This essay aims to analyse the evolution of management accounting techniques from basic cost accounting methods to modern management accounting techniques. The essay alsoanalysesthe circumstances that made it mandatory for management accountants to develop new techniques so as to be able to better adapt to the changing times and to manage emerging challenges accordingly. Further, it covers the role of accountants in the implementation of modern management accounting techniques in their companies.

Main body

Origin of Management Accounting Practices

Information related to recording of expenses has existed since long whereas the cost accounting methods are known to have developed during early 19^th century when these were implemented by private companies so as to bring more efficiency in industrial production and other related processes.This helped the businessmen calculate cost per pound of finished goods, cost per hour of production etc. Further, practicerelated to hiring labour on daily wagebasis changed to appointment of permanent staff with an aim to maintain a better control over the related expense through regular monitoring of labour efficiency and costs. Therefore, the role of accountants enhanced from the role of bookkeepers to management accountants controlling and supervising the costs related toproduction processes (Johnson and Kaplan, 1987).

These changes made the industrialists realize that the theoretical concepts of cost accounting did not meet the practical issues that were faced by the cost and management accountants. The concepts and methodologies of cost accounting therefore changed over time as these were implemented in various companies, which customized these concepts as per their needs. Further, cost accounting techniques and concepts of other disciplines were merged to develop new, more effective methodologies to better reflect the costs associated with various business processes. These concepts further developed with the growth of railway systems that required calculations per mile travelled, per ton coal utilized and so on and these concepts were ultimately picked by the industrialists for implementation in their factories (Waweru, 2010).

Development of Cost and Management Accounting Techniques

The costing techniques mostly got developed before 1930 and remained unchanged for a long period of time. With the globalization, challenge of increased competition emerged on a broader level. Companies, all over the world, started taking benefit of access to international markets through producing low cost goods that made the business environment more challenging for their European counterparts. This necessitated the development of more robust processes and systems to decrease costs of producing goods and services and therefore stay relevant in the business community. One of the key initiatives taken in this regard included revamp of management accounting techniques by the accountants that have become critical today for maintaining profitability of any organization (Garrison et al., 2003).

One of the major breakthroughs related to revamp of management accounting techniques came with the introduction of variance analysis concept by Charter Harrison in 1911 (ibid) which has become an integral part of management accounting today and is being used for monitoring of costs and efficiency related to different processes by almost every industry.Further, cost / management accounting was initially focussed on direct labour and direct material costs only for calculating cost of finished goods (Geense, 2005). However, factory overheads gradually made their way to become part of the cost of finished goods. These were initially calculated and charged on the basis of direct labour hours (Sollomons, 1952). However, the basis of allocation of overhead costs revamped gradually for incorporating other methodologies, as well.Further, budgeting techniques that were focused on preparation of fixed budgets earlier gradually changed to preparation of flexible budgets for incorporating factors such as actual number of items produced.

Standard costing is another important cost accounting concept that was used for calculating the cost of a product, prior to introduction of more robust techniques such as marginaland absorption costing. This method was effectively used by the managers to maintain the control over the production process and to keep the cost of production under control. However, marginal costing has become more popular as it only takes variable costs into consideration for determining the cost of a product (Kaplan, 2012). Hence,it becomes easier for the management to decide which product to manufacture with available resources so as to maximize profitability, considering the fact that the fixed costs will remain the same.

Contributions of Traditional Management Accounting techniques

Traditional management accounting techniques have contributed significantly in the form of cost control, decision making and production planning. The usage of various costing techniques such as absorption of factory overheads to the cost of the product on the basis of allocation basis such as number of units produced, direct labour hours or machine hours worked help the managers determine total cost of producing the good (Averkamp, n.d.).

Further, the important concept of variance analysis is widely used by the managers to ascertain volume and prices variances that are otherwise not identifiable easily. Further, material mix and yield variances help improve efficiency related to production processes and also identify areas that require improvement. This concept also helps the management to keep a check on the overall cost of production and helps complete run the production cycle within budgeted costs (CIMA, 2008).

Moreover, Woolf et al., (1985) stated that process costing is another major concept which helps in calculating costs of goods manufactured by a company during every process / completion stage along with the costs associated with normal and abnormal losses that occur during production process. This not only helps the managers to control production costs at every level but also supports in managing the extent of loss during the process. Further, proper allocation of costs related to abnormal losses has also been made possible through this concept.

Organization across the world have also made a good use of costing concepts related to booking of direct and indirect wages and their impact on the cost of goods manufactured. This aids the production team and their supervisors in assessments related to production planning and optimal use of labour workforce during different production processes.Another benefit associated with using traditional costing measures related to identification of idle machine hours / capacity that could then be used in another production facility for manufacture of additional goods within stipulated time (Bragg, 2014).

Necessity for Modern Management Accounting Techniques

The concepts of traditional cost accounting have been in place since early 19^th century and companies have been able to take substantial benefit from these techniques. However, with change in business outlook, it also became imminent that traditional costing measures are reviewed and revised / updated not only to reflect a better picture of expense being incurred on production of goods but also to be able to make informed decisions that could decide the long term sustainability of an organization (Kaplan, 1984).

One of these concepts is related to maintenance of optimal inventory levels through Just in Time (JIT) concept of ordering the inventory which is very popular in companies that have streamlined supply channels in effective coordination with their suppliers. In this method, goods are ordered when these are required in the production process which not only saves the inventory storage costs but also saves other issues such as inventory obsolescence and pilferage. This is a modern technique which works keeping in view the lead time that the suppliers are going to take to deliver required goods to the company (Kokemuller, n.d.).

Similarly, concept of Economic Order Quantity (EOQ)emerged that showed how much inventory levels are required by the company to maintain on regular basis for every type of inventory item so as to avoid possibilities of inventory obsolescence. Another important benefit brought by this concept was that companies used to purchase additional inventories which had a negative impact on its working capital cycle and liabilities accumulated which often resulted in going to banks for obtaining running finance loans (Teng, 2002). However, EOQ enabled companies to save in the form of less frequent payments to the creditors, reduced inventory handling, reduced ordering costs and warehouse costs and improved control over inventory losses in the form of damage / lifting of stocks (Inc. n.d.).

Activity Based Costing (ABC) is another concept that has been used to ascertain exact cost of a product as unlike traditional costing techniques where a single overheads absorption method e.g. machine hours was used. In ABC method, activities are identified and costs assigned to these activities. Further, indirect costs that are not directly related to that product e.g. warehouse rent etc. are not allocated in the cost of goods as it gives a more realistic picture about the cost incurred on the production of that good (Hindle, 2008).

Break even analysis is another important topic that has been covered by the management accountancy. This concept assists in arriving at the production level where the company would be able to come out of losses and start making profits. This is a critical technique as it helps many companies to avoid incurrence of unnecessary and very much avoidable losses through better production and sales planning (Kaplan and Atkinson, 2002).

Further, process costing has helped improve production processes, avoidance of abnormal losses which is occurring due to, for instance technical glitches in machinery or labour faults (Freer, 2011), and identify production costs at different production levels / goods completion levels with an aim to ensure its quality and timeliness.Moreover, absorption and marginal costing have also helped in analysis of fixed and variable costs that were ignored in traditional costing techniques.Modern management accounting techniques also help the accountants to determine whether to continue or discontinue a specific product line due to factors such as continued losses related to a product (Drury, 2008).Another modern concept that has been adopted by many organizations is Throughput accounting which looks into the bottlenecks that hamper the growth or functioning of an organization and thus leads to improvement in related processes (Sodhi, 2011).

Role of Accountants in the Implementation of Modern Management Accounting Techniques

One of the most significant impacts of modern management accounting techniques in related to the strategic decision making of the managers due to increase in availability of relevant data for the perusal of senior management. This includes different costing techniques, maintenance of optimal inventory levels and formulation of production plans in order to meet different sales orders.

The role of accountants in the implementation of modern management accounting techniques is critical as they are the only persons who understand the costs related to end to end production and supply processes and thus can guide the senior management in a better manner. The accountants coordinate with almost all of workforce engaged in the production and inventory maintenance processes and thus can play an active role in deciding the implementation of more robust and modern cost accounting systems.Another factor that can benefit the organization is implementation of effective and real time management information systems that can help identify exceptions related to various production processes and therefore will address major issues related to production process (Freedman, n.d.)

Further, tools like real time inventory management can help the company in tracking the inventory items in addition to recording of inventory costs when these items are sold. Further, techniques such as JIT, EOQ, optimal inventory levels and keeping a regular check on lead times required to replenish inventory levels can improve profitability of the company (MSU, n.d.).Another important area where management accountant can help improve the processes is through relocation or outsource of expensive inventory warehouses that often lead to significant reduction in related costs as well such as supplier costs, freight costs etc. in addition to availing some incentive from the government by moving to the special industrial zone (Barry, 2006).

Hence, the management accountants can play an important role for streamlining the production, inventory, supplies and procurement, labour and other processes with an aim to bring efficiency in these areas, reduce production costs and other overheads thereby increasing the profitability of the company. These steps often lead to long term sustainability of the organizations as these become more competitive and efficient and also stay up to date with the industry practices (Bhimani et al., 2002).

Conclusion

With the changing business environment, management accounting techniques have evolved considerably as business owners and management accountant have realized that important business techniques must change accordingly so as to adapt to the change. The availability of critical information such as cost of producing a good has become significant for decision making especially related to continuation / discontinuation of products andformulation of production plans in line with the strategic goals of the organization. As a result, important management accounting initiatives have been adopted by organization across the globe such as Just in Time inventory ordering, EOQ, optimal inventory levels, throughput accounting, activity based costing, absorption costing technique and so on that have helped the organizations make significant cost savings and increase profitability. This adaptability of management accounting techniques has made businesses more competitive, resilient and sustainable on a long term basis with a significant impact on the overall economic growth of the countries.

 

 

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