402. 3. Drury, C. 2000. Introduction of Management Accounting, in Management & Cost Accounting 4. Kajuter, P. (2004) Cost Management Creating Value, Accountants Today, January/February, p.38-41. 5. Newman and Westrup. (2005) ERP Systems Affecting the Role of Management Accounting, Accountants Today, March, p.36-38. 6. Omar et al. (2004) Management Accunting in Malaysia Has Relevance Been Lost?, Accountants Today, November, p.26-27. 7. Omar et al. (2004) Management Accounting Best Practice a Conceptual Framework, Accountants Today, December, p.30-31.

ACC 2204 Group Assignment 2010

8. Ramli and Sulaiman. (2006) Tools in Value Creation, Accountants Today, April, p.30-32. 9. Scapens and Bromwich. 2001. The First Decade. Journal of Management Accounting Research, 12: 245-254. 10. Shillinglaw, G. 1989. Managerial Cost Accounting: Present and Future. Journal of Management Accounting Research, 1: 33-46. 11. Srikanthan, S. (2004) Success through Strategic Management Accounting, Accountants Today, December, p.28-29.