1 MANAGEMENT ACCOUNTING TableofContents Introduction..................................................................................................................................2 Causes for role change of management accountants...................................................................2 Resistance to change by different parties.....................................................................................5 Influence of Finance Function in an organisation........................................................................7 Impact of IT on management accounting function......................................................................9 Steps taken by professional bodies............................................................................................11 Conclusion.................................................................................................................................12 Methodology..............................................................................................................................12 Bibliography...............................................................................................................................15
2 MANAGEMENT ACCOUNTING Introduction The main purpose of the field of management accounting is to identify, measure, analyse, interpret and communicate financial information to the managers. This helps the organisation in achieving the previous goals set by it. Although it can be said that it is similar to financial accounting, it is much wider in terms of scope and importance to the organisation. The financial accountingendswithquantifyingthefinancialperformanceofanentity.However,the managementaccountinggoesbeyonditandanalysesthefactorsbehindthefinancial performance of the entity. It is an extremely valuable tool in helping the managers make well- informed decisions regarding the business aspects of the entity. Some of the roles which are performed by the management accountants of an organisation include product costing and valuation, analysis of cash flow and inventory turnover, analysis of constraints and the metrics related to financial leverage. In order to do so, they tend to use a wide variety of tools like budgeting, forecasting, ratio and trend analysis and some of the standard capital budgeting tools. While the importance given to the management accountants in the early part of the 20thcentury was not very high, this has not been the case in the modern day businesses. The change in the nature of business from being completely manufacturing oriented to operating in a wide variety of areas can be suggested as a reason for the same. The role still continues to be relevant in the modern day businesses. Despite the change in the nature of the operations of the modern day businesses, the decision making process is still undertaken after taking a wide range of factors into consideration. These include the financial, technical, environmental, ethical and legal factors. A management accountant is able to combine all of them together to provide a comprehensive solution to the problems faced by the business.
3 MANAGEMENT ACCOUNTING Causes for role change of management accountants The nature of the roles which have been performed by the management accountants over the years can be classified into three categories. They include attention-directing, scorekeeping and problem-solving roles. The jobs performed under the attention-directing and scorekeeping roles generally include reporting on compliance and control related issues of the business. However, the problem solving roles mainly focus on giving relevant solutions to business unit managers for decision making purposes. These roles very clearly match the different images held of an accountant. They include the roles of a bean counter and that of a business partner. However, not every agrees with these range of roles performed by them. Some suggest that management accountants have become more oriented towards the business decision making role than the normal clerical role performed by them. This is because of the change in the nature of the modern day business which involves more uncertainty and less reliable information. In order to overcome this limitation, the business managers need more problem solving people who are easily able to process new information and use it in the business. Managing uncertainty has become the primary responsibility of the modern day management accountants. Other reasons for the change in their roles include an increase in business related management accounting innovations like ABC Costing, Standard Costing, Target Costing and Life Cycle costing. Implementing latest technologies like financial and operational control systems and other related software in the modern day businesses has resulted in the reduction of the focus on recording and bookkeeping functions. The division of the roles among the management accountants has made them more oriented towards being completely responsible for the division of which they are in charge. However it needs to be kept in mind that the amount of power shown by a management accountant depends on the nature and management of the organisation. The roles of management
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4 MANAGEMENT ACCOUNTING accountants tend to change on the basis of the business they are employed in. While some management accountants are responsible for safeguarding the management of outside parties, the others do other variety of jobs. Some of these include safeguarding the management accountant function. The partner management accounting function tends to make the process of decision making easier by providing necessary information while the management accountant can also play a part in centralising power. However, authority and power should be also be given to the management accountant to fully fulfil their responsibilities. The study by some of the researchers reveals that the concept of a management accountant partner is a myth in the modern day business and is not as common as one would think it is. The authority held as a part of the business by the management accountants also tends to become limited due to their relationship with the operational managers and the product managers in an entity. The enhancement of the role of a management accountant requires specific conditions. One of them is the integration of economic reasoning into the operating conditions of the management without giving too much of authority to the management accountants. Another finding suggests that delegating too much power to the management accountants is also responsible for making operational managers complacent. Hence, this also acts as a potential hindrance to the increased importance of the management accountants in the business. The level of relationship on a personal note between the operational managers and the management accountants is also responsible for determining the role that a management accountant would play in an organisation. The concept of a management accountant who also acts as a partner in the firm is a very fragile one. It depends on the level to which it is co-opted by the other teams operating as a part of the entity. If accepted by a majority of the people at the organisational level, then it can be suggested that the importance of a management accountant significantly increases. This leads to activities better
5 MANAGEMENT ACCOUNTING suited to the entity’s needs like manipulation of the earnings and other operational decisions. The nature and size of the organisation is also another factor responsible for the change in the nature of the role of the management accountant. In larger firms which tend to employ a large amount of accountants, the significance of a particular accountant is not very high. However, this tends to increase in SMEs where more crucial decisions are dependent on the expertise of the management accountant. Resistance to change by different parties Another important factor which determines the role of a management accountant as a part of an organisation is the level of resistance to any new changes which are implemented as a part of the organisation. In a traditional organisation, there tend to be gaps which exist between the various parties operating within an organisation. Although they need to work together for the betterment of the organisation, gaps tend to exist between them due to the previously existing structure of the organisation and the differences in the roles. In situations like these, a contextual change like the restructuring of the organisation may result in the two set of groups working together in the organisation. However, it is not something which should be taken for granted. The purpose of this organisational shift is that it allows people to work more closely as a part of the organisation and complement each other’s roles better. However, one of the factors which is responsible for the lack of necessary change in the organisation is the continuing differences in perspectives.Themanagementaccountantsemployedbyanorganisationalwayslookto implement a new system which satisfies one single purpose. It is to make others realise about the value added by them to the organisation. Hence, any system which is implemented within an organisationmainlydealswithfulfillingtheneedsandnecessitiesoftheirroleinthe organisation. However, the operations management always tries to implement changes which are
6 MANAGEMENT ACCOUNTING a part of the organisation as a whole and not just focus on the role and importance of the management accountants to an organisation. This difference in perspective is also responsible for the factors driving the change within the organisation. The management accountants within the organisation look at a system which enhances their role within an organisation as something which is beneficial to the organisation. However, accountants operating outside the organisation tend to look at the overall picture and decide the impact of the new system on the basis of its contribution to the organisation as a whole. This is also the view of the operations management who tend to not to acknowledge the role of a management accountant within an organisation specifically and always look at the bigger picture. This resistance to change by both the parties is another factor which decides the extent to which the role of a management accountant changes within an organisation. In order to institutionalise the new role of a management accountant as a part of an organisation, there are a few factors which need to be implemented within the entire organisation. The new “business partner” role which is given by the management of the organisationtothemanagementaccountantofthecompanyshouldbeinstitutionalised throughout the organisation as a whole. The role identity of a management accountant within an organisation should be reconstructed from within the organisation. The intra-organisational level of an organisation should be linked with the external environment in which external factors also try to achieve the changes in the role of a management accountant. Hence, on an overall basis, it can be suggested that in order to avoid the conflict between the external parties and also the internalpartieswithinanorganisation,itisnecessarytoimplementasystemwhich institutionalises the role of a management accountant within an organisation. This would result in a wider recognition of their responsibilities and contribution to their organisation. It would also be responsible in ensuring that they take a broader view of the things and not mistake their
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7 MANAGEMENT ACCOUNTING personal development with the development of the entire organisation. Another important factor which has been identified by the researchers is that the introduction of a new management accountant system in aspects like a family business should not be considered as a mere matter of formality. The appointment should rather be considered as a matter of cultural competence. Hence, both the owners of the business and the management accountants of the organisation should share a common view in areas like transferring vision, knowledge, competence and strategies. In case of many of the family businesses, the decision to adopt a system of management accounting is more of an obligation than a genuine desire to manage the business professionally. This should be avoided by the businesses to ensure that the appointment of a new management accounting system is beneficial to meeting the obligations of an organisation. Influence of Finance Function in an organisation One of the main issues related to the role and control of the finance organisation within an organisation is that it is considered from a single perspective in most of the researches. However, this practice should be avoided. The finance should also be considered as part of the other procedures implemented by an organisation like the HR, operations and supply chain. There are some aspects which need to be considered in determining the role and influence of the finance function within an organisation. These include the manner in which it is linked to the organisational performance and the balance which the organisation is able to achieve with other relevant functions. Other relevant questions include the manner in which the particular function allows the organisation to achieve competitive advantage and the circumstances which are most necessary for an organisation to succeed in the business. The differences in the functions also existacrossthenationalboundariesseparatingdifferentcountries.Despitealackof comprehensive research on the above questions, there are a few widely accepted notions which
8 MANAGEMENT ACCOUNTING are accepted throughout the world with respect to the role of finance within an organisation. Low Value Adding finance functions like processing of transactions and maintenance of payroll should either be outsourced or done with the help of third parties. More value adding functions like business analysis, supporting decisions and strategic financing decisions should be situated closer to the decision makers of an organisation. People who are well –versed in these financial aspects are given more importance in an organisation and are asked to undertake more important roles like that of the business partner within an organisation. They are also looked upon to make important decisions regarding forming the strategies and driving change within an organisation. Even when the models implemented by the experts fail, the problem is considered to be related to the aspect of implementation. The risks which arise with such a model are seen as aspects which can be managed during the time of implementation. One such example is the failure to achieve cost savings through the outsourcing model by an organisation. The failure is usually attributed to the selection of a wrong outsourcing partner and not because of an underlying fundamental flaw existing within the model. This is because of the underlying assumption that every function within an organisation will contribute towards achieving the goals of the organisationwithoutproperlyunderstandinghowitwouldactuallydoso.Likeother departments, the attempts of the finance function to play a more active role in the decision makingprocessofanorganisationisusuallydownplayedbytherelevantpartiesofan organisation. It is expected that the finance function will produce the annual financial accounts within a limited cost and generate significant profits for the organisation. However, in doing so, other important factors like the prevention of fraud or understanding whether the firm is over- resourced or under-resourced are not taken into consideration by any of the relevant parties. One of the pressures frequently faced by the finance professionals is being involved in the decision
9 MANAGEMENT ACCOUNTING making process of an organisation. There are instances when the problems within a plan or a course of action are detected after its implementation or at an advanced stage of the planning process. In this case, arising issues about the plans becomes difficult for the finance professionals as they were also involved in the decision making process. However, as suggested by some of the CFOs of large scale organisations, this concept of being committed to an organisation in all situations is not in the best interests of the firm. Hence, one of the most important roles of the finance in an organisation is to always raise the difficult questions about the implementation of a plan which others may not be able to see directly. The unique features of the finance function should be allowed to be implemented within all levels of the organisation and become a part of the decision making process of the organisation. Some of the other pressing issues in the modern day world where the finance function needs to increase its inputs include the aspects of globalisation, changes in technology and achieving more sustainable financial practices within an organisation. However, as it has been noted on a global level, building a finance function for the future of an organisation is an extremely challenging task. Some of the issues arising as a part of the business include the responsiveness of the function to the needs of the business and efficiency of cost procedures. Technology and risk compliance along with the requirements of corporate governance are other important factors which need to be kept in mind during the development of a finance function of the organisation. Impact of IT on management accounting function An extremely relevant case study where the role of the management accounting function was enhanced due to the usage of the IT systems is the case of Clarke Chapman. The management accounting information system developed by the management of the firm was not done for the purpose of explicit decision making as a part of the business. However, the
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10 MANAGEMENT ACCOUNTING information which became available from the routine management accounting system was extensively used in strategic decisions related to the continuance or discontinuance of a particular project. It was also used as a method of employing financial caution within the face-to- face strategic discussions conducted by the firm. In case of labour management, the firm preferred to employ a more direct approach in dealing with the labour. However, the data obtained from the ad hoc management accounting reports was used in framing the suggestions made to a particular labour. The management accounting systems also produced results related to the downturns in the demand for the products of the entity. These reports helped in restructuring the sales strategy and the manufacturing functions of the organisations. The management accounting functions of scrutiny of costs were the key underlying functions in case of the decisions made by the firm. Hence, using the evidence of Clarke Chapman’s case, it can be said that the management accounting system which is built in a gradual and evolutionary manner is useful in helping the firm in the long run its operations. The use of IT enabled the management accountant to make decisions in a timely manner due to the preciseness and the wide variety of information available at their disposal. The usage of the systems also allowed it to better merge with the observations of the engineers of the entity and make decisions which were technical and also done at a reduced cost by the business. One of the modern Information Technology trend implemented as a part of the businesses is the increased use of Business Intelligence & Analytics (BI&A) as a part of the reporting and decision-making process of the entity. As management accounting is the traditional decision making tool of an organisation, the link between BI&A and management accounting will be clearly beneficial to the organisation. One such tool is the performance dashboards which are useful in helping the employees know about their performance for a particular period of time.
11 MANAGEMENT ACCOUNTING However, in order to make them more effective, the purpose of the dashboard should be aligned with their functional and visual design. Their usage should also be made more flexible to better align with the needs of the organisation and the needs of the person using them. While the number of researches conducted in relation to the link between management accounting and BI&A is limited, there is generally an optimistic view about the impact of its usage on the overall performance levels of a business. However, there are also some worrying concerns about the impact of the usage of these technologies. They include the privacy concerns of the data, data security issues, extreme management of employees and possible negative behavioural effects. The dynamic nature of the information provided by a BI&A tool makes it easy for the management accountant to study varied perspectives regarding the same issue. This makes the management accountant equipped with diverse information and include a wide variety of variables like legislation, economic development, requirements of the firm and supplier relations into the process of decision making. Some of the studies in Turkey suggest that the bookkeeping system, efficiency of financial reporting and a better budgeting system seem to have a better impact on the corporate governance level performance of the firm. Merely adopting the accounting standards does not seem to have much of an impact in this regard. Management accounting techniques like budgeting have a significant impact on the corporate governance of the firm as suggested by the available empirical evidence. Allocating resources efficiently, prevention of misuse of the financial and non-financial resources of the firm and generating more value to the shareholders is better possible with the implementation of IT based internal controls. Auditing and financial reporting have become relatively easier due to the implementation of an efficient accounting information as a part of the business.
12 MANAGEMENT ACCOUNTING Steps taken by professional bodies ProfessionalbodiesacrosstheworldliketheCharteredInstituteofManagement Accountants (CIMA) have recognised the growing importance and demands from the role of a management accountant in the modern day businesses. The professional development cycle employed by CIMA as a part of its business activities includes a six-step procedure. The first step is to define the requirements of the role of an accountant. The next step is to assess the steps involved in preparing a program for the use of the members of CIMA. A program is designed on the basis of the results of the assessment. The program thus designed is implemented and the results obtained from it are reflected upon to identify the flaws and good aspects existing within them. There is an evaluation of the programs thus obtained which results in an improvement to the programs previously designed by the organisation. These steps have also been collectively known as the CIMA Professional Development Cycle. In order to prepare the training programs of the highest possible standard, CIMA takes a number of factors into consideration. The primary step is the employer accreditation program in which the quality of the employer is assessed on the basis of a quality assessment matrix. The accredited employers are then allowed to retain the various talented professionals who are a part of the CIMA in different levels of education undertaken by them. This allows the students to get good practical exposure during their training period as apprentices in a large scale organisation. It will also help them in understanding the demands and requirements of working in a modern day high class firm. The study curriculum of the modern day management accounting student is prepared in a completely exhaustive manner to ensure that students have a sufficient level of knowledge of all the subjects which they will be required to use as a part of their profession. Constant timely updates are sent to the students to ensure that they remain in touch with the changes occurring in the industry and undertake
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13 MANAGEMENT ACCOUNTING necessary steps to implement these steps as a part of their profession. Training is provided in IT in relation to the required analytical tools like Excel and R to help the students become competent and comfortable in conducting their job with relative ease after they obtain the necessary qualifications. Specialised professional qualifications like AICPA and CGMA are also provided to diversify the roles which can be performed by a management accountant. These qualifications ensure that the role of a management accountant is not just limited to the analysis and decision making process of an entity. They also take active part in aspects like the strategy design of a firm and allow it to undertake business in an entrepreneurial manner. Seminars and training programs are undertaken to improve the leadership skills and the analytical capabilities of the students as a part of their training curriculum. Conclusion On the basis of the above discussion, there are a few aspects which can be summarised together. The role of the management accountant is both clerical and management oriented in nature and has been evolving ever since. This is because of the vast scope of the role available to the management accountant. Due to the nature of their role, the demands and responsibilities that amodernday organisationexpectsfromamanagementaccountantarealso consistently increasing in their scope. This allows them to not only quantify a situation but also analyse it thoroughly and understand the reasons behind the performance of the company. However, the business decision making aspect of the role is not always possible to implement efficiently. The support of the management and the flexibility of the organisation are necessary for this. The resistance to the change by the operations management and the management accountants themselves is responsible for the lack of increase in the scope of the role. However, this can be overcome by improving the level of importance given to the management accountants within the
14 MANAGEMENT ACCOUNTING decision making process of the organisation. Other steps which can be taken by the management include the increased implementation of Information Technology (IT) tools which allows the organisationto reducetheerrorsinvolved initsprocedures.Increased support fromthe management bodies like CIMA in the form of professional training is also essential for the growth of the management accountants. Methodology The consistent aim throughout the preparation of the report was to produce a critical analysis of the changes in the role of the management accountant over the years. Hence, initially various sources of literature available throughout the internet were researched to understand what constitutes a management accountant. Then an attempt was made to understand how it was different from the role of a financial accountant in terms of the responsibilities of the profession. During this, it was understood that the role of a management accountant is much wider in its scope and importance to the decision making process but it had not always been the case. Hence, the literature review of the article by Lambert and Sponem (2012) was undertaken to understand the evolution of the role of the management accountant since the inception. It was understood from this review that there are certain biases which still prevent a management accountant from being part of the decision making process of a firm. One of them is the resistance to change by both the management accountant and the operations management itself. Then literature related to the resistance to change by management accountants was actively pursued. This literature review suggested that the role of the management accountant was not becoming relevant due to the selection of extremely limited technical tools by the accountants. The disapproval of the management accountant was thoroughly understood in this case. In order to better understand the role of the finance function in the business of the organisation, the literature review of various
15 MANAGEMENT ACCOUNTING accounting professionals was undertaken. This suggested a clear segregation of the duties of the accountants and the roles that the organisation expected them to play in the business. One of the issues that most finance professionals suffered from in this situation was to make a reliable decision without any negative effects. It was understood that in order to improve this situation, they need to be equipped with more varied information. This also highlighted the importance of implementing technology as a part of the business. The literature review further progressed to identify whether the benefits provided by the use of IT was real or just a hype created by the companies. Evidence was thoroughly searched to clearly understand the impact of using IT based tools and their impact on the decision making process and other business related decisions of the management accountant. This suggested that being well-versed in IT along with the academic topics is one of the requirements of the modern day accountants. The ever increasing demands from this role can only be met with the help of different parties related to the management accountant. One of them is the Professional bodies governing them. Hence, the websites of various governing bodies like CIMA were analysed to understand the steps taken by them in developing the new generation accountants to be market ready. All of this information was combined to prepare a comprehensive report about the changing role and scope of a management accountant in the current business environment.
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16 MANAGEMENT ACCOUNTING Bibliography Baldvinsdottir,G., Burns,J., Norreklit,H. and Scapens,R. (2009) ‘The management accountant’s role’,Technical matters,Financial management Sept 2009, p33-34. Bisogno, M. and Vaia, G., 2017. The role of management accounting in family business succession.African Journal of Business Management,11(21), pp.619-629. Brands, K. and Holtzblatt, M., 2015. Business Analytics: Transforming the Role of Management Accountants.Management Accounting Quarterly,16(3). Cimaglobal.com. (2020).CIMA - Chartered Institute of Management Accountants. [online] Available at: https://www.cimaglobal.com/ [Accessed 28 Mar. 2020]. De Loo, I., Verstegen, B. and Swagerman, D. ( 2011) ‘Understanding the roles of management accountants’,European Business Review, Vol 23, No 3, p287-313. Goretzki, L., Strauss, E. and Weber, J. (2013). An institutional perspective on the changes in management accountants’ professional role.Management Accounting Research, 24(1), pp.41-63. Icaew.com.(2020).[online]Availableat: https://www.icaew.com/-/media/corporate/files/technical/business-and-financial-management/ finance-direction/finance-s-role-in-the-organisation-finance-direction.ashx?la=en[Accessed27 Mar. 2020]. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Lambert, C. and Sponem, S., 2012. Roles, authority and involvement of the management accounting function: a multiple case-study perspective.European Accounting Review,21(3), pp.565-589.
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