Importance of Modern Management Accounting Practices in Modern Business Organizations

All organizations have to make decisions on a day to day basis as well make decisions regarding the future and how to survive and grow in a dynamic market place with ever increasing uncertain circumstances. Traditional or modern management accounting system provides relevant information to all levels of management, financial and other information to make decisions regarding planning, control of operations and identifying opportunities to add value.

In essence, Management accounting is an important factor, which gives internal managers sufficient and relevant information in time and set targets, monitor performance and systematically improve the efficiency and effectiveness of the organization in meeting its objectives consistently, as well adds value by creating operations and processes within the organization. 

The modern management accounting practices are  essentially different from that of traditional management accounting because they enable managers to make sound decisions to minimize cost as well in the same time add value to the products and services by improving the quality of products, which is required by the customers, and reduce waste. In addition, the modern management accounting systems enable the organization as whole to improve the innovative capacity of the organization and flexibility so that it can continually change and improve performance financially as well  in its non financial areas of performance.

Different Types of Modern Management Accounting Methods

There are well recognized modern management accounting practices, which are well established in many modern organizations. The most important of these methods are as follows:

1. Business Process Re-engineering
2. Total quality Management or (TQM)
3. Just-in-time production and  back flush accounting
4. Target costing method
5. Six sigma
6. Balanced score card or (BSC)
7. Activity Based Costing as opposed to traditional costing systems
8. Incremental and Zero-Based budgeting methods
9. Transfer Pricing and sectoral performance measurement systems
10. Throughput Accounting

Some of these methods are entirely different methods and not compatible methods. However, some of these methods are supplementary in nature. For example, Business process Re-engineering is compatible with Total Quality Management  and Just-In-Time Operations methods even though they have their differences. Most of the other modern management Accounting practices are very different to each other because of their orientation, emphasis and the issues they address within the organization.

Definition of Modern Management Accounting Methods and their analytical models

Business Process Re-Engineering

In management Business Process Re-engineering is aimed at holistically improving the organization by increasing the business efficiency in production and the effectiveness of primary and support activities which exist within and outside organization. The most important rule of Business process Re-engineering is that the organization should view its business processes from scratch and not build new process on existing models. This is important in order to create most appropriate production and business conduction.

Total Quality Management Practices

The important aspects of Total Quality Management Practices are as follows:

• Customer Driven quality of products and services
• Top management leadership
• Continuous improvement in production and other processes
• Fast response to the point of product design to production and shipment
• Action based on facts
• Employee Participation

Most of all to have quality is considered essential by all staff and managers in the organization. That is, to have a Total Quality Management culture in the organization.

Just-In-Time Production and Back Flush Accounting

In Just-In-Time Production is a method of production which is based on the customers orders. After the orders,  the raw materials are ordered from reputable suppliers with appropriate quality assessed by the producer and delivered to customers by having reputable supply chains. In this manner, it avoids to keep inventories or very low levels of inventory.  In this manner, it has little inventories and finished goods and work-in- progress there fore eliminating many cost or avoidable cost, there fore improve the response to customer demand and with appropriate quality demanded by customers. This process reduce waste and focus on value adding operations and streamlining  production and other processes within the organization. The back flush accounting enable when this production system is adopted in an organization to record transactions at a particular point in time and reduce the number of accounting processes, tracing and controls there by increasing the efficiency and the quality and relevance of accounting information to enable to identify weaknesses and eliminate them in time.

Target Costing Method

In traditional pricing methods mostly a firm determines its cost of products and services. Then it, tries to base its pricing based on the cost and the determination of the profit margin. This has a definite disadvantage because it may lead the management to cut costs but may add value which is not valued by the customers in terms of quality matrix. That is, it may invest in activities and processes that may not be valued by the customers or customer groups. In a Target costing method the first process is to determine the ability and the willingness to pay for the products by various methods and then align the production in such a manner that will only add value which is valued by the customers. In this way, the firms managers are induced to identify firms operations and processes in a continuous manner to review the prices the customers pay for the quality and add value in a cost effective manner, reduce waste and there fore also contribute to other social benefits as well. This is certainly a new costing and operational management method with appropriate management information from the price and link the decision making process to add value, valued by customers. That is, it is radically different from traditional methods of cost cutting and quality enhancement but neglects to add value which is valued by customers and may include non-value adding processes within an organization.

Six Sigma

This is basically is a statistical technique of quality control and basically concentrates to minimize defects in a product and improve quality based on team work processes and the use of statistical information about defects and a standard set for the defect targets and tries to improve the target and implement processes to achieve these targets by completely improving production processes, technology applications, work logistics and work practices to reduce waste and improve precision in the products produced as well reduce defects to a very minimum which progress towards zero defects.

Balanced Scorecard Or (BSC)

In traditional management accounting practices the managers base their decsion based on mostly on financial information. As well, the management concentrates mostly on financial objectives and successfully achieving these objectives. In this process, they do not measure non-financial performances, which may have a consider bale impact on financial performance and innovative capability and adaptability of the organization. These performance measures, may influence change in a shorter period to meet ever changing customer requirements in a dynamic market place. In Balance Score card management system,  the objectives is not only measured in financial terms but also in non-financial terms in terms of customer performance, production performance, measures of organizations learning and creative potential performance indicators because they all are interrelated.  There fore to improve performance in non-financial measures and also in financial measures has the greater potential for the firm to become more innovative and also adaptable so that in has the capacity to improve quality and meet customer requirements consistently. As well, they have the potential to reduce waste and there fore reduce costs as well as improve value adding processes and products to survive and grow in the short as well as in the long term.

Activity Based Costing Method as opposed to traditional costing methods

Traditional costing methods apply overheads fixed and variable overheads only applyting one cost driver. Mostly based on direct labor hours or or machine hours or on volume basis of the overhead applicable to each product or services they produce. However, in activity cost methods overhead are allocates depending on the activities consumed and the cost drivers are more than one. That is, activity based costing methods are more accurate costing methods than traditional costing methods. However they are more expensive than traditional costing methods. As well, activity costing methods enable managers to make decisions based on accurate financial information and there fore they can reduce costs as well make product mix and volume decisions which can optimize profit and allocate scarce resources to improve profitability and efficiency of operations. In addition, it also enable them to value add in such a way that enhances the profitability of an organization on consistent basis. The benefit of implementing such costing system and success depends on the nature of operations of the business, size of organization, the necessary skills of managers to effectively manage change and provide training to staff and most importantly, the system is valued by the top management and have enough support so that adequate resources are allocated to implement such a system.

Incremental and Zero Based Budgeting Methods.

Budgeting in management accounting is an important method for planning and controlling the operations of the business so that it can set achievable but challenging objectives and set strategic, operational and tactical planning to have flexibility to achive these objectives on a consistent manner and review its plans make appropriate adjustments and also review activities so that the organization consistently based on facts, improve its efficiency and value adding capacity in the medium to long -term. incremental budgeting is method based on the existing methods and make appropriate adjustments to make the budget for the next period or for the periods the budgets are designed. They have built in weakness because they assume the existing budget is a reflection of the optimal picture the organization can be at a particular time. This makes the managers to not concentrate on the weaknesses of the organization and to review all processes and functions to re-engineer from the scratch and ask questions whether the activities and processes are most cost effective and have the maximum value adding capacity. Zero Based budgeting is a method not based on the existing budget but it is a budget which asks fundamental questions and review radically all processes and functions and identify weaknesses and design appropriate solutions, which are cost effective and also reduce waste and value add operations. However, Zero Base budgeting is not feasible if it cannot or information is not available to embark on such a radical overhaul of operations. In reality in many organization incremental and Zero Based management budgeting practices are the norm than exceptions.

Transfer Pricing and sectoral Management Systems

The transfer pricing method is setting a price when goods are transferred within the organization so that it can measure sectoral performances and reward management when they meet a coherent organizational goal. As well, it is a reward system based on sectoral performance within an organization. However it also has the potential to sub optimize sectoral performance at the expense of overall organizational goals. As well, it may also increase conflict between different departments and there fore reduce the efficiency of organization as a whole. This is practiced in organizations, which has subsidiaries and other associated companies such as in multinational and Trans national organizations, which has more decentralized decision making systems. The transfer pricing also has problem of addressing tax issues and other legal issues because the transfer pricing can be a vehicle for tax minimization and it can create legal and other issues for the organization. As mentioned above, transfer pricing is a complex issue and its costs and benefits depends on many factors. However, if the transfer pricing is reasonable and it reflects arms length prices and they are negotiated between managers on a rational basis that maximizes the overall organizational objectives in the same time improving the sectoral contribution to the overall organization, then it is a valuable management accounting methods to measure sectoral performances and rewarding mechanism of an organization.

Throughput Accounting

The throughput accounting is also similar to Target costing as it intends to reduce cost but it also concentrates not reducing labor cost and efficiency like other costing and management accounting system but it also considers value adding and waste reduction and customer performance enhancement by proving goods and services at the proces they can prepared to pay for the quality they require. In modern organization labor cost is becoming more fixed and other costs has a greater potential to be controlled and they have the potential to improve quality as well value add rather then only controlling labor cost in the traditional costing and management accounting practices.

Conclusion

As discussed above, the modern management accounting practices address issues relevant to modern organizational management issues as well rectify and reform the traditional management accounting practices to make the management information system to enable management to make decisions and specialized decisions based on relevant financial and non-financial information depending on the nature of activities, size, external circumstances and market conditions, customer profiles, organizational human resource issues, structural issues. It can have a strategic management accounting perspective rather than only on cost reduction methods but neglects value adding and waste reduction and quality improvement, which is vital in a dynamic and uncertain market environment. It is also important to note that as discussed above, even the modern management accounting is not supplementary but can be totally different. As well, some are more suitable to some organizations and some are not, given the internal management practices, size of organizations, top management support, human resource practices. organizational structural issues, employee motivational factors, centralization decentralization issues. In other words, before considering to implement modern management accounting practices the management must have a feasibility study considering the above issues and evaluate the cost and benefit of the systems in financial and non-financial terms. Other wise the benefits are applied  without through evaluation and commitment by top management, there fore the benefits of these practices will not be realized fully. If care fully considered based on enough facts and not on emotions, then the modern management accounting with other strategies will certainly helpful for management to make sound decisions and there fore contribute to the success of the organization than the traditional management accounting practices.