Management Accounting

Management Accounting in a Dynamic Environment

Management accounting serves as a mechanism to help create organizational value Opens in new window through better decision making and management of the members of the organization Opens in new window.

Management accounting is accounting system used within the organization to provide information for two general functions, making planning decisions and control.

Management accounting supports the achievement of the goals of the organization through the provision of financial and non-financial information and systems to support and direct planning and control decisions.

For example, managers use information on costs to make decisions on products and services Opens in new window.

Management accounting includes the design and use of information within organizations Opens in new window.

Previously, management accounting focused on financial information, such as the cost of a product or the revenues generated by a unit of the organization.

But selecting and analyzing nonfinancial information, such as the time required to make a product, the percentage of defective products, or the number of non-time deliveries, has become an important part of management accounting.

Nonfinancial information supplements financial information by providing a broader understanding of the organization, which can lead to better decisions.

Management accounting is not composed of a fixed set of rules. Organizations have different goals and are composed of different members; therefore, no universal rules exist.

Management accounting is not a static process and must adapt to each organization.

Management accounting adapts to organizational change Opens in new window. Three major forces cause organizations to evolve:

  1. changes in technology,
  2. increased competition and globalization, and
  3. customer preferences.

Organizations that fail to adapt to these forces will not be able to survive in the long run.

Organizations must meet the needs of other stakeholder groups beyond those of their customers. For example, the goals of shareholders and employees must be satisfied to maintain the organization’s viability.

Government and regulatory bodies also affect how organizations operate in the pursuit of their goals.

Organizations Opens in new window depend on management accounting to provide information in a dynamic environment.

If the evolution of the management accounting system lags behind the evolution of the organization, the system will act as an anchor preventing the organization from successfully dealing with a changing environment.

Organizations must adapt to dynamic environments and management accounting must adapt to a changing organization.

New environments require managers to have different information, including accounting numbers. Therefore, the study of management accounting is a study of a process, not a study of a set of procedures.

The process of management accounting is linked to organizational characteristics, which are constantly changing. To understand management accounting, you must understand organizations and the forces that affect them. As noted earlier, the three major forces that affect organizations are technological change, competition and globalization, and changing customer mix and preferences.

Organizations have chosen to adapt to these forces in different ways. Some of these adaptations, such as total quality management (TQM) Opens in new window and just-in-time (JIT) Opens in new window, have become commonplace.

In identifying and understanding these changes in organizations, we can appreciate the role and process of management accounting.

Strategies and Management Accounting

Whether an organization chooses to create customer value Opens in new window through innovation, high quality, or low cost, management accounting plays an important role.

Strategies require planning and implementation, both of which are supported by management accounting.

Management accounting methods should differ, however, depending on the strategy chosen. Certain management accounting methods promote innovation, while others promote quality or low-cost production.

Matching management accounting methods with a strategy is critical to the success of the organization. The role of strategy in achieving customer value Opens in new window is incorporated in the Value Chain Analysis Opens in new window.