There is a significant increase in various 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 situations in the future. This transition may require administrative changes in an organization. As the business environment is developing persistently, this has steered to diverse activities and multiple innovative products, leading to challenging administrative and operation 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 used by the organizations 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, profit-based performance measures, e.g., profit margin and return on investment. However, the contemporary management account techniques strategically focus on both the financial and non-financial perspectives of the company’s operations.
However, in the present day, there are various limitations for developing, utilizing, and implementing modern management accounting techniques.
Here are the strengths and weaknesses of some of the modern management accounting techniques:
ABC Costing
ABC costing methods determines the most accurate and reliable product costs as it links 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 in controlling the fixed and variable overhead costs. Thus, ABC costing creates a link between the activities of the production and its 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 ABC costing system is a lot more beneficial than traditional absorption costing methods, it does have some limitations. For instance, it is usually a complex procedure to identify all the activities that may influence the cost of the products. Once it is identified, it isn’t easy to pick an appropriate cost driver. In addition, the evaluation of cost by the activities is also a complex procedure. Therefore, ABC costing techniques is not appropriate 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, which can help the managers determine whether they have to 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 compute the projected costs of the product persistently. This may help in product alteration or may even lead to termination of the product before complete operations.
In this technique, the costing accountants and product designers work together to achieve a good quality productively and maintain its cost rather than calculating cost after the production in other costing methodologies. As a result, it is highly commended for the business which 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 product designing 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 their large amount of inventory or raw material. 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 aids in saving money by decreasing the need to substitute timeworn inventory.
This technique is also suitable for small and medium enterprises where funds are limited, and the firm cannot buy a bulk 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 of the manufacturing process hence affecting the whole operations of the firm. The company then have to maintain a healthy relationship with his supplier and agree with 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 that more stock is required for manufacturing 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. First, beyond Budgeting is cheap as compared to other traditional budgeting processes. The traditional budgetary approaches are more time-consuming in terms of composition. Second, managers are less manipulative when implementing the beyond budgeting model. Finally, 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 to obtain. The flow of information is easy and faster to the firm resulting in accurate and speedier decision-making. Though 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
The contemporary management accounting techniques have brought an enormous change in traditional management accounting, which many organizations appreciate as they meet the requirement of the changing needs of today’s business world.
It aids in developing cross-functional disciplines, e.g., financial and asset management, performance management, and strategic management. But, unfortunately, traditional management accounting tools cannot keep up with the world’s changing technology and philosophies.
Most of the process is automated in this technological era, and the old-style management techniques are unable to keep up with the pace of this rapid technological change. Likewise, the pace of implementing contemporary management accounting techniques 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 of it all 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 the new management accounting techniques is mostly high, resulting in the reluctance of the company’s top management to invest in such adoption. In the under-developed 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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