CIA 3004

Seminar Management Accounting

TOPIC 1
Evolution of Management
Accounting
Outline
Definition of Management Accounting
Scope of Management Accounting
Changes in the Business Environment
Evolution of Management Accounting
Criticisms of Traditional Management
Accounting

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Definition of Management
Accounting
 Managerial accounting is an integral part of the
management process. It is the process of
identifying, measuring, analyzing, interpreting, and
communicating information in pursuit an
organization’s goals.

 National Association of Accountants (NAA) (1981):

"Management accounting is the process of
identification, measurement, accumulation, analysis,
preparation, interpretation, and communication of
financial information used by management to plan,
evaluate, and control within an organization and to
assure appropriate use of and accountability for its
resources. 3
Definition of Management
Accounting
 New definition issued by Institute of
Management Accountants (IMA) in 2008:
“Management accounting is a profession that
involves partnering in management decision
making, devising planning and performance
management systems, and providing
expertise in financial reporting and control to
assist management in the formulation and
implementation of an organization’s strategy.”

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Scope of Management
Accounting
The American Institute of Certified Public
Accountants (AICPA) states the 3 scope of
management accounting:
 Strategic management - advancing the role of the
management accountant as a strategic partner in
the organization.
 Performance management - developing the
practice of business decision-making and
managing the performance of the organization.
 Risk management - contributing to frameworks
and practices for identifying, measuring, managing
and reporting risks to the achievement of the
objectives of the organization.
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Change in the Business Environment

1st Industrial 2nd Industrial 3rd Industrial 4th Industrial Revolution

Revolution Revolution Revolution
DIGITAL
WATER & STEAM ELECTRICITY AUTOMATION
CONVERGENCE

Steam and water power Electricity, internal Electronics, the internet Driverless cars, smart
replace human and combustion engines, and IT used to further robotics, materials that
animal power with airplanes, telephones, the automation of mass are lighter and tougher,
machines cars, radio and mass production and a manufacturing
production process built around 3D
printing

18th 19th ~ 20th Late 20th Century

Century Century Today
2. CHANGES IN THE EXTERNAL ENVIRONMENT

LEGAL

ENVIRONMENT POLITICAL
AL
PESTEL
ANALYSI
S
TECHNOLOG
ICAL ECONOMIC

SOCIAL
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ADVANCEMENT IN
TECHNOLOGIES

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Evolution of Management
Accounting
Kaplan, R. S. (1984). The Evolution of
Management Accounting. The Accounting
Review (July), pp. 390-418.
 This article and a book (relevance lost) made a
wakeup call for academicians, researchers,
accountants and many others as well.
 Provides historical developments of cost and
management accounting since early 20 th century.
 Management accounting began under the label ‘cost
accounting’ and split from cost accounting in the 1950s.
 Describesnew innovations in management
accounting.
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Evolution of Management
Accounting
International Federation of
Accountants (IFAC)’s Evolution of MA
(1998):
Stage / Time period Focus Managerial Accounting Practices

Stage 1: Prior to 1950 Cost determination Budgeting and cost accounting systems.

Providing information needed for Investment appraisal, decision analysis,

Stage 2: 1950 - 1965
planning and control. responsibility accounting

Stage 3: 1965 - 1985 Reduction of waste ABC, strategic cost management etc.

Balanced scorecards of leading economic

indicators, measures that approximate
Creating firm value shareholder return, MAS that address
Stage 4: 1985 - 1995
(value creation) current & future strategic uncertainties. –
value-based management, value-chain
analysis
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Evolution of Management
Accounting
IFAC’s Evolution of MA (cont’d):

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Evolution of Management
Accounting
IFAC’s Evolution of MA (cont’d):
Stage 1 - Cost determination and financial control
 Prior to 1950, the focus of management accounting is
on cost determination and financial control with the
use of budgeting and cost accounting techniques.
 Management accounting was seen as a technical
activity to achieve organisational objectives.
 The main source of data was from financial statements
which include Income Statements, Balance Sheet and
Cash Flow Statements.
 The use of methods such as ratio analysis, financial
statement analysis, budgeting and other cost
accounting techniques was predominant in this period.
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Evolution of Management
Accounting
IFAC’s Evolution of MA (cont’d):
Stage 2 - Information for management planning and
control
 From 1950 to 1965, the focus shifted to the provision of
information for management planning and control.
 Management accounting was seen as management activity.
 It involved staff support to line management through the
provision of information for planning and control purposes.
 The aim is to enable the management team to plan, control and
take the best course of action in their decision-making
processes.
 The use of management accounting techniques which could
support decision analysis and responsibility accounting was
introduced. Hence, the introduction of traditional methods such
as standard costing, cost-volume-profit (CVP), break-even
analysis, transfer pricing and performance measurement was
increased during the period. 14
Evolution of Management
Accounting
IFAC’s Evolution of MA (cont’d):
Stage 3 - Reduction of resource waste in
business processes
 From 1965 to 1985, the focus was on reducing waste
in resources used in business processes, process
analysis and cost management technologies.
 Waste in resources was made possible through the
elimination of ‘non value added activities’.
 During this period, management accounting
techniques included JIT, Activity Based Costing (ABC),
TQM, Economic Order Quantity (EOQ), inventory
valuation methods such as Last In First Out (LIFO),
First In First Out (FIFO), Management Resource
Planning (MRP) and multiple regression. 15
Evolution of Management
Accounting
IFAC’s Evolution of MA (cont’d):
Stage 4 - Creation of value through effective use
of resources
 From 1985 to 1995, attention shifted to the generation or
creation of value through the effective use of resources
and technologies which examine the drivers of customer
value, shareholder value and organisational innovation.
 Relatively modern management accounting methods such
as Target Costing, Balanced Scorecard, Value Chain
Analysis and Strategic Management Accounting were
prevalent during this period.
 Even though the management accounting evolution can
be distinguished into four recognisable stages, the
techniques used in previous phases continued to be used
in later stages. 16
Evolution of Management Accounting

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Criticisms of Traditional
Management Accounting
Johnson and Kaplan (1987). Relevance Lost:
The Rise and Fall of Management
Accounting.
 Explored and discussed about the growth and
decline of management accounting between 1800
and the late 1980s.
 Argued that traditional management accounting
techniques that were developed during industrial
revolution are no longer relevant to the current use.
 Even though the techniques originate from the
scientific era, but their innovation has stagnated
since then.
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Criticisms of Traditional
Management Accounting
Johnson and Kaplan (1987). Relevance Lost:
The Rise and Fall of Management Accounting.
1. Management accounting information, driven by the
financial reporting cycle is too late, too aggregated,
too distorted and too narrow to be relevant for
managements needs.
◦ Too late – do not provide timely information, not useful for
control purposes (Variance reports in standard costing)
◦ Too aggregated – by functional areas and time – eg: Indirect
costs (diff categories) are combined in plant wide or
departmental overhead accounts, mfg costs are aggregated
by months/quarters
◦ Too distorted – relate to volume-based allocation of
overhead costs
◦ Too narrow – eg. Focus on financial measures and ST focus 19
Criticisms of Traditional
Management Accounting
Johnson and Kaplan (1987). Relevance Lost:
The Rise and Fall of Management
Accounting.
2. Direct labor allocation systems
◦ Inaccurate and may lead to cost distortion.

3. The traditional accounting systems provide

short term financial measures that are invalid
indicators of performance.
◦ Short-term orientation and ex post evaluation in nature
◦ Focus only on efficiency
◦ Promote data manipulation
◦ Not adequate for ex ante evaluation, controlling and 20
Other Criticisms of Traditional
Management Accounting
Maskell (1991).
 Lack of relevance - many of today's
manufacturing strategic goals are non-financial
such as customer satisfaction, quality and
flexibility which cannot be monitored with
traditional reports (mainly in financial based
measures), thus not relevant for operational
control.
 Cost distortion - allocation of overhead costs
based on direct labor content will lead to a major
cost distortion when direct labor only represents
less than 10% of total costs.
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Other Criticisms of Traditional
Management Accounting
Maskell (1991).
 Inflexibility- accounting reports (based on financial
measures) are inflexible for manufacturing
management – managers are not able to modify the
measures as the needs of performance measures vary
among plants, products, processes and departments.
 Impediment to progress in manufacturing excellence.
High emphasis on machine and labor efficiency
results in production in large batch size with the focus
on production quantities. This is actually the opposite
of the modern manufacturing, such as JIT, that
focuses on small lot size, zero inventory and high
quality.
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Other Criticisms of Traditional
Management Accounting
 Cost control rather than cost reduction (Shillinglaw,1989).
 Only providing cost data, thus does not seem to support
strategies and actions (Nanni and Dixon,1992).

Criticisms of Standard Costing

 Overemphasises the importance of direct labour
 Delay in feedback reporting – out of date information
 Standards are a static base against which actual events
are measured (standards can quickly become out of date)
 Their main objective is control, with conformance to
standards and the elimination of any variances – this is
seen as restrictive and inhibiting
 Areas of responsibility may not have clear lines of
demarcation
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The End

End of Lecture

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