MANAGEMENT

ACCOUNTING

THE EVOLUTION OF
MANAGEMENT ACCOUNTING
PRACTICE
 ROLE OF
MANAGEMENT ACCOUNTING
 The purpose of management accounting in the
organization is to support competitive decision making by
collecting, processing, and communicating information that
helps management plan, control, and evaluate business
processes and company strategy.
 The interesting thing about management accounting is
that it is rare to find an individual within a company with the
title of “management accountant.”
 Often many individuals function as accountants within the
organization, but these individuals typically operate as
financial accountants, costs accountants, tax accountants,
or internal auditors.
THE EVOLUTION OF MANAGEMENT
ACCOUNTING PRACTICE
THE EVOLUTION OF MANAGEMENT
ACCOUNTING PRACTICE
 CHANGING ROLE OF
MANAGEMENT ACCOUNTING
 Stage 1 – prior of 1950, the focus was on cost
determination and financial control, through the use
of budgeting and cost accounting technologies.

 Stage 2 – By 1965, the focus had shifted to the

provision of information for management planning
and control, through the use of such technologies as
decision analysis and responsibility accounting.
 CHANGING ROLE OF
MANAGEMENT ACCOUNTING

 Stage 3 – By 1985, attention was focused on the

reduction of waste in resources used in business
processes, through the use of process analysis and
cost management technologies.

 Stage 4 – Beyond the mid 1980, attention had

shifted to the generation or creation of value through
the effective use of resources, through the use of
technologies, which examines the drivers of
customer value, shareholder value and
organizational innovation (IFAC, 1998, para 7)
 STAGE 1: COST DETERMINATION
AND FINANCIAL CONTROL

 IFAC referred to this period of the evolution in

management accounting as a period of “technical”
activity for the pursuit of organizational objectives.

 Early 20th century, planning and control tools such as

standard costing and variance reporting were introduced
as part of the management accounting function.

 Standard costing formed as integral part of production

planning.

 Variance analysis was used for cost control.

 STAGE 1: COST DETERMINATION
AND FINANCIAL CONTROL

 Business budgeting was founded on the principles of

governmental budgeting procedures used in England and
the US.

 The different to standard costing, a budgetary control

system involves all the functions and departments in an
organization.

 The final development was the provision of cost

information for decision making. The classification of
fixed and variable elements for improving the planning
and control in short term decision making.
 STAGE 2: TRANSITION TO
MANAGEMENT ACCOUNTING

A shift from cost accounting to management

accounting, which involved a shift from technical-
focused activities to managerial-centred
responsibilities.
 Managerial centred responsibilities relied mostly on
the provision of information for more effective
planning and control decisions.
 Responsibility centres and responsibility accounting
were developed, such as divisional transfer pricing
and long term planning and control decision.
 STAGE 2: TRANSITION TO
MANAGEMENT ACCOUNTING

 Capital budgeting techniques was developed in this

stage which focused on accounting measures such as
payback period and return on investment (ROI).

 With the development of time value money concept,

the discounted cash flow (DCF) methods, such as net
present value (NPV) and internal rate of return
(IRR) were introduced for evaluating long term
decision making.
STAGE 3: JAPANESE INFLUENCE AND TRANSITION TO
STRATEGIC MANAGEMENT ACCOUNTING

 In 1985, the management accounting focus on

information provision (stage 2) was revised in IFAC
stage 3 & 4.
 Key focus in stage 3 was reduction of waste in
resources used in business processes using the
process analysis and cost management technologies.
 This development was promoted by Japanese
industries that adopted quality as their competitive
tool.
 STAGE 3: JAPANESE INFLUENCE AND
TRANSITION TO STRATEGIC MANAGEMENT
ACCOUNTING

 Formed the new concept of strategic management

accounting (SMA).

 The Japanese organizations who dominated the world in

quality management during the period focused on three
fundamental developments that changed production
methods to meet consumer demands such as just in time
inventory system (JIT), total quality control and
computer-integrated manufacturing (CIM) systems.

 Introduction of target costing and cost reduction

exercises.
 STAGE 4: WIDESPREARD USE OF SMA
PRACTICES
 Concerned with the effective use of organizational
resources for value creation.

 Involved supporting strategies positioning and

developing or adapting the management strategies for
organizational success and survival.

 Influence
by value-based management and quality
management practices.

 Adoption of innovative strategies that emphasize

external organizational factors such as global
competition.
 STAGE 4: WIDESPREARD USE OF SMA
PRACTICES

 The types of SMA techniques influenced by external

factors include life cycle costing, benchmarking,
supply chain management and strategic quality
management initiatives.

 The types of SMA techniques influenced by internal

factors include value chain management. Theory of
constraints, process management, activity based
management and the development of an integrated
or balanced performance measurement system.
 IMPACT OF IT ON
MANAGEMENT ACCOUNTING

 The development of new management practices

such as JIT (Just in Time) and total quality control
led to increased use of digital computer production
technology.

 Computer integrated technology enabled greater

manufacturing flexibility with improved quality and
reliability.
IMA’S STATEMENT OF ETHICAL
PROFESSIONAL PRACTICE
COMPETENCE
CONFIDENTIALITY
 INTEGRITY

CONFLICT
OF
INTEREST

 INTEGRITY
SUPPORTING
ANY ACTIVITY
THAT MIGHT
DISCREDIT

ENGAGING IN
ANY CONDUCT
THAT WOULD
PREJUDICE
DUTIES
ETHICALLY