Continuous Improvements in the Accounting Information Systems of Businesses - Literature review Example

Management Accounting Contents Contents 2 Introduction 3 Discussion 3 Conclusion 9 References 11 Introduction The use of traditional cost accounting systems was mainly done when the components of cost mainly comprise of direct labour and direct materials. At that point in time, manufacturing overhead was considered as a component which has relatively less importance. The production of a particular product was done by using direct labour and direct materials. Indirect labour and indirect materials constitute a part of manufacturing overhead and are used in the production of several products. For example, the labour cost and supplies are employed with regard to maintenance and machine setups. The application of manufacturing overhead is mostly on production which is based on machine hours and/or direct labour hours. Excessive use of machine hours or direct labour hours may result in over application of manufacturing overhead. The manufacturing costs which result as a consequence are then allocated to inventories and also to cost of goods sold. The unit manufacturing cost of a product is derived by dividing the total manufacturing costs of a particular product by the number of units produced with regard to that particular product. This is considered as important because it plays an important role with regard to determination of selling prices of products. Discussion The division of business entity into investment centres, profit centres, and cost centres lead to the designing of accounting reports such as to facilitate comparison between budgeted and actual amounts for each unit of an organization. Management by exception is considered as an important part in this system where significant amount of variances are highlighted (Agresti, 2002, pp. 31-35). The setting up of accounting systems with high regard to standard costs lead to conversion of actual costs for the purposes of presentation in financial statements. These variances tend to be apportioned between inventories, cost of goods sold, finished goods, and work-in-process. The cost accounting systems were mostly developed for small businesses that focus on production of a small number of units and have direct labour as their main input. There used to be repetition of the same production processes and costs were kept at a low level through efficiency, high productivity, and increased output. This is basically achieved through inspections of detective products and an increased utilization of labour (Albrecht and Sack, 2001, pp. 17-23). The level of inventory was considered to be very high due to increased output and reduced idle time for workers of the plant. There used to be purchase of huge amounts of materials to obtain discounts with regard to quantity. Labour and materials were considered to be direct costs with regard to production which tend to variable in nature. Technology was also considered as fairly constant and the costs relating to overhead tend to be less in amount which can be allocated to the production process based on direct labour hours. In this regard, it can be said that all overhead costs are not considered as variable. Power was considered to have a fixed cost element and depreciation was considered as a cost which can be easily allocated. Repairs were also made as and when needed but these costs tend to be very low in magnitude (Boer, 2000, pp. 313-317). The development of cost accounting system must be in such a way so as to meet the needs of financial reporting of an organization. Cost of goods sold is considered to be an important requirement for income statement of organizations. The cost of inventory with regard to work in progress, direct materials, and finished goods is needed for balance sheet purposes of organizations. There seemed to be an important question whether the cost accounting system that was developed mainly for external needs of organizations is competent enough to meet the internal requirements of organizations. The change in the way businesses are conducted led to increasing presence of automation on the floors of factory (Burnett, 2003, pp. 129-134). Direct labour as a consequence resulted in smaller proportion of the total cost. There were new manufacturing equipments that utilized computer technology in an efficient manner and the pace of change in technology is also considered as very rapid. There was a need for constant replacements. Certain machineries needed the involvement of direct labour while others could be operated without any presence of workers. The attempt by organizations to reduce direct labour costs which are considered as variable resulted in an increase of fixed overhead costs (Carlton, 2004, pp. 466-471). There were numerous arrivals of new products in the market. Organizations tend to focus on variety of products with shorter life cycles instead of focusing on high volume products that are considered to have little differentiation. Organizations tend to manufacture such products in small batches. This resulted in an increase in number of setups and also the amount of downtime significantly increased. Marketing activities, product design, and research and development activities were considered to be of significant importance. There was development of new philosophies in organizations to cope with such changing needs. Total Quality Management (TQM) is considered as an important philosophy in this regard whose main purpose is to continuously improve the performance of organizations at all levels (Cooper, 2006, pp. 287-290). This may result in higher profits for organizations, lower costs, and increased productivity. It considers that for success of an organization, it is of immense importance that all its employees including the top management are involved in every aspect of its functioning. The main objective of organizations is to manufacture quality services and products in an attempt to delight consumers. Engineers and production specialists are considered not as ones who are only responsible for effective implementation of this technique. Self managed teams comprising individuals from every functional area of an organization are responsible and also have the power to make much needed changes that are considered as necessary in this system. The development of TQM by organizations is considered to consume much effort and time and as such is considered as not suitable for every organization (Gabbin, 2002, pp. 81-86). There are many problems in this regard such as data collection, training, employee compensation, and approach that should be adopted which have a considerable bearing on the ultimate success of organizations. Cost benefit analysis are also undertaken by organizations which uses different economic techniques to analyse the benefits and costs of a particular project. The main goal in this regard is efficiency. Projects should be undertaken by organizations only in such cases where benefits are in excess of costs. Economic value analysis is concerned with defining an organization’s value proposition. It is considered as a systematic approach which evaluates the performance attributes of an organization’s product with regard to resource expenditures that are considered as necessary to enjoy its benefits. It is considered that ascertainment of product costs plays an important role in the profit making capability of an organization (Gerard, 2005, pp. 661-666). The ascertainment of costs of products is considered as very necessary for determination of selling prices of products. It also helps organizations to determine the marketing effort that is required to market their products in the market. The evaluation of product profitability is considered not that difficult when an organization produces few products. But when organizations are engaged in the production of a large number of products, the task can be considered as fairly difficult (Howieson, 2003, pp. 69-74). Incorrect data regarding costs can constitute numerous problems for an organization which are discussed as follows: I) the design of a product can unnecessarily raise the cost of a particular product, for instance, a three hold circuit can substitute two hole and one hole circuits in the production process, but according to cost systems the manufacturing of a three hole circuit require more direct labour and hence is considered more expensive, II) organizations may acquire wrong equipment which may influence the designing processes in organizations in a way that may reduce the quality and flexibility and also may raise costs for an organization, III) the centralizing functions of an organization to reduce costs may influence quality and services of organizations, IV) the process of cutting costs by organizations may lead to decline in quality of services and products that are offered by organizations and as the process of hiring people commences, the costs tend to increase again, V) The shifting of production process by organizations to foreign countries may lead to decline in quality and increase in costs. The traditional system of cost accounting is considered as an absorption cost system. The allocation of fixed and variable costs to production process is made with regard to direct labour hours (Johnson and Kaplan, 1987, pp. 51-53). But with increasing automation of factories, direct labour is considered to be used very little in the production of goods and services of organizations. The use of labour is mostly in fields such as systems analyzing, designing, engineering, programming, and support and supervisory activities of an organization which is concerned with numerous products and is not associated with a single product or service. The cost of software with regard to computer integrated manufacturing is very difficult to allocate on the basis of direct labour hours. The system of traditional cost accounting allocates costs of overhead to cost centres. It then reallocates those costs to individual products of an organization. The main basis of reallocation in this regard is considered to be direct labour hours. Direct labour is considered to be a small part of the total cost of an organization. The change in the management accountant’s role implies paradigmatic shift of expectations which encompasses two types of development such as adoption of new techniques and tools and acting as an advisory which is considered as integral to managerial decision making. Current management accounting techniques are not considered to provide organizations with competitive advantage over their rivals (Maher, 2000, pp. 335-346). As the business environment of today has become increasingly competitive, organizations tend to be dynamic and aggressive in their competitive strategies to ensure profitability of organizations. Certain management accounting practices by organizations can provide them with strategies which can influence consumers in a significant manner to prefer an organization’s product. An organization is considered to gain sustainable competitive advantage over its competitors if it adopts efficient management accounting techniques. In this regard, management accounting practices of organizations must move from reporting historical information with special regard to variance analysis to strategic planning processes of organizations. The skills of management accounting have important applications in the environment of business where market intelligence is considered as an important factor. The skills of management accounting have also got important applications in competitive strategies and strategic decisions of organizations. The management accountants of organizations in this regard should be at the forefront in the development of innovative strategies by organizations which are considered as competitive to remain profitable in their existence (Pierce, 2002, pp. 10-12). There should be regular examinations of internal processes by managers of organizations in order to make such organizations cost effective and efficient. It is considered that management accounting provides ideas to both service and manufacturing organizations and as such it can be used to develop strategies which can be considered as cost effective and efficient as a competitive tool for profitability and growth. Conclusion The environment of business is considered as ever changing and competitive and as such there is a growing need for continuous improvements in the accounting information systems of businesses. It is considered that the accounting system of an organization is a key element that has a significant influence on management control and strategic planning of organizations. The allocation of overhead costs in traditional cost accounting systems is largely dependent on direct labour hours. But direct labour hours are considered to be a small component in the production process as diversity in product line increases. In this regard, it can be said that allocation of overhead costs based on direct labour hours can be considered as irrelevant and inaccurate. This can result in incorrect discontinuance decisions with regard to products of an organization and can leave the company manufacturing and selling very few products. References Agresti, A., 2002. Categorical Data Analysis. New Jersey: John Wiley & Sons. Albrecht, S. and Sack, R., 2001. The Perilous Future of Accounting Education. CPA Journal, Vol. 71(3), pp. 17-23. Boer, G., 2000. Management Accounting Education: Yesterday, Today and Tomorrow. Issues in Accounting Education, Vol. 15(2), pp. 313-317. Burnett, B., 2003. The Future of Accounting Education: A Regional Perspective. Journal of Education for Business, Vol. 78(3), pp. 129-134. Carlton, D., 2004. Why Barriers to Entry are Barriers to Understanding. American Economic Review, Vol. 94(2), pp. 466-471. Cooper, P., 2006. Adapting Management Accounting Knowledge Needs to Functional and Economic Change. Accounting Education, Vol. 15(3), pp. 287-290. Gabbin, A., 2002. The Crisis in Accounting Education. Journal of Accountancy, Vol. 193(4), pp. 81-86. Gerard, G. 2005. Slack Resources and the Performance of Privately Held Firms. Academy of Management Journal, Vol. 48(4), pp. 661-666. Howieson, B., 2003. Accounting Practice in the New Millennium: Is Accounting Education Ready to Meet the Challenge? British Accounting Review, Vol. 35(2), pp. 69-74. Johnson, H. and Kaplan, R., 1987. Relevance Lost: The Rise and Fall of Management Accounting. Boston: Harvard Business School Press. Maher, M., 2000. Management Accounting Education at the Millenium. Issues in Accounting Education, Vol. 15(2), pp. 335-346. Pierce, B., 2002. Management Accounting without Accountants? Accountancy Ireland, Vol. 33(3), pp. 10-12. Read More