PAS 3173 ADVANCE

MANAGEMENT
ACCOUNTING

TOPIC 1:
DEVELOPMENT OF
MANAGEMENT ACCOUNTING
ROSMAWATI MAHFAR
 Introduction : development
of MA
 Modern MA - Industrial Revolution started from
managed, hierarchical enterprises in 19th century
with the emergence of factory system.
 Needs the information regarding cost of internal
operation and the efficiency of converting raw
materials to finished goods;
 In industries such as textile mills (cost per process,
cost per tons); the development of railroads
companies (cost per passenger mile, cost per gross
ton mile); the steel industry (improvement process) -
there was little concern with measuring costs of
different products separately
 There was an urgent needs for a separate financial
accounting and MA system 
 A Brief History
 In the late 19th century, railroad managers
implemented large and complex costing systems
◦ Allowed them to compute the costs of the different
types of freight that they carried
◦ Supported efficiency improvements and pricing in
the railroads
 The railroads were the first modern industry to
develop and use broad financial statistics to assess
organization performance
 About the same time, detailed records of the cost of
materials and labor used to make the steel produced
in the steel mills was being developed.
 A Brief History
 The emergence of large and integrated companies at
the start of the 20th century created a demand for
measuring the performance of different organizational
units
◦ DuPont and General Motors are the examples
 Managers developed ways to measure the return on
investment and the performance of their units
 It was only in the 1970s that interest returned to
developing more effective management accounting
systems
◦ American and European companies were under
intense pressure from Japanese automobile
manufacturers
 During the latter part of the 20th century there were
innovations in costing and performance measurement
systems
Introduction
 Scientific Management Era - engineers
concentrate on improving the efficiency of
production process by using standards and
variances
 
 The growth of diversified companies -
increased integrated multi-divisional firms,
measure performance (ROI) of each
divisions (decentralisation).
 Products diversity and the scale plus
complexity of the production processes
created enormous information processing
problems
The Changing Focus
Traditionally, MA information has been using
financial information
However, MA information has now expanded
to encompass information that is operational
and nonfinancial:
◦ Quality and process times
◦ More subjective measurements (such as customer
satisfaction, employee capabilities, new product
performance)
Three dimensions in MA:
◦ Financial & Non-financial information
◦ Internal & External information
◦ Operational & Strategic information
 The scope of the MA field is an activity that is
weaved together with the management process in
all business organisations.
 MA forms an integral part of the management process in
an organisation, where it provides essential information
to the business in its planning, evaluating, controlling
and decision-making processes.
 In March 1998, Financial and Management Accounting
Committee (FMAC) of the International Federation of
Accountants (IFAC) has released a revised
International Management Accounting Practice
Statement (IMAP), which underlies all concepts that
concerns with the management accounting field of work.
 In view of that, the revised statement IMAP 1 provides a
benchmark of best practices in MA that can serve as a
resource in developing practice in this direction
worldwide.
The Evolution of MA
 The field of organisational activity encompassed
by management accounting has developed
through four evolutionary stages.
 IFAC (1998) had identified a four-stage
Management Accounting Evolution, namely;
◦ cost determination and financial Control,
◦ information for management planning and
control,
◦ reduction of waste of resources in business
processes and
◦ creation of value through effective resource
use.
The Evolution of Management Accounting

Stage

Ongoing
Transformation

1995 Transformation

1985 Transformation

1965 Transformation

1910
Focus
Cost Information Reduction of Creation of Value
Determination for Waste of through Effective
and Financial Management Resources in Resource Use
Control Planning and Business
Control Processes
Stage 1 : MA stage prior to the
years of 1950
 The main focus of this stage was on cost
determination and financial control.
 Hence, the main source of data was from
financial statements that include Income
Statements, Balance Sheet and Cash Flow
statements.
 During this period, the use of methods such
as ratio analysis, financial statement
analysis and other cost accounting
technologies were very popular.
 Stage 2 : MA stage by the
years of 1965
 At that time, the focus shifted to the provision of
information for management planning and
control, through the use of such technologies as
decision analysis and responsibility accounting.
 The main aim then was to enable the management
group to plan, control and take the best course of
action in their decision-making processes.
 During this stage, the use of MA techniques that
could support decision analysis and responsibility
accounting was introduced.
 Hence, the traditional methods such as standard
costing, Cost-Volume-Profit (CVP) and Break-
Even Analysis were introduced in these periods.
Stage 3 : MA stage by the
years of 1985
 The attention was focused on the reduction
of waste in resources used in business
processes, through the use of process
analysis and cost management technologies.
 This was made possible through the
elimination of “non-value-added activities”
and the use of mathematical formulas.
 During this period, the use of methods such
as the Economic Order Quantity (EOQ
model), Inventory evaluation models
such as FIFO, LIFO, MRP and multiple
regressions.
 Stage 4 : MA stage by the
years of 1995
 where the attention of the world shifted to the
generation or creation of value through the
effective use of resources and technologies.
 In this stage , the MA examines the drivers of
customer value, shareholder value, and
organisational innovation.
 For an organisation to survive in the competitive,
ever-changing world, it must put in place sound
management accounting practices.
 The introduction of AMA methods such as Just-in-
Time (JIT), Target Costing, Balanced Score
Card, and Strategic Management Accounting
were very dominant in this stage.
IFAC (1998) had identified that between the
years of 1985 to 1995, attention of the world
especially the developed countries had now
shifted to the generation or creation of value
through the effective use of resources and
technologies.
 The Just-in-Time (JIT), Balanced Score Card,
Value Chain Analysis and Strategic
Management Accounting are some of the
techniques that belong to this relatively
modern management accounting methods.
For an organisation to survive in the
competitive, ever-changing world, it must put
in place sound MA practices.
The growth of diversified companies
However in recent years, an increase in product
diversity, a shortening in product lifecycles, the
widespread of information technology in
manufacturing and the advent of world markets
in products as a result of the erosion of barriers
to trade, have intensified the challenges for
managers
an increase of integrated multi-divisional firms,
products diversity and the scale plus complexity
of the production processes created enormous
information processing problems.
Thus, the latest 5th stage of MA evolution is
called the information and knowledge
management – still lack of academic research
on this stage.
 Criticisms of MA practices
a. Failure to respond to changes in the
manufacturing and competitive
environment
 companies invested in Accounting and
Manufacturing Technologies (AMT) and focusing on
quality, delivery, product innovations and customer
services issues in order to produce low cost, high
quality product with high quality customer
 However, the traditional cost and performance
measures system still being used
 all these do not provide the appropriate information
as the cost behaviour pattern has changed, failure
to report on non-financial issues such as quality,
reliability, lead times, flexibility and customer
satisfaction
 Criticisms of MA practices
b. Limitations of traditional product
costing system
 full product costs to fulfil the FA requirements used
arbitrary allocation overhead costs
 but not suitable to making decisions such as
introducing new product, discontinuing products and
product pricing which should be based on incremental
cost approach
 it is difficult to do so when company has a wide range
of product and the possibility to generate relevant
costs information for each product is very low
 today: wide range of product, small fractions of labour
costs and tremendous increase in overhead costs plus
intense competition increase the need for a more
accurate information
 Criticisms of MA practices
c. Ma has become subservient to FA
product costs computed for FA is also used in
making decision in the company
MA practices have been driven by FA
requirements, the benefits of having 2 systems
do not outweigh the benefits offered, congruence
with outsiders measures of overall company
performance
d. Little attention to external
environment
 MAfocus on internal comparison of costs and
revenue and little attention is given to external
environment where business operates (competitive
positioning of the company in the market)
 The Issues of MA
1. Dominance of Financial Accounting
- FAS requires costs be allocated between cost of
goods sold and inventories. The focus is the
allocations of costs (rather than measuring the costs
accurately) and cost accounting satisfies this
requirement.
 - The FA information is also used for management
accounting purposes. Due to high costs incurred,
company is not willing to invest in a separate system
of financial and management accounting.
 - Overhead costs were allocated using simple
measures of activity, where the rational of using the
measures to absorb overhead to products is being
ignored, and the treatment of unused capacity (ABC)
is being neglected.
 The Issues of MA
2. The period of lost relevance
An increase in variety of products offered,
production processes, shortened product life
cycle and advances in information technology,
but MA system failed to respond to these
changes.
Firms still used conventional MA system
installed many years ago to help in making
decision today.
 many experts have warned that if
management accounting is to maintain its
relevance, management accounting needs to
adapt to meet the changing needs of
managers (IFAC, 2001).
 The Malaysian Scenario
 ZetiAkhtar Aziz (March 2000) has highlighted, new
shape of M’sian economy is arising from globalisation,
advances in technology and greater reliance on
knowledge for value creation.
 With the new challenges of globalisation, liberalization
and advances in information and communications
technology, the challenge to M’sia is to evolve with
new sources of competitiveness and to build new
capabilities to produce new sources of economic
growth. This is by relying and understanding the
knowledge for value creation.
 The knowledge for value creation is the advanced
stage of MA application that creates values in
organisational activity through effective use of
resources, and through the use of technologies that
examine the drivers of customer value, shareholder
value and also the organisational innovations.
 The Malaysian Scenario
Research results: the practice of advanced MA
techniques (Stage 4) is still low in selected companies
in Malaysia.
MA practice of selected companies in Malaysia has
reached the second stage, and a few companies have
evolved into the third and fourth stage of MA
evolution.
The prospect of utilising more of Stage 3 and Stage
4 techniques in M’sia are high, especially with the
support of CIMA members in the organisations.
The respondents (CIMA members) must play a big
role to initiate the practice of advanced MA
techniques in Malaysia.
 The MA practice has to stand out as a valuable tool in ensuring
proper resource allocations and proper performance evaluations.
 Thus, M’sian companies must be able to utilise this advanced MA
tools to ensure that businesses operate efficiently.
Thank You!