1

Changing Practices in
Management Control and
Cost Accounting System

For Assignment or Dissertation Help, Please

Muhammad Sajid Saeed

Table of Contents
1.0 Introduction................................................................................................................................4
2.0 Factors Imposing Change and Innovation in Management Control System.............................4
3.0 Different Innovative Practices in Management Control and Cost Accounting System.............5
4.0 Implications for Management Accountants...............................................................................7
5.0 Conclusion.................................................................................................................................8
References........................................................................................................................................9

Abstract
This paper is about the identification of innovation and change in management accounting
control system, which mainly focused on three parts. The first part deals with the overview of
previous literature regarding the change in management and cost accounting system. With the
help of different management control tools and examples second part tries to elaborate
technological and administrative innovations and last part provides some important implications
for the management and cost accountant to cope up with changing external and internal needs
of management control system.

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1.0 Introduction
This study elaborates the changing practices that have taken place in the field to cost and
management accounting. It shows the impact of different factors such as competition,
decentralization of operation, technical and administrative innovation on management control
system. This study also provides different innovative practices and models such as target costing,
activity based management (ABM), enterprise resource planning (ERP), total quality
management (TQM) and balanced scorecard (BSC) on management control system and also
provide valuable implications for cost and management accountants.
2.0 Factors Imposing Change and Innovation in Management Control System
With the critical understanding, Kaplan (1984) argued that in the field of management
accounting system there has been very little change in practices since 1925. Johnson and Kaplan
(1987) in their publication indicated that there is very little change and innovation from last 50
years in the field of management control system, so ultimately according to them, there was not
reliance between management accounting technique and management practice. There were less
innovation in management accounts due to complexities in transformation, conversion and
observation of administrative innovation (Dunk, 1989). Foster and Young (1997) proposed that
disruption in management accounting innovation exists due the hierarchical organisation. But in
the past two dacades, there had been a significant change and innovation in management control
system (Otley, 2008). Decentralization of operations which is also known as management by
objective or results1, technological innovation and increase in level of competition are the major
factors contributing to such change. Damanpour and Evan (1984) identified two factors for the
change in management control system. One factor is technical innovation i.e. idea of new
products or services which change the operation and system of management, and the second is
administrative innovation, which referred to the policies, recruitment, allocation of resources,
and strategies. Libby and Waterhouse (1996) indicated that the management accounting and
control systems which support the decision making and control, are more innovative than the
1 Management by objective can be formed when organisation strategies are divided into
individual strategies and make each employee responsible for his actions (Deal & Kennedy,
1982)

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organisations that support directing, planning or product costing. But the major driver for the
convergence of management and control system is the increasing global competition which
requires firms to utilise diverse nature of management systems with new software programs and
with advanced information technology (Granlund and Lukka, 1998).
The management accounting theories i.e. Target Costing, Life Cycle Costing, Balanced
Scorecard, and Activity Based Costing change the dynamics of management control system
(Bjornenak and Olson, 1999). The main objective behind the change and innovation of
companys administrative activities is to gain competitive advantage in the market. Firms should
have ability to show flexibility according to the need of the environment and technological
advancement (Traneld et al. 2003). Marsh and Stock (2003) proposed that there should be a
significant interaction between technology innovation and daily basis administrative ideas. The
efficient integration will lead towards not only success of the ideas and business but also help the
firm to gain competitive advantage. Another management and control tool which is used
excessively these days is Balanced Scorecard (BSC) approach in which managers keep track of
all the executed activities under their control and also monitor the consequences arise from these
activities (Atkinson, 2006). Balanced Scorecard which is also known as integral management
chart developed by Kaplan and Norton (1992) has shown strong integration with innovation
regarding administrative control system and ensure effective communication (Ax and Bjrnenak,
2005).
3.0 Different Innovative Practices in Management Control and Cost Accounting System
The primary objective of the management accounting is to give the financial assessment and
information regarding management activities and decisions making. Management accounting is
concerned with the internal performance of the organisation and do not relate to outside
stakeholders, but for the changing environment of management and financial accounting it is
essential for the operational managers to link up a management accounting system to diverse
fields such as financial accounting.
Fry et al. (1995) indicate that cost accounting has always related to the determination of cost of
goods sold and valuation of inventory, but in contemporary era it has gained importance in
management and operational decision making. Their study indicates the different practices in the

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manufacturing companies of the USA that changing environment of the management accounting
the manager should adopt the best suited alternative which is not only according to management
accounting but also fulfill the financial dynamic of the organisation. Technology plays an
important role in the development and innovation of all the financial and managerial systems. It
however provides new possibilities of management control system which can be differentiated
from traditional management control. Beaubien (2013) provides the implication regarding the
change in technology using the Enterprise Resource Planning (ERP) system and he analysed that
how much change ERP brings to management practices. ERP changes the dynamics of how the
managerial organisation system used to operate (Chapman, 2005). Technology is not about
allowing or disabling the management control system rather it provides the new forms of control
which helps to develop better management control system (Dechow and Mouritsen, 2005;
Quattrone and Hopper, 2001, 2005).
Beaubien (2013) took large financial institution and conducted a three year longitudinal study on
Abank, who was enabling the ERP management control system in 15 regional unites employing
3000 employees, with 100 branches approximately. With the help of interactive case study, the
purpose is to analyse the effect of technological control system on the organisation prior to the
installation of new control system and after its installation. Use of information technology and
new practices e.g. Balanced Scorecard, may emerge as the new management control system,
which can reduce the distance distortions. Distance was the major constraints in the old
management control system.
Brhl et al. (2010) studied the integration of technological innovation and operational process
with the help of management control tools i.e. Activity Based Management (ABM), Balanced
Scorecard and business process reengineering, and observed their impact on competitive
advantage. They choose eight top product differentiating companies and analysed integration
capabilities of these companies. In all cases, for efficient and effective communication and
coordination, technology plays the important role and ensures successful operational integration.
They suggested that higher control intensities in research and development department is due to
the management higher control intensities, which end up correlating the innovation with the
operational effectiveness.

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A longitudinal case study of a shipping company was conducted by Rolland and Monteiro (2002)
indicates that at first the technological change in the management control serves to be a
constraint but the survey analysis of long after indicate that they used to the technological change
in the management and accounting system specially the changing activities brought forward by
Balanced Scorecard. The case study indicates that new practices relied on the associated social
practices.
Modell, (2009) compares the practical implication of Total Quality Management (TQM) and
Balanced Scorecard for the case analysis of Swedish Central Government Agencies. He suggests
that past 20 years have seen innovation in management control system due to the development of
Balanced Scorecard and Activity Based Costing systems. He further adds that TQM is concerned
with the customer satisfaction, support continuous improvement in corporation processes and
learning and there are no financial goals involve. On the other hand Balanced Scorecard in
practice gives importance to shareholder values and provides financial performance. It also
supports strategic alignment of goals and it gives control and responsibility to the individual.
Blake et al. (2000) investigated the practices of management accounting of Spanish firms using
survey analysis. They suggested that guiding from regulations and government is reducing in
management accounting. They found that in the current scenario, most of the management
accountants are university qualified and few were from some professional associations. They
suggested that a range of innovative accounting techniques is considered in current cost
accounting management. They surveyed that management accountant used various innovative
management tools helping them to cope up with the competition. From these tools Activity
Based Accounting (ABC) leads all the other techniques.
Gunasekaran (1999) considered ABC as the most appropriate tool for costing the manufacturing
concerns that are capital intensive in nature. This approach of costing provides additional
development in traditional costing procedures as it not only provides financial information but
also non-financial information i.e. quality and service. The ABC system focuses on activities
rather on the product. The improvement under ABC is more significant than traditional costing
systems and it benefits the organisation by targeting the cost reduction with new measures,
improve operational performance, provide measures to help management in making decision

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regarding product pricing and profitability, which leads toward proper channels of budgeting.
Further ABC can cope up with the changing managerial control system and also technology.
4.0 Implications for Management Accountants
As suggested by Kaplan (1984) there should be some research strategy which ensures that
accountants can meet the changing needs of organisational planning and control. So there should
be some investment in research and development regarding accounting procedures and practices.
Further training programs should be there for the development of accounts department according
to the changing needs and also enable them to cope up with contemporary planning and control
system. Kaplan (1986) suggested that a managerial accounting system should be flexible and
change according to the change in manufacturing processes and procedures to ensure relevance
to managerial planning and decision making system. In contemporary management control
system decentralization is the main concern to which management accountants should focus and
form their objectives which leads towards the overall objectives of the organization.
With the changing requirement of cost and management accounting environment, the role of
management accountants is more challenging. Their role is not limited to analysing reports from
the plant managers but they have to take a proactive role in the management and operations of
the plant themselves. They must become the part of the management and should educate
themselves according to the new technology and innovations (Wauters, 2005).
5.0 Conclusion
The changing requirements of the global economies require firms to develop not only the product
and service they offer but also they alter the internal business environment and management
control. It is clear from the literature and examples that innovation in the management control
system is due to the competitor and technological pressure and companies has to mold
themselves according to the changing environment. So for the past two decades we have seen the
significant change the practices of management accounting and control system.

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