There are several differences between modern and traditional management accounting. The most significant difference between modern and traditional accounting is its reporting speed and accuracy. In conventional management accounting, the main aim is to analyze, summarize, and record expenses, and companies were not seeking expense behavior, drivers, and fluctuations.
Modern management accounting aims to record, summarize, and analyze expenses and analyze expense behavior, drivers, and fluctuations. In the past, companies were not competing so closely, so they did not have to do such an in-depth analysis of their expenses. Now, companies are competing closely, and they must know about expense drivers to control them according to the results.
Modern management accounting allows companies to record their expenses, break them down into different categories, and analyze them at every business or production stage. By achieving milestones, companies can easily stay on track with their expense drivers, align their expenses with the external environment, and create a win-win situation by aligning the expense structure with their overall business strategy.
Under traditional management accounting, there are numerous opportunities to manipulate because the expense was directly recorded to the account when the product was sold. Therefore, managers were able to manipulate the production process in pursuit of bonuses. In contrast, under modern management accounting, manipulations are almost impossible because expenses are debited directly to their relevant accounts at the time of occurrence, resulting in less opportunity for misrepresentation.
Moreover, modern management accounting can help companies gain a sustainable competitive advantage. By obtaining more information about their expense drivers and analyzing the external environment, companies can identify their expense-related strengths and weaknesses and overcome their weaknesses to gain a competitive advantage.
Modern management accounting can break down expenses into different categories, promptly record expenses, and estimate upcoming expenses. Here are some modern management accounting techniques a company can use to keep up with expenses.
Standard Expensing System
The system allows the company to estimate the expense of material, labor, and FOH before starting the new project. Afterward, the company completes the project and analyzes the variances among prices of material labor and FOH. Furthermore, standard expensing allows the company to estimate production expenses easily and record them on an estimation basis. Afterward, the company analyses the variance and records them accordingly. Higher estimation and lower actual expense result in favorable variances or vice versa, while favorable variances are preferable.
Activity-Based Costing (ABC)
It is one of the most effective and efficient expense accounting systems that breaks down all expense items into small categories. Because it breaks down a broad category of expenses into an in-depth structure, the expense that allows the company to analyze that expense is crucial and a waste. Moreover, due to the expense breakdown, the company can also analyze and control the expense of useful expense drivers. ABC also allows the company to eliminate less value-added activities or waste from the expense structure.
Process Expensing System
Process expensing refers to the estimation and analysis of expenses at different levels of production. Process expensing is helpful for those companies that produce and manufacture products in various departments. Process expensing allows the company to record and analyze the production expenses of multiple departments easily. Also, using a process expensing system, there is almost no chance of manipulation even if the company produces a single product in 100 different departments because the expense is recorded side-by-side, reducing the chances of error fraud.
Finally, as the above section shows, there are numerous differences between modern and old managerial accounting. Those using modern expense and management accounting have a higher competitive advantage because they have better insights into their expense structure. They can also align their business strategy, expense structure, and external business environment.
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