1) Identify and explain why traditional practices have been criticized for not being relevant and flexible. Traditional accounting practices have typically been characterized of the following: A practice that has short term focusAccounting practices lacking value innovationVery conventional financial projections and planningHaving too high innovation costs Typical lack of financeFraught with too long payback periodsGiven that scenario, it was in the late 1980s, that traditional accounting practices came under fire. More precisely it was educators and accounting practitioners who were criticized of using traditional accounting practices even then since there had been a sea change in the same during the last 60 years or so.
Not only that what came under heavy criticism was also the curriculum taught to accounting students, which had remained the same despite a radical change in the practices during then last six decades. Also, during this period business environments had changed along with the way the businesses are done. In spite of the great progress made in accounting concepts during recent years, accounting that has been carried forward from the mid-twenties are beset with numerous criticism of existing practices and with unsolved problems of considerable magnitude.
Current accounting literature certainly doesn't suffer from a lack of ideas and suggestions for improvement and expansion of accounting literature. Critics of today even opine that new sticking to the old accounting practices have retarded the new innovations from being employed and considered for purpose of betterment of accounting practices. The criticism finds its genesis in a presumption that professional accounting institutes feared that management accountants would increasingly be seen as superfluous in business organizations. It is based on this premise that later a number of resources were employed to the development of a more innovative skills set for management accountants. A reference to cost control can be used to draw a distinction between ‘traditional’ and ‘innovative’ accounting.
Cost accounting is a central method in management accounting, and traditionally, it was variance analysis that was management accountants’ principal technique. Variance analysis, on the other hand, is a systematic approach to the comparison of the budgeted costs and actual costs of the raw materials and labor used during a production period. While some manufacturing firms still use some form of variance analysis, it nowadays tends to be used in conjunction with innovative techniques such as activity-based costing, which are designed with specific aspects of the modern business environment in mind and life cycle cost analysis.
It is considered that lifecycle costing recognizes that managers’ ability to influence the cost of manufacturing a product is at its greatest when the product is still at the design stage of its product lifecycle (i. e., before the design has been finalized and production commenced), since small changes to the product design may lead to significant savings in the cost of manufacturing the product.
Activity-based costing, popularly termed as ABC recognizes that the amount of activities in modern factories determine manufacturing costs. Activities could be the number the amount of production equipment idle time and production runs per month. Therefore the key to effective cost control is giving attention to these activities and optimizing them.