Term Paper on "History of Management Accounting"

Term Paper 15 pages (4082 words) Sources: 1+

[EXCERPT] . . . .

History Of Management Accounting

Management accounting has been defined as "the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information that is used by management to plan, evaluate, and control within an organization. It is the accounting used for the planning, control, and decision-making activities of an organization" (Siegel and Shim,1995, p. 508). Based on an essay by Robert N. Anthony that identified several significant changes in management accounting in recent years, this study provides an overview of management accounting and how it is used today. The study provides a review of the relevant and scholarly literature to identify changes in methods of product costing, investment analyses and organizational performance evaluation; a summary of the research is provided in the conclusion. One of the most important recommendations to emerge from this study was the need to transcend existing approaches and integrate the best from organization theory, behavioral sciences, information theory, and others, in a multidisciplinary approach that will facilitate the production of information for top management decision-making purposes.

The History of Management Accounting

More and more people -- inside the business world and out -- realize the significant changes which have been taking place for years in accounting and the role of the accountant in business. No longer is he simply a recorder of business history. He now plays a dynamic role in making business decisions, in future planning and in almost every aspect of business operations. This new accountant is called a Management Accountant and he sits with top management because his responsibility is developing, producing and analyzing information to help management make sound decisions. -- The National Association of Accountants, 1992

Introduction

The epigraph above is indicative of the growing importance being assigned to management accounting today. Indeed, corporate transparency has assumed new importance in the wake of the accounting frauds perpetrated by Enron and their ilk in recent years, and management accounting is playing an increasingly crucial role in this broad initiative. For example, in his essay, "Management accounting: A personal history," Robert N. Anthony (2003) reports that the field of management accounting has experienced some fundamental changes over the years that have had a profound effect on how corporate managers and the general public alike view the field itself, but more importantly, there has also been a shift in the emphasis from its record-keeping function to the actual people who participate in the process. To identify what important changes have taken place in the field of management accounting in recent years that have created the accounting disasters of years past and what steps are being taken to improve the techniques involved, this paper reviews the relevant literature to determine changes in methods of product costing, investment analyses and organizational performance evaluation. A summary of the research will be provided in the conclusion.

Review and Discussion

Background and overview.

Accounting has been defined as "an attempt to wrest coherence and meaning out of more reality than we ordinarily deal with" (Weick, 1979). While this definition may appear extreme, it serves to provide a sense of the complexity of the challenges that are confronted by much accounting measures. According to Neely (2002), financial statements are supposed to provide, within the just a few pages of numerical reports, an account of the complete financial outcomes of a complex set of interrelated activities that have been undertaken over a period of time.

When used for management control purposes," Neely advises, "the task becomes even more complex, for these accounting measures are intended to help ensure that operating managers will be continually motivated and challenged to exercise their managerial skills in the interests of the overall organization. In such a way, the accounting numbers provide a 'window' into the organization which gives an (albeitly imperfect) image of the activities being undertaken and their consequences. (p. 20).

Clearly, managers today need timely information upon which to base informed decisions, and management accounting represents a solid framework in which this information can be gathered, analyzed, interpreted and communicated to those who are in a position to need to know. Not surprisingly, then, management accounting has become a hot topic in recent years, due in large part by the demands from governmental regulatory agencies such as the Securities and Exchange Commission and Internal Revenue Service, that require specific financial measures to be reported. In addition, in 2002, the U.S. Congress passed legislation that established the Public Company Accounting Oversight Board; this is a private, quasi-regulatory body that was established by the Sarbanes-Oxley Act, which was signed into law on June 30, 2002 (Gips, 2003). The oversight board has been tasked with the responsibility of replacing the longstanding practice of self-regulation by accountants. "The board, overseen by the Securities and Exchange Commission (SEC), is charged with registering accountants that prepare audits for public companies; establishing auditing, ethics, and other standards for the industry; investigating accounting firms that work on public companies; and enforcing compliance with the oversight board's own rules" (Gips, 2003, p. 12). In response, accounting experts have worked to refine these measurements through decades of work with governmental agencies (Denton, 2003).

According to Siegel and Shim (1995), management accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information that is used by management to plan, evaluate, and control within an organization. It is the accounting used for the planning, control, and decision-making activities of an organization" (p. 508).

Changes in methods of product costing.

In this regard, while the relationship between cost accounting and management accounting has not been specifically described, it is generally held that it is one point of emphasis. For example, Riahi-Belkaoui (1992) reports that, "Cost accounting deals mainly with cost accumulation, inventory valuation, and product costing. It emphasizes the cost side. The objective function is implicitly perceived to be cost minimization. Similarly, management accounting deals with the efficient allocation of resources. The objective function may be perceived to be profit maximization" (p. 3). It is also widely accepted that the cost accountant and the management accountant perform different activities; for example, cost control falls within the purview of the cost accountant, while cost reduction is the responsibility of the management accountant (Riahi-Belkaoui, 1992). Generally speaking, accounting textbooks that are labeled cost accounting emphasize cost control while those labeled management accounting or managerial accounting tend to focus on the planning function; this in turn has most likely reinforced the concept that there is a fundamental difference between both of these areas (Riahi-Belkaoui, 1992).

In this regard, though, Riahi-Belkaoui recommends that a more appropriate approach that emphasizing the differences in these approaches is to conceive of management accounting as an effort to integrate the techniques from other disciplines into the area of cost accounting. In fact, in recent years, the scope of cost accounting has been expanded in a number of areas, including the following:

1. It emphasizes not only the explanatory but also the predictive ability of accounting data;

2. It develops normative models to be applied in the accounting context with an emphasis on mathematical, statistical, and operations research techniques.

3. It stresses the behavioral impact of accounting information on the users;

4. It uses nonaccounting information -- economic, environmental, and qualitative -- to improve the relevance of management accounting data;

5. It merges economic and social goals and consequently draws the accountant into program budgets and "performance" auditing in not-for-profit organizations; and, 6. It relies on more frequent and heavier use of computers, leading to a centralization of information and the expected candidature of the management accountant for the job of the "information manager" having overall responsibility of this resource (Riahi-Belkaoui, 1992).

This expansion of the scope of cost accounting into management accounting has caused the role of managerial accounting to consider the entire formalized information function of an organization (Riahi-Belkaoui, 1992). In this regard, Mitchell, Reid, and Terry (1997) suggest that "overall management accounting systems tended to bear the characteristics of the Universalist theory... i.e. that practical management accounting procedures remain similar despite differing contexts in terms of contingent variables" (p. 46).

The systems of product costing that became widely used in the United States and the United Kingdom were introduced in contract engineering firms where unique "one-off" products were constructed to order. In those situations, engineers were required to be able to quickly calculate prices for their work in the same manner contractors do today (Garner & Tsuji, 1995). For those purposes, some rule of thumb was needed such as "keystoning," or doubling the price or to 'provide for overhead by multiplying direct labor by 150%; these have always been useful techniques for quickly calculating the costs associated with any project, but they are only useful in some specific applications.

For example:

motor mechanic, plumber, electrician, or engineer has to be able to prepare the customers' accounts quickly and authoritatively without trying to recalculate an appropriate share of the overhead which each job should bear. It even makes sense to trace the overhead component of each… READ MORE

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