Management Accounting: Implications for Service Industry Analysis

This essay delves into the implications of management accounting within the service sector, highlighting its evolution from a manufacturing-centric approach. It begins by contrasting goods and services using the IHIP characteristics (Intangibility, Heterogeneity, Inseparability, and Perishability), emphasizing the unique challenges services present for traditional accounting methods. The essay then explores the potential role of management accounting in service environments, discussing the impact of customer involvement, cost structures, and the difficulty in applying traditional principles like causality and analogy. It examines the rise of servitization, the shift from selling products to offering product-service systems, and the implications for management accounting. The essay further discusses service-dominant logic, the service paradox, and the need for management accounting principles to adapt to a service-oriented economy, providing a solid base for the change from manufacturing model to service model.

Running head: IMPLICATIONS FOR MANAGEMENT ACCOUNTING
IMPLICATIONS FOR MANAGEMENT ACCOUNTING
Name of the Student
Name of the University
Author Note

1IMPLICATIONS FOR MANAGEMENT ACCOUNTING
The service industry n our economy has reached to a new height. The developed
countries have already shifted their primary industry to the service sector. The process
remains the same for the developing countries where the weight age of importance is being
changed gradually to the service sector. The growing number of resorts and hotels, a primary
contributor to the service sector has brought about new challenges in the field of accounting.
The boost in the field of digitalization and technology has lead to the further advancement of
the service sector. In spite of such advancements, the focus of Management Accounting as a
discipline, which deals with critical accounting information for the decision making of the
business, still maintains its original principles and primarily focuses on the manufacturing
firms (Tandfonline.com 2017). Services are still being referred to as special products. With
reference to decision-making based on Management Accounting, the service sector has been
undermined.
This essay aims to highlight the difference between goods and services as stated by
Management accounting principles. It is then followed by the potential role of Management
accounting in a service environment and the changes with reference to traditional
manufacturing organizations.
The difference between goods and services can be made on four different dimensions
based on the IHIP characteristics as proposed by Shostack in his study. Using these basic four
characteristics, the difference between a service and a good can be understood. The first
characteristic is Intangibility, which concentrates on the immaterial dimension of a service,
which means a service is untouchable. The second is Heterogeneity, which means the
uniqueness of a service (Ward 2012). Each service is unique and hence it is difficult to
compare them. The success of a service largely depends on the performance of the staff and
customer expectation. The next dimension is Inseparability, which relates to the availability
of a customer during the procedure of delivery of the service. The last dimension is the

2IMPLICATIONS FOR MANAGEMENT ACCOUNTING
Perishability aspect, which deals with the opportunity costs concerned to the resources, which
are idle when the service is not being provided.
It is based on these approaches that, the services present outputs containing certain
features, which are to be dealt with in accounting terms by Management Accounting systems.
It is to be noted that the traceability of costs to products deems to be a critical problem in the
service industries. The simultaneous actions of production and consumption by the customer
with the unavailability of inventories makes the accounting for inventory evaluation baseless
(Joshi 2013). However, some experts argue that management accounting will be much
simpler in the absence of work in progress and stocks.
Secondly, since most of the services deal with serving of customers. The overhead
costs and labor costs incurred by the firms result from the assistance provided to the
customers. These related costs are often dealt as selling and administration expenses rather
than being treated otherwise. The cost structure in the service industry would be called
overheads and this makes it difficult to separate these costs in their variable and fixed
components (Mok, Sparks and Kadampully 2013). Another important implication for
management accounting is that the customer involvement in a service makes the planning and
management less powerful as customer behaviour is difficult to predict.
Management accounting is based on certain principles and practices. Management
accountants tend to rely on analogy and causality as their basic principles.
The causality principle states that the relationship between the objective`s quantitative
input and output quantities must be consumed in case the output has to be achieved. This
input and output of the production of goods. Where there are strong causal relationships. This
principle is mainly based on the production aspect of an organization and not on the service
aspect where the input involves the participation of both the service provider as well as

3IMPLICATIONS FOR MANAGEMENT ACCOUNTING
output, which is based on the satisfaction of the consumer (Hong et al. 2013). The analogy
principle states that the causal relationships, which have been defined previously, can be used
to analyze the previous outcomes and predict the future outcomes.
Five factors can be identified that can have implications on management accounting
with the rise in services. These factors are the intangibility of the service, the Presence of
customer during the service, the heterogeneity of performance of the service personnel and
customer expectations, the simultaneous production of service production and consumption
and the perishability of the service (Awerbuch and Preston 2012).
From an accounting perspective, the service business varies from that of a
manufacturing busy less in the sense that the output is difficult to measure, all costs are
period costs and the service industry is a labor intensive.
Next, we shall discuss the process of servitization and the evolution in the concept of
service with the perspective of its implications for Management Accounting. Many experts
have stated that organizations must start concentrating on the looking at the whole system
from the eyes of customer and start integrating services their product offerings. The rationale
given by those experts is that first, from an economic point of view although substantial
revenue can be raised from the products, however the margin for service offerings is much
more. The second argument in factor of this statement states that customers want services
more than products these days and lastly while introducing the term-`servitization` in the late
1980s, Vandermerwe and Rada stated that opting services helps to block out competitors as it
helps in avoiding price competition and related barriers (Cmawebline.org 2017) . It also helps
to induce customers to raise the costs of substitution and also helps in increasing
differentiation, as services are relative and depends on both the customer as well as the
provider.

4IMPLICATIONS FOR MANAGEMENT ACCOUNTING
Various term have been produced in the literature relating to service strategy in
production. A learned scholar Neely, defined `servitization` as involving the renovation and
innovation of the organization`s abilities to create equal mutual vale through a shift room
selling just products to selling product-service systems (PSS). According to the expert, there
are five kinds of PSS systems (Cugini, Carù and Zerbini 2007). They are `integration oriented
product service systems` where the services are added downstream by through vertical
integration. Then next in line is the `product oriented product service system` where the
product is transferred to the consumer but additional services like installation implementation
and maintenance services are provided to the user. In `service oriented product service
systems`, the service is incorporated in the product itself. The fourth one is the `use oriented
product service system`s where the ownership of the product remains with the provider but
only the service is transferred to the user. Lastly `result oriented product service systems`
tend to aim to replace the product with a service which changes the need for the product or
certainly a product owned by the individual (Cinquini and Tenucci 2016).
Research on the economic aspect of servitization is often referred as to the service
paradox where there exists a certain level of difficulty to gain the expected returns from the
services (Kerr 2008). While servitization tends to help a firm gain more revenue, the same is
not the case for the profits. The servitized firms tend to have higher labor costs, net assets and
working capital.
The service dominant logic emerged as a key concept of marketing with time as the
organizations started realizing the importance of services. The service dominant logic can be
defined as a theoretical framework for explaining the creation of value with exchange among
the actor`s configuration (Laine, Paranko and Suomala 2012). The main idea behind the S-D
logic is that people often apply their skills to benefit others and they benefit from others skills
through a medium of service exchange.

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Hence, Services became the general concept and the common ingredient of an
exchange process. The belief is that service is traded with goods and this supports the
procedure of service delivery. It can be said that service is a new concept and a shift in these
concepts involve relevant alterations and new related questions for deciding making in
business and also changes are required in the informative function which is provided by the
Management Accounting system. They are the consequence the services have on the
particular accounting information which makes it relevant for decision making, how is the
value created to be measured to what extent are the results and effects of management and
control of business of the shift to a service centric logic, providing a solid base for the change
from manufacturing model to service model (Modell 1996).
Therefore from the discussion it can be stated that more than 50% of the organizations
have adopted to a service based approach and that as accounting is an integral part of any
business organization, the principles of management accounting need to be made relevant to
that of the service based functions or activities. While accounting for management, several
decisions need to be taken from the result and hence variance of the principles of accounting
resulting from its production orientation can lead to wrong decisions. Hence, the principle is
being modified to suit the needs of the services. These concepts and rules relating to
management accounting need to be altered to suit the need of the hour.

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