There has been a significant increase in the number of organizations all around the world. With the new revolutions, traditional costing systems cannot compete with the technical evolution of modern systems. Therefore, the increase in the development of cost systems has directed various management accounting methods.
A policy change is necessary for the company to transition from past situations to future situations. This transition may require administrative changes in an organization. The persistently developing business environment has steered diverse activities and multiple innovative products, leading to challenging administrative and operational management.
Therefore, it has become crucial for industries to adopt new management accounting techniques to effectively and efficiently use available resources to achieve the organizational goal.
The traditional management accounting methods organizations use to focus on the internal issues of the particular firm and are often focused on the financial perspective of operations.
Examples of such traditional methods are Cost variance analysis and profit-based performance measures, such as profit margin and return on investment. However, contemporary management account techniques strategically focus on both the financial and non-financial perspectives of the company’s operations.
However, there are various limitations to developing, utilizing, and implementing modern management accounting techniques today.
Here are the strengths and weaknesses of some of the modern management accounting techniques:
ABC Costing
ABC costing methods determine the most accurate and reliable product costs as they link the cost and activities relating to producing goods. Under the activity-based costing method, it is fair to fix the selling price of multiple products due to the allocation of overheads instead of the relevant cost drivers.
ABC costing techniques induce monitoring of activities, which can help control fixed and variable overhead costs. Thus, ABC costing creates a link between production activities and costs. Moreover, adequate knowledge can also be acquired regarding the profitability of each product line to make decisions regarding the production volume, product design, or termination of the product.
Although the ABC costing system is much more beneficial than traditional absorption costing methods, it has some limitations. For instance, it is usually a complex procedure to identify all the activities that may influence the cost of the products. Once they are identified, picking an appropriate cost driver can be challenging. In addition, evaluating the cost of the activities is also a complex procedure. Therefore, ABC costing techniques are not suitable for small manufacturing industries.
Target Costing
Target costing is a strategic tool that reduces the costs of production during the life cycle. In the target costing method, costs are described in a future-oriented manner. This can help the managers determine whether they must alter the product designs before entering into manufacturing phases to ensure that the firm attains optimum or targeted profit.
When an organization implements a target costing system, the product design team is appointed a cost accountant whose function is to persistently compute the projected costs of the product. This may help in product alteration or even lead to product termination before complete operations.
In this technique, the costing accountants and product designers work together to achieve good quality productively and maintain cost rather than calculating cost after production in other costing methodologies. As a result, it is highly commended for the business that designs its products.
However, this technique may be costly because it requires a lot more cost accounting staff and may also be time-consuming in terms of the product design and development process and procedure.
Just in Time (JIT) Management
It is an inventory management system. The basic idea behind this technique is that stock is only received when the company requires purchasing a bulk quantity of raw materials and holding. Therefore, it is deemed to be cost-effective in terms of carrying costs.
The major advantage of JIT is that the company will not need warehouses to stock its large amount of inventory or raw materials. This saves the company a hefty cost of buying or renting warehouses.
Another prominent feature of this management technique is that it leads to a significant decline in waste, as stock often becomes obsolete and damaged; this saves money by decreasing the need to substitute timeworn inventory.
This technique is also suitable for small and medium enterprises with limited funds, where the firm can only buy a small amount of stock at a time, resulting in strong cash flows.
JIT also comes with possible disadvantages. One of the basic risks concerned with JIT management is there’s always a risk that the company may run out of stock which will eventually result in a delay in the manufacturing process hence affecting the whole operations of the firm. The company then has to maintain a healthy relationship with its supplier and agree on a specific timeline to receive the required stock. This leads to the complete reliability of the firm on its supplier. Furthermore, in the case of delay of products, the company has the risk of losing its customer base, which would hugely affect the business.
For proper JIT management, the company must analyze its production and sales trends to understand the variation of sales according to different seasons, occasions, etc. Higher sales volume at a certain time means more stock is required to manufacture enough consumer goods. JIT can be considered best for the companies that have built healthy relations with its supplier and can plan and forecast correctly.
Beyond Budgeting
There are several merits of using this model:
- Beyond budgeting is cheap compared to other traditional budgeting processes. Traditional budgetary approaches are more time-consuming in terms of composition.
- Managers are less manipulative when implementing the beyond-budgeting model.
- Traditional budgetary systems have more rigid norms, whereas beyond budgeting, enjoys negotiable norms.
The rolling forecasts used in this technique ensure that the goals are realistic and feasible. The flow of information is easy and faster for the firm, resulting in accurate and speedier decision-making. However, for successful implementation of beyond budgeting, managers must be fully aware of their roles and responsibilities and the firm’s expectations.
Development in Modern Management Accounting Technique Concerning the Changing Economic Environment
Contemporary management accounting techniques have brought enormous change in traditional management accounting, which many organizations appreciate as they meet the changing needs of today’s business world.
It aids in developing cross-functional disciplines, such as financial and asset management, performance management, and strategic management. Unfortunately, traditional management accounting tools cannot keep up with the world’s changing technology and philosophies.
Most processes are automated in this technological era, and old-style management techniques need to catch up with the pace of this rapid technological change. Likewise, the pace of implementing contemporary management accounting techniques is slow, as management accountants cannot fully implement modern management accounting tools and techniques.
There are various reasons behind the rebuff and sluggish application of these methods. One of the most important is the organizational culture of the respective businesses. Some managers are risk-averse and feel less motivated to switch to traditional methods. Most organizations are less innovative, and rather than trying new techniques, they tend to stick to the old ones.
The cost of implementing new management accounting techniques is usually high, resulting in the reluctance of the company’s top management to invest in such adoption. In underdeveloped and developing countries, the lack of awareness and technological expertise is the cause of the refusal of modern methods. Moreover, the lack of support from the top management is also a significant concern in such firms.
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