Management Accounting Systems

 Management accounting system has developed gradually over the time, and has changed in nature. Originally, cost accounting system was used to record costs and report expenses/costs to management in manufacturing industries. This was the time when manufacturing costs consists of direct materials and direct labour cost. Manufacturing costs were “drive” by direct labour hours worked or machine hours operated.

Cost and management accounting information was also used for planning, particularly for annual budgeting. Some industries produce standard products I large quantity, so standard costing systems could be operated for budgeting and also for control reports.

The key development in management accounting was the use of marginal costing and the separation of costs into fixed and variable costs. Marginal costing concepts were applied to planning and other aspects of decision -making. Management accounting system became more relevant and reliable in providing information to management for decision making, through techniques such as relevant cost and discounted cash flow analysis.

What is Management Accounting System (MAS)?

A management accounting system (MAS) can be defined by looking at its components:

(a)    A people with accounting knowledge (management accountants)

(b)    The technology they use

(c)     Paper or computer records of financial transections

(d)    The cost accounting system on which it is based

(e)    Wide range of simple and complex mathematical techniques for analyzing data

(f)      The reports produced by system and accessible online.

Risk in Using management accounting system

Some typical weaknesses in management accounting system are as below:

Unnecessary financial measures

Management information may be unduly focused on financial costs and short-term profits that can easily be measured. Non-financial information’s my be overlooked.

For example, at strategic level objective of a company may be to increase profitability, but in order to grow the business and its profit, it may be necessary to consider other factors such as quality, flexibility, customer satisfaction, and employee skills.

Internal Orientation

Management accounting system may use data and information from internal sources, and fail to make use of external sources. There should be some focus on customers and competitors, suppliers and perhaps other stakeholders.

Lack of goal equivalence

The management system may encourage a lack of goal congruence within the organization. i.e., managers may be encouraged to concentrate on their own part of the company operations, regardless of other aspects of the business. Managers may purse targets that are in their departmental interests but not in the best interest of the organization as a whole.

Lack of future prospects

The management accounting systems may highlight historical financial costs and report of past performance. This way, management accounting systems may fail to provide relevant cost information for management.

Failure in adoption of changing circumstances

A particular problem with management accounting systems is that they may remain “stuck” in traditional methods of reporting and analysis, whereas new approaches are more appropriate and value able for the management.

 

Challenges involved in adopting traditional management accounting method

A serious risk with using traditional management accounting methods and reports is that the information they provide may be inappropriate for management’s changing needs. Changes in the business environment have include:

·         Globalization and increase competition

·         Information technology changes resulting and information flow

·         Changes in organizational structure, such as internal and external mergers.

·         Increase awareness of environmental issues.

Timing

The cost of new product is substantially determined when it is being designed, not at the time it goes into production. The material we used, the machines and labour required, are largely determined at the design stage. Traditional management accounting, however, continues to direct its attention to the production stage.

Controllability

Traditionally, management accounting systems have provided more information about direct costs than indirect costs (Overheads). However, specially in manufacturing industries, only small proportion of direct costs are actually controllable in the short term. Generally speaking, overhead costs are about three times larger than direct costs.

Non-Financial assets

Management accounting systems need to be able to provide information about the resources that drive value, as knowledge-based assets help the organization to improve its strategic value. In contrast, traditional management accounting measures don’t deal with intangible assets, such as Knowledge-based assets.