Introduction
Accounting
is a concept that has been in existence for thousands of years. It can be traced back to the time when humans started
trading. That was the beginning of accounting. However, their records used to
be engraved on tablets for record keeping. The evolution of accounting began
around 500 years ago when Luca Pacioli, a monk well known for his mathematics,
emphasized the basics of a double entry record keeping system. Ever since the civilized community has been using accounting
as an organizational tool to manage their business. During the industrial
revolution, a lot of processes were transferred to large companies from
individuals. The making of products from one stage to the next used to involve
a lot of transactions within the factory instead of selling the final outputs
in the market (Ball, 2006, p. 20).
As time went by, these mega factories came to establish an accounting system
that would control and regulate the work done in the companies. Also, they
wanted efficiency measures that would control the cost of production in these
factories. It was at this time that traditional managerial accounting was born.
Using
traditional management techniques, it changed how companies used to operate.
Companies started making profits because of the accounting procedures. However,
the accounting system used was not as efficient as they would expect. The
traditional accounting systems would track how a business performed by
evaluating how long the business had been in practice and the systems they
used. In the real sense, accounting shows the daily performance of a company or
business, but traditional accounting failed to capture the daily performance of the enterprise because of
the lack of tools to capture all the aspects involved in manufacturing.
For
accountants to calculate the cost of a final product, they would add the total
cost of direct material and direct labor. However, by the end of the nineteenth
century, accountants saw that there were still some missing portions in how
they determined the price and as a result added indirect costs in the final
price. The value of overhead costs was determined at a certain percentage of
the overall cost of direct costs. Summing up of overheads into a small
percentage was used for several years, however,
in the book of expenses, most of them did not even relate to each other hence
making the percentage formulae misleading. It could not tell much about the
product or the costs that product specifically incurred.
At
this point, they advocated dividing the company into a series of production
centers to be evaluated differently. The cost incurred by each production
center was summarized as one cost both for the machines and workers. In each
production center, am hourly rate was calculated
which represented the total cost of production of that center per hour. It was then added to the amount of work passing
through it per hour.
Over
the years, traditional management systems evolved and reached a point where
they are being regulated by a single regulatory body worldwide. However, the
management methods being used by company’s would differ. The practice became
widespread and as being utilized by all types of businesses. The regulatory
body was in charge of changing the accounting systems and also determining the
criteria for evaluating overheads. Also, the body was charged with
communicating information to companies around the globe. In as much the
regulatory authority was sufficient, it called for an upgrade of the
traditional accounting systems to feature day to day transactions.
The
need for modern management accounting techniques
Kaplan,
a research accountant, noted that the accounting methods differed in various
books of accounting. It made the accounting system ineffective, and as a result
different companies could not be compared
because each company was most likely used its standard of accounting.
Traditional accounting methods were rendered inefficient and needed an upgrade
by the beginning of the twentieth century. They were inefficient, unreliable
and inaccurate. There was the need to change the accounting system to match the
changing characteristics of the business world today
In
the modern world, companies have evolved to become multi-dynamic with an array
of products and services. The companies
that still use the traditional mode of accounting have a narrow range of goods
and services that do require an upgrade. The traditional method focused mainly
on reporting of costs and asset usage. In the production industries,
performance was measured by the amount of products produced or the number of
sales made by a company. If there was more demand for usage, it indicated an improved business. In the end, a balance
sheet with increased asset value and labor cost showed how the business has
improved. However, there was a significant variance between how the company
performed and what the balance sheet was showing. It created a rift in
inventory and also in performance evaluation. Because of the small range that
traditional accounting can offer, it is not suitable for companies that produce
in large quantities.
The
management would report growing business and huge returns to the shareholders
raising their hopes in their respective companies. Sadly, the companies would
collapse or underperform contrarily to the balance sheet statements. It was a major
setback for accountants in this era trying to figure out the downfall of the
business not indicated in the assessment.
The
Changing Business Environment
Change
in technology has seen the world of business evolve from product to services.
The era where products used to dominate is long gone. The situation has taken
on a new twist that was not expected a
few decades ago. Everything is now technological. Funny enough, manufacturing
has now become modernized that a company does not have to run its machines all
day to make the business run. Unlike decades ago, company’s had to run their
machines all day to support their operations.
Business
has resulted in digital and technological innovation such that they aim for
better business results and a high inventory turnover. Most business today are
more concerned about the customer, his satisfaction, and needs. More research
and money is being spent on the client to ensure all aspects of his needs are captured. To boost their performance, they
no longer rely on the product but high-quality customer services. They have
shifted their minds and resources to the client while still maintaining fixed
usage of machines and labor. Traditional
accounting methods can not handle such diverse changes in the environment.
It would also be impossible for the traditional systems to track a new
business. Besides, some business today do not have an office, but they deal
with millions of money in their transactions. In this case, there are no
material costs or overhead costs. Instead,
new values have emerged that need to be
categorized and calculated carefully, otherwise, the performance of the business
would collapse. Traditional methods, would inaccurately measure items and
activities (Emmanuel, p. 384).
Accounting
Measurement Problems
Traditional
accounting would provide wrong information concerning business performance and
cash flow for companies no longer involved in the mass production of goods.
Companies are now offering distinguished services from financial services to
online sales and marketing, and such criteria would be difficult to quantify or
even include in the traditional accounting system. For instance, using the
traditional accounting methods, a reduction in inventory value, translates to
low profitability.
However,
in today’s accounting, a company that keeps less inventory reduces the costs
involved in it, thus increasing the profitability of the company. The business of today knows how to
work on capacity performance by having low inventory. In most cases they make
their products give the customer the specific requirements requested. It is of no importance to business
to stock up a pile of goods rather than focusing on customer satisfaction.
Because companies have become many fighting for the same client, it is
necessary for the company to spend more on customer and less on the product.
Changing
Accounting Practices
Challenged
with how to measure the financial performance, a business has no otherwise,
other than changing the accounting practices with changing business practices.
There are changing practices that cannot be
handled by the old system hence the need to accommodate the new system.
Furthermore, efficiency and accountability are the core factors in determining
the performance of the company, and the old
accounting system does not support these two factors. Businesses have
become liner, more streamlined, more accurate and result oriented to cope with
the changing needs and trends. For example, in the traditional system,
accounting used to be manual and the final result put on a computer to be
printed out. However, because of the changing trends, accounting has become
computerized such that no manual work is involved. The accounting systems had
to change to accommodate this trend.
On
the other hand, accounting is now used by the top management to make decisions
that influence the company’s performance. Unlike in traditional systems of
accounting, less could be used for decision making because the accounting was
too generalized missing the important links that make a business grow. Managers
of today cannot function without a proper accounting system that fits the
standard of the industry as well as the changing needs of the company.
The
Need for More Information
Business
is rapidly growing, and the thirst for more information is inevitable. More
financial and nonfinancial information is required to evaluate on performance.
Technology is the key factor that requires more information to be collected about products and customers. Technology is deskilling the routine of work
done by accountants to a wider area in diagnosing problems, giving advice and
decision making (Fields, at el., p. 260). All these sectors require
more information on costs and other factors that potentially affect the
business. The internal management in organizations is cutting down on the
information needed for products but
rather taking in more information on advice and financial operations, managing
of people, competitions, and strategic business plans. Factors such as these,
will require an overhaul of the traditional accounting system to accommodate
them
All
accounting methods and procedures that have been set the by the international
standards of accounting is by accountants. Accounting cannot operate without
qualified personnel who are accountants. Accountants have been in operations
ever since the Mesopotamia error when Egypt was a superpower. They used to keep
records of wheat harvest and other financial records for the pharaoh. Today,
accounting is a profession that requires much practice and precision.
Implementers
Accountants
have the responsibility of ensuring that there are due diligence and designing
of the accounting systems. They are the most prefer personnel to design the
accounting systems. They are also involved in the maintenance of the system as
well as making changes to the accounting policies that regulate accounting
worldwide. They are the ones who implement the procedures and regulations that
are put in place (Today, p. 18).
They can identify problems in accounting systems that ordinary people would
find hard to understand.
As
auditors
They
audit the accounting information systems to ensure that what is stated in the regulations is followed by the
accountants. They also edit the professionalism of other accounts as well as
the standards being developed by a company in financial reporting. They are
also involved in documenting the procedures and ensuring that where
documentation is not possible, the regulations are followed to the letter.
As
users
Accountants
are the primary users of the accounting management system. They know how to use
it and understand it better than other professions. They have an important advantage in helping companies
come up with the best accounting standards to be
followed.
Conclution
Managerial accounting has long been
practiced so, and it is not a new phenomenon. The techniques used have
continued to improve due to various factors. Traditional managerial accounting
changed the way businesses operate, more notably, during the world war error.
In as much as it was efficient, managerial accounting had to be upgraded
because of the following: It had a narrow range of accounting, change in the
way organisations do their business, account measurement problems and changing
accounting practices with time. This factors contributed to the change of the
traditional system to a modern one. However, it cannot take effect without the
accountants who are the implementors of the system. They ensure changes and
system rules are followed to the letter as well as auditing of the standards
under which accounting is done.
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