Evolution and Aspects of Management Accounting

This essay discusses the evolution and development of management accounting, its functions within organizations, and various aspects such as performance measurement, balanced scorecard, and activity based costing. A practical example is provided to show how management accounting can be applied in business. The essay also covers the importance of controlling business expenses and performance through techniques such as marginal costing and absorption costing.

Applied Management
Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Management accounting aims to prepare various financial and non – financial reports
concerning a business and its operations in an attempt to facilitate the task of management that
is, taking managerial decisions for both long term and short term perspectives. It is the process
aims to pursue business goals through identification, measurement, analysis, interpretation and
communication of financial and non – financial information to the managers, so that they can
make decisions accordingly (Taipaleenmäki, 2017). The two words that is, management
accounting itself is sufficient in making clear the meaning of what MA is, that is, accounting
meant for the management in order to enhance their efficiency by providing them with all the
required information that is necessary for carrying out their managerial tasks such as planning,
controlling and formulating policy for the business concerned. In the present essay, the
discussion will be done with regards to the evolution of MA, its functions within the organisation
and various aspects of MA such as performance measurement, activity based costing, balanced
scorecard, etc. Also, a practical example will be quoted with reference to both service and
production sector to reflect how MA can be applied within the context of business to establish
control and enhance efficiency.
MAIN BODY
Management accounting too has its development stages like other disciplines of economics.
The stages represent the economic conditions, societal conditions of the time and their reactions
to such situations. In this essay, the discussion pertaining to the evolution and development of
management accounting over the time and its interaction with other functions within the
organisations.
Management accounting can be defined as the process that identifies, measures, interprets
and communicates information that the management team can use to plan, evaluate and control
their actions in an organization (Amara and Benelifa, 2017).
In other words, the job of people in the management accounting department of an
organisation is to provide the management team with the most accurate and useful information
which would help them in decision making and evaluation. Some of the strategic functions of
management accounting are as:

Planning and forecasting: to provide data and information for short term as well as
long term planning and forecast about the operations of the business, using tools such as trend
analysis through correlation and regression, capital budgeting, marginal and standard costing etc.
Organising: The management accountant helps in organising financial as well as non-
financial functions on the modern lines by assigning specific responsibilities. For e.g. specific
divisions for accounting and finance (Wren and Bedeian, 2020).
Coordination: Various tools such as reconciliation of cost and financial accounts,
budgets and standard costing are used to facilitate coordination among various departments.
Controlling: Tools such as ratio analysis, cash and fund flow analysis and or the
comparison of the actual with the standard or desired help in controlling the performance of the
organisation.
Financial Management: The management accountant presents the financial analysis and
interpretations along with his comments and suggestions so that the leadership is helped in taking
decisions easily.
Last but most importantly, management accounting is also concerned with evaluation of
decisions and performances and improving internal as well as external communication.
An example of management accounting is the decision by Marks and Spencer plc to adopt new
currency Euro. It called for planning future course of action and strategies (Lyly-Yrjänäinen,
and et.al., 2017). To deal with the use of Euro as the currency for financial reporting, the
company took some time until the government’s decision on the Euro embark.
Paul Smith, Euro project manager for the company stated that significant training of the staff and
expenditure of about 2 million pounds went into the preparation for adopting new currency.
Evolution of Management Accounting
Management accounting is very liquid and subjective in nature. The academicians and
practitioners of the discipline too never expected such development like what is practised in
today’s real world. Many a time, educational institutions receive enormous amount of pressure
that they update their curriculum so that it matches with the existing practice of the discipline
(Loft, 2020). For a general example to show the growth of management accounting, basic
differences between traditional and modern management accounting can be described. Whereas
the field was dominated by principle techniques of analysis of variances traditionally, it has
developed to include concepts like activity based costing, life cycle costs etc.

Stage I – Before 1950
In this stage, the discipline was considered in its original form, where the only
components of management accounting were the technical activities in requirement to keep track
of business. So the discipline was simply concerned with activities that determined product costs.
Due to relatively simple production technology at the time, this was quite easy (Kehoe, P. J.,
Midrigan and Pastorino, 2018). After the material and labour costs were defined, overheads
could be determined simply based on direct labour hrs.
At this stage, there were few regulatory challenges and less competition. The focus was
more on cost effectiveness and productivity than innovation. The use of cost accounting and
budgetary control was popular, still the information distribution for the purpose of managerial
decision making was poor. Managers were still allowed decision making on the basis of
intuition, experiences etc.
Stage II – 1950-1965
In the second stage of the evolution of the discipline, the concept developed to include
more than just the technical activities of costing. By this time, planning and controlling activities
have been included (Oldman and Tomkins, 2018). Experts believe that the discipline shifted to
more of the managerial work than the technical work by this time but, remaining at the staff
level. In other words, controls were restricted to manufacturing and operations rather than
strategic decision making. Therefore, management accounting was more or less reactive; actions
are only taken when problems are discovered through analysis of deviations.
Stage III – 1965-1985
This stage is noteworthy representing a significant change in the practice of the
discipline. Corporate leadership and the management team have joined hands in their common
interest to reduce waste in processes by efficient and effective decision making. This has
increased the need for better management accounting practices significantly.
The department of management accounting can no longer afford to be passive and
reactive in its job. Aggressive plans of cost cutting and efficiency have driven the management
accountant to be much more skilled and creative in providing information to support decision
making by the managers.

Researchers believe the cause behind such a change to be the oil crisis in the 1970s. The
world went into a recession and even threatened stable economies. Competition gave rise to
better strategies for financial management (Jansen, 2018). However, others believe the cause
behind the change to be the rapid advances in the production technologies that enhanced
competitiveness in production and operations, leading to improved management accounting
practices and informed managerial decisions.
Stage IV – 1985-1995
In this stage, the development of the discipline got a boost mainly by the advent of new
information and communication technologies such as World Wide Web. Now the game is no
longer about reducing waste and cost cutting, but rather generating value through better and
better use of available resources. Since then, professionals in the management accounting
department have been struggling to enhance value generation by the information provided to
leadership having already clearer strategic focus.
Aspects of management accounting revolves around the company’s financial results such as
sales, cost control and operating expenses of the company (Nielsen, 2018). There are various
aspects of MA which indicates the scope and characteristics of management accounting. Here
three of such aspects will be discussed that is, performance measurement, balanced scorecard
and activity based costing.
Performance measurement refers to the monitoring of targets or budgets against the results
actually achieved to determine the functioning of company’s employees in terms of their ability
as a whole or individually, in other words how well a company’s employees are performing
individually or as a whole. Performance measurement is useful for both short term and long term
objectives that is, by controlling cost and satisfying customers (Bititci and et.al., 20180. It
facilitates numeric outcome of an analysis in order to indicate how well a business is achieving
its objectives both in short and long run. Some of the examples of what management accounting
measures in terms of performance of the company are efficiency in controlling cost, ability to
attain sales targets, effectiveness that is, the speed with which the sales targets are being met by
the business.
There are various tools and techniques that is being used vastly in modern business
scenario such as balanced scorecard which is considered to be best known technique of
performance measurement based on four different perspectives that is, customer, learning &

growth, financial and internal process. These four perspectives are designed in such a way
covering all the activities of the organization whether it is external or internal and future or
current. Therefore, performance management is also known as a tool meant for strategic analysis.
Also, this aspect of MA is useful for organization disregarding the industry in which it operates
and the size or type it has (Rikhardsson and Yigitbasioglu, 2018). With the help of various tools
and techniques of management accounting such as budgets, costing reports, etc. are very useful
in providing information to carry out the performance measurement activities and also suggests
various systems for efficiently and effectively carrying out of related tasks. The other
performance measurement techniques are financial, non – financial and benchmarking. In
financial performance measurement, various ratios are calculated to determine the performance
trends of business for various years and can also be compared with that the competitor's average.
Accordingly, areas which needs improvement are determined and managerial actions are taken
for correcting figures in future periods. Non-financial techniques takes into consideration the
measurement of customer satisfaction, resource utilization and quality measurement. At last,
benchmarking is being useful in setting standards in advance which the business aims to achieve
within the given period of time and in this way the organization become efficient and effective in
getting up to the best practices across the industry.
Another aspect of MA is balanced scorecard, a performance metric used by management
to help in the identification and improvement in the company's internal operations that are seems
to be useful in increasing external outcomes (Loft, 20200. Here, past data indicating the
performance are measured to provide feedback to the managers on how they are need to make
better decisions in future. For example, increase in revenue per customer is a mission forming
part of financial perspective of balanced scorecard.
The last one is the activity based costing which is based on principles that are meant for
controlling the resource consuming activities of the organization to ensure that the costs are
controlled at the source itself. Time driven ABC in the recent time helps in overcoming various
issues pertaining to traditional system of cost management. With the use of activity based
costing, all the indirect and overhead costs are assigned to the organizational products and
services. The cost are assigned to products on the basis of activities performed for producing it.
For example if the total electricity bill for production house comes to 35000 as against the usage
of electricity for 700 hours, then the overhead rate of this cost comes to 35000 / 700 = 50 per

hour. If a product say, XYZ consumes 30 hours for its production, then the cost allocated to this
activity would be 30 * 50 = 1500.
Controlling
The other and most important function of the management accounting is controlling the
performance of the business by using the various aspects and tools. The purpose behind the
company for controlling the business expenses and performance is achieving the targets and
goals of the enterprises (Hayes, 2019). Two most important and main aspects of the management
accounting which help the businesses in controlling is Marginal Costing and Absorption Costing.
Marginal Costing is one of the technique and aspects of management accounting which
state that profits earned by the company where fixed cost taken into account by the company. In
simple term, in marginal costing aspects the company need to exclude the fixed cost of
manufacturing and admin expenses from the product cost so that the management of the
company can manage marginal cost effectively. With the help of marginal costing the degree of
the treatment of over and under overheads get reduces. Not only that, the management of the
company with the use of these aspects can start the new line of the production because they help
in making the decision regarding the buy and manufacture of products along with decision
regarding pricing and tendering. However, the marginal costing does not provide the real profit
as it does not consider the semi-variable and semi-fixed cost in their decision-making (Johnsson,
Normann and Svensson, 2020). Along with that, the most important issue attach with this aspect
is that it basically ignores the time element while classifying the total cost into the variable and
fixed category. Another issue found out under the marginal costing aspect is that the assumption
regrading the constant selling price of the product is unrealistic.
Absorption costing is also another and most significant aspect and technique of
management accounting which helps in controlling and decision-making function. In this aspect,
the company get the real profit of the products as it seize the fixed cost of the product in the
closing stock itself. The benefit of absorption costing is that it comply with the GAAPs
principles such as accrual and matching concept. With the application of the absorption costing
technique, the company match the cost with the revenue of the same period. It is one of the best
aspects of management accounting for the purpose of preparing external reports. In this costing
method, the company need not separate the total cost of manufacturing of product in the fixed
and variable cost as it cover whole cost of manufacturing in direct cost. It is because these

aspects is highly recognized the importance of including the fixed production cost (Xu and et.al.,
2017). This techniques are the best for determining the suitable pricing policy for their products
of the company.
However, on the other hand, absorption costing is also had various disadvantage. Many
authors have argued that the fixed cost are period cost not the product cost and thus it should be
eliminated from the product revenue. One of the biggest issue arises in this management
accounting aspects is that it skewed profit and loss. It means that it reduces the level of the profit
of the company which further causes the issue of poor decision-making of the company (Hojna
and Stryckova, 2018). Any wrong decision may result into the heavy loss to the company thus it
is advisable to the company that before adopting any technique and aspects the company have to
do though analysis of it.
Practice Example of marginal and absorption costing aspects of management accounting:
Prime furniture is a UK based furniture production company that have the following information
about their sales and production:
Sales (in units) 350000
Units produced 400000
Sales price €200 per unit
Closing stock 50000 units
Direct material cost €30
Direct labour cost €15
Variable manufacturing costs €20
Fixed manufacturing costs €800000 per year
Variable marketing & administrative expenses €25 per units
Fixed marketing & administrative expenses €5000000 per year
Note 1: Cost Structure under absorption costing:
Particulars Amount

Direct material cost €30
Direct labour cost €15
Variable manufacturing cost €20
Fixed manufacturing cost (€800000/ 400000
units)
€2
Total €67
Note 2: Cost Structure under marginal costing:
Particulars Amount
Direct material cost €30
Direct labour cost €15
Variable manufacturing cost €20
Total €65
Income Statement
Under Absorption costing
Particulars Calculations Amount (€)
Sales (350000 units * €200) 70000000
Less cost of goods sold
Variable cost of goods
manufacture (400000 × 67)
(Note 1)
26800000
Less closing stock (50000 *67) -3350000 (23450000)
Gross contribution margin 46550000

Less variable marketing &
administration expense
(400000 * €25)
-10000000
Contribution margin 36550000
Less period expenses
Fixed marketing &
administrative expenses
-5000000
Net Operating Income 31550000
Income Statement
Under Marginal Costing
Particulars Calculations Amount (€)
Sales (350000 units * 200) 70000000
Less variable cost
Variable manufacturing cost
(400000 * €65) (Note 2)
26000000
Less Closing stock (50000 ×
65)
-3250000 -22750000
Contribution 47250000
Variable marketing and
administration expense
(400000* €25)
-10000000
Gross Profit 37250000
Less Fixed manufacturing cost 800000
Less Fixed marketing and 5000000 -5800000

administrative expenses
Net Profit 31450000
Reason of difference between absorption profit and marginal profit
The main reason behind the difference between the profit under marginal and absorption
costing aspects is the fixed cost of manufacturing the products. In the marginal costing, the fixed
cost of products is excluded while on the other hand in the absorption costing the fixed cost is
remained in the product. The impact of which the fixed cost is seized in the closing stock of the
product. At the time when the production of the product is higher than the sales of the product
than the net operating income under absorption costing is higher than marginal costing. On the
other hand, in the case when the production of product is lower than the sales of the product than
the absorption profit must be lesser than the marginal costing (Devi, Irasari and Sudibyo, 2020).
On the above practical example, it is stated that the production of units is higher while the sale is
lower which further result into the high absorption costing and low marginal costing.
CONCLUSION
From the above report it has been concluded that management accounting is one of the
most important branch of accounting concerned with the use of accounting information for
making various decisions which may be both of financial and non-financial nature. In this essay,
the various functions performed by management accountant such as planning, controlling,
decision-making and forecasting has been discussed. Also, value aspects of MA has been
evaluated such balanced scorecard and activity based costing which indicates what a great role
the MA play in an organization to ensure their sustainability on the path of success and also to
compete in market which is highly competitive and everchanging.

REFERENCES
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