Contemporary Management Accounting (part 1)


The economic environment has forced many firms to develop more relevant management accounting in practices. Many manufacturers have to change their way in doing businesses. These changes not only create a new environment for management accounting to do with many aspects but the focus of management accounting systems has been broadened to enable managers to bring better serve the needs of customers and keep managing the firm’s value chain. To secure and maintain a competitive advantage, managers must emphasize on time, quality and efficiency. Accounting information must be used to support the organizational goals. The factors that are bringing these changes on a traditional cost accounting to become a contemporary management accounting as follow

1. Activity Based Management (ABM)
It is a systemwide, integrated approach that focuses management’s attention on activities with the objective of improving customer value and the resulting profit. The demand for more accurate and relevant management accounting information has led to the development of activity based management.

Activity Based Management (ABM) or Activity Based Costing (ABC) improves the accuracy of assigning costs by first tracing costs to activities and then to products or customers that consume these activities. Process value analysis is talking about emphasis activity analysis, trying to determine why activities are performed and how well they are performed. The objective is to find ways to perform necessary activities more efficiently and to eliminate those that do not create customer value. Traditional cost accounting does not record the cost of nonproducing in manufacturing such as

a. The cost of faulty quality
b. The cost of a machine being out of order
c. The cost needed parts not being on hand

These unrecorded and uncontrolled costs in some plants run as high as the traditional accounting cost does record. A new method of cost accounting called “ACTIVITY BASED” accounting records all costs. The transition from traditional management accounting to activity based management accounting not instantaneous. Time is required for firms to adopt new procedures.

2. Customer Orientation
Activity Based Management (ABM) has the objective of increasing customer value by managing activities. Most of firms are focusing on creating a competitive advantage by creating better customer value for the same cost or with lower cost than that of competitors.

Custormer value is the difference between what a customer receives in realization and what the customer gives up or sacrifice. What is customer received is called The Total Product, so the total product is the complete range of tangible and intangible benefits that a customer receives from the product what he or she purchased. Customer realization includes product features, service and after sales service, quality of a product, instruction for users, product reputation and brand name, other factors deemed important to customers.

Customer sacrifice includes the cost of purchasing the product, delivery time and any other effort to acquire and learn about how to use the product or services. The cost of using, maintaining and disposing of the product called Postpurchase Costs.

Increasing customer value means increasing customer realization or decreasing customer sacrifice or both.

To create a sustainable competitive advantage, a firm must select and decide upon several strategies which to be used. Cost information called STRATEGIC COST MANAGEMENT plays a critical role in this process because the use of cost data to develop and identify strategies to produce a sustainable competitive advantage. There are two strategies in strategic cost management which often be used by many firms.

I. Cost Leadership
The effective of the cost leadership strategy is to provide the same or better value to customers at a lower cost then competitors, to increase customer value by reducing sacrifice such as reducing the cost of making a product by improving a process will reduce the product’s selling price, this effort will reduce customer sarifice.

II. Superior product through differentiation
A differentiation strategy to increase customer value by increasing realization will provide customers with something which not provided by competitors. After sales service for a computer with on-site repair service is a kind of differentiation strategy. The firm must ensure that the value added to the customer by differentiation strategy exceeds the firm’s cost of providing the differentiation. Each differentiation strategies require different cost information, according to the strategy adopted by a firm.

Concern with customer orientation or focus on customer value means the management accounting system should produce information about customer realization and customer sacrifice. Collecting information about customer sacrifice means gathering information outside the firm, a practice not usually found within traditional management accounting system. Successful pursuit of cost leadership or differentiation strategies requires of a firm’s internal and industrial value chain.

Effective management of the value chain is very important to increase customer value especially if a goal of the firm is maximizing customer realization at the lowest possible cost.

Value chain is a set of activities required to
* Design
* Develop
* Produce
* Market and deliver products or services to customer

Emphasizing customer value forces managers to determine which activities in the value chain is important to customers. Management accounting system should track information about a wide variety of activities that span the value chain. Timely delivery of a product or service is part of the total product, so it has a value to the customer. By increasing the speed of delivery can increase customer value. It means that a good response of accounting management system ought to be developed and use to measure a customer satisfaction.

The industrial value chain is critical for strategic cost management. The industrial value chain is the linked set of value, creating activities from basic raw materials to the disposal of the final product by end-use customers.

A firm operating within the industry may not span the entire value chain. Different firms have to participate in different segments of the chain. Breaking down a firm’s value chain into its strategically important activities is a basic to successful implementation of cost leadership and differentiation strategies. Fundamental to a value chain framework is the complex linkages and interrelationships among activities. There are two type of linkages.

I. Internal linkages
Are relationships among activities that are performed within a firm’s portion of the industrial value chain or internal value chain.

II. External linkages
Are activity relationships between the firm and firm’s suppliers and customers.

These linkages bring about win-win outcome for the firm, suppliers and customers. Managing the material flow beginning with suppliers and their upstream suppliers, moving to the transformation of materials into finished goods and finishing with the distribution of finished goods to customers and their downstream customers, called SUPPLY CHAIN MANAGEMENT.

Undestanding the industrial value chain, suppliers and customers may reveal hidden benefits. The firm’s objective is to manage these linkages better than its competitors to create a competitive advantage.

The companies have internal customer too. The support of staff function to serve the line function such as the procurement department process acquires and delivers materials and parts to producing department is just as vital as it is for a company to provide high quality goods to external customers.

3. Cross Functional Perspective
Emphasis on the value chain means the management accountant must understand functions of the business, from marketing distribution to customer service. This need is magnified when the company is involved in international trade. Contemporary management accounting has moved beyond the traditional manufacturing cost definition of product cost to more inclusive definitions. In contemporary approaches, the product costing include
a. Initial design and engineering costs as well as manufacturing     costs.
b. The costs of distribution, sales and service.

Concerning with determining which information is relevant to use for decision making process. Strategic decisions require a product cost of all value chain activities, whereas a short run decision that is occurred with a special order should be accepted or rejected.

When a value chain approach is taken and customer value is emphasized, we see that these disciplines are interrelated. Many manufacturing encourage wholesalers and retailers to buy more product than they can quickly resell by offering huge discounts. As a result, inventory become bloated and the wholesalers and retailers stop purchasing for a time. When selling activity stops, so does production. As a result the factories were idle and workers were laid off. In effect, the sales were costing the companies with more amount of production cost as additional. By using this cross functional perspective, we see the forest, not just one or two of the trees. This broader vision allows managers to increase quality, reduce the time required to serve internal and external customers and improve efficiency.

4. Global Competition and E-Business
Several decades ago, firms did not care about what similar firms in Japan, Taiwan, Korea, China were making. These foreign firms were not competitors since the markets were separated by large geographic distances. However vastly improved transport action and communications have led to a global market for many manufacturing and service firms. Modernizations in transportation and communication have led to increased global competition. Cars made in Japan can be in United States in two weeks. Investment bankers and management consultants can communicate with foreign offices instantly. Because of these intense competitive pressures, the cost of making bad decisions based on low quality information has increased significantly. Thus, global competition has created a demand for improved management accounting information.

Many firms has forced to know and use of electronic business called “ e – business “ in doing their transaction or information exchange. E-business provides opportunities for a company to expand their sales throughout the world and lower costs significantly relative to paper based transactions. It also facilities the value chain to management, however management accountants need to understand the benefit and risks of e-business as well as its opportunities. The e-business plays a vital role in providing relevant cost information. Managers may need to know the cost per electronic transaction versus the cost per paper transaction.

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