The usefulness of management

AcF213: Management Accounting for Business Decisions

Ana Seco Library card no.: 32754051

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AcF213 Management Accounting for Business decisions- Ana Seco

Introduction Businesses operate in an increasingly uncertain and competitive environment influenced by huge technological and social changes, globalization and environmental issues. A useful management accounting system has to bear this in mind in order to provide relevant information to increase business value. The emphasis of this essay will be on the changing roles of management accountants and how these changes, if successfully implemented, can enhance the usefulness of the information provided in the context of modern business environment. The first source consists of a historical background of management accounting and its critiques, and the following sources address the changes and developments of management accountancy that have occurred in recent years. The sources include two books, an academic journal, a newspaper article and a webpage. I decided to present them in chronological order, to illustrate the evolution of management accounting issues throughout the years.

Relevance Lost: The Rise and Fall of Management Accounting (Johnson & Kapland, 1987) This book explores the evolution of management accounting in American businesses, and makes a critique of the old-fashioned system used by organizations. Johnson and Kaplan (1987) show the importance for businesses to adapt to a rapidly changing business environment. Although accounting reports were already used thousands of years ago, it was at the beginning of the 19th century when the demand for management accounting services started to become popular, due to the emergence of new organizations influenced by the Industrial Revolution. First, the services were very simple but advances in transport and communication by the middle of the 19th century called for more developed accounting systems to coordinate increasingly varied activities. Technological advances, in the last two decades of the 19th century, also improved efficiency of the systems. The latest innovation was however carried forward in the early 20th century, when accounting tools such as return on investment (ROI) were created. By 1925 all the management accounting practices used in 1987 had already been developed. The lack of innovation and low relevance in management accounting since 1925, was extremely criticized, as the diversity of products in organizations and the complexity of manufacturing processes had increased considerably at the end of the century. Changes in modern organizations were demanded in order to adapt to the technological and competitive environment, for example in the way they manage costs. This source provides a useful background on management accountancy and introduces the challenges for the modern businesses, that must develop new accounting practices in addition to the traditional ones for maintaining a competitive advantage.

AcF213 Management Accounting for business decisions- Ana Seco

Introduction to management accounting (Atrill & McLaney, 1999) The authors discuss the changing roles of management accountants, as the environment in which businesses operate has become increasingly turbulent and competitive (Atrill, P. & McLaney, E., 1999: 13). To succeed, companies must adapt to technological advance, more demanding customers and a global economy, by becoming more customer oriented and also by reducing costs. In the past, management accounting mainly provided information that came from within the company. Peter and McLaney argue that for this information to be useful, it should be more outward looking. Although traditional roles of management accountants- developing strategies, control, allocation of resources and determination of costs- are important, new roles involve a higher participation in the management decisions, and not focusing only in the financial information but also in the management reporting. Technology is seen as a very helpful tool, as it makes the production of reports and measurement systems a lot easier and quicker, allowing manager accountants to focus on new processes that did not make part of their old function. This explanation shows how the usefulness of management accounting depends on the establishment of new management accounting roles, without which the information provided would be practically irrelevant for business decisions. I will address this topic as well when commenting on the other sources.

Connecting Management Accountants Changing Roles, Competencies and Personalities into the Wider Managerial Discussion- A Longitudinal Case Evidence from the Modern Business Environment (Jrvenp, 2001) Jrvenps (2001) main argument is the increasing business orientation of management accountants. This refers to a change in their roles, from a traditional focus in reporting and consulting- a supporting role- to a more creative role. As in the previous source, managers are regarded as members of a management team; their involvement in decision-making is higher than it used to be. According to the journal, management accounting is useful in a modern business environment due to the new techniques such as the ABC method of costing and the balance scorecard, the new accounting information systems (new databases, ERP systems) and also due to the innovative human dimension of accounting. This dimension includes a higher participation, communicative skills and customer driven management. In order to adapt to the new challenges they face, management accountants have to develop some competencies: productive (technical), normative, innovative, emotional-moral and inter-personal (Mintzberg, 1994). The first two are more related with the traditional role and the last ones with the modern role. Philanto (1995) describes two types of management accountants, the instrumentally oriented, who focus on technical information (traditional role) and the participation oriented, who is more proactive and communicative (modern role). He states that a mix of the two roles is essential.

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AcF213 Management Accounting for Business decisions- Ana Seco

The idea presented in this paper is similar to the one Atrill and McLaney defended, as they both agree on the necessity of a management accountant with more varied skills and who actively supports the management of a company. Jrvenp argues that management accounting is also useful due to the existence of the new techniques and information systems.

Working in management accountancy: Finance skills still trump MBA (Financial Times, 2009) This article revolves again around the roles of management accountants, emphasizing the positive effect of new technologies on them and the relevance of the financial function within a business environment. A decade ago it was broadly believed that the management accounting activities would change completely, decentralize or eventually even disappear. According to the article, technology made it possible for these activities to evolve, transforming the role of management accountants, which is now more flexible and useful. The increasing importance of the involvement of accountants in the general strategy of the company and decision-making is also an important point in the article. Management accountants are more influential, with roles that include advising and support, management of risk, cost reduction, creation of value, long-term planning and else, environmental and governance issues. This is very different from the traditional view of cost and work accountants, as new skills are required, principally business skills. Yet again, a combination of technical and business skills (traditional and modern) is a requirement for a successful business strategy. According to Charles Tilley, CEO of the Chartered Institute of Management Accountancy, management accounting is nowadays a very useful field within the industry as it is related with virtually everything that occurs in a business. The relevance of this article in my opinion consists of the importance the author gives to technology, as the tool that preserved management accountancy from disappearing or losing its importance. Furthermore, it agrees with previous viewpoints of the increased involvement of accountants in decision-making.

How does your business earn money? (Tilley, 2011) Business leaders today need to achieve success in the face of fierce global competitive pressure and uncertainty (Tilley, 2011: 1). This required change in leadership and the concern of sustainability are the main concepts discussed in this article. Therefore, the main interest of management accountants is long-term sustainable success, which can be reached with a well-planned strategy and business model. Social and technological development, globalization and environmental issues are the biggest challenges faced in the last decade; the activities of accountants should adapt to them. Sustainability is viewed as a straightforward way of improving business

The usefulness of management

performance, which increases the competitive advantage of a company. Management accountants are in charge of measuring sustainability, in order to demonstrate how it consistently drives business value, helping senior managers to commit to it in a permanent way. To do this they must make use of their communication skills and experience backed up with financial information. This article introduces and highlights the concept of the natural environment and its relationship with the change in management accounting systems. The sustainability is one of the most recent problems that our economy faces, so it makes sense that we refer to it by giving it the same relevance as other traditional accounting issues.

Conclusion This report starts with an overview of the history of management accountancy and its critique, which serves as an introduction to the challenges faced in the modern business environment. In the following sources we can see that the way to overcome these challenges is mainly by introducing changes in the management accounting systems. Traditionally, the roles of management accountants consisted essentially on the provision of technical information to managers, focusing on the business in question alone. New roles have widened, becoming more creative, as management accountants are increasingly involved in the process of decision-making. This adaptation assures the usefulness of management accounting information. Furthermore, management accounting information is still useful thanks to the technological developments, new techniques and information systems that have been developed in the last decades. In conclusion of my findings, management accounting will continue to be useful as long as companies keep adapting to the ever-changing business environment and training its employees in a way that they are ready to overcome the challenges that they will inevitably face.

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AcF213 Management Accounting for Business decisions- Ana Seco

REFERENCES Atrill, P. & McLaney, E. (1999) Management Accounting for Non-specialists, 2nd Edition, UK: Prentice-Hall. Drury, C. (1998) Costing: An Introduction, 4th Edition, London, UK: Chapman & Hall. The Financial Times Limited (2009) Working in management accountancy: Finance skills still trump MBA, Financial Times, 24/09/2009. Jrvenp, M. (2001) Connecting the management accountants changing roles, competencies and personalities into the wider managerial discussion a longitudinal case evidence from modern business environment The Finnish Journal of Business Economics, 4/2001, 431-458. Johnson, Thomas H. & Kaplan, Robert S. (1987) Relevance Lost: The Rise and Fall of Management Accounting, Boston, Massachusetts: Harvard Business School Press. Mintzberg, H. (1994) Rounding out the Managers Job Sloan Management Review, 36(1), 11-26 Philanto, P. (1995) Vlinejohtaja ja osallistuva johtaja: erilaiset informaation kytn profiilit, Publications of the Turku School of Economics and Business Administration, Series A9:1995. Tilley, C. (2011) How does your business earn money? CIMA, http://www.moneycontrol.com/news/business/how-does-your-business-earnmoney_621091.html [Accessed 27/11/2011].