Today, because of revolution in management accounting, both smallest corner store and largest multinational organization start their own innovation on their accounting perspective. They were successful by applying new cost accounting model such as ABC systems and JIT system to improving the cost accounting system. Their Sociological perspective can be understood as a point of view that focuses not on individuals but their group or society, this is another concept that can be improve the value of modern management accounting system. Nowadays, most successful organization are more and more concentrate on the management accounting system innovation, by using
both technical model and sociological/behavioral perspectives to improve the value in their management accounting system. The following essay will discuss the organizations how to apply the management control system to improve the working performance, and guide the employees achieving the goals.
Simon (1995, p5) states that management control system as “the formal information-based routines and procedures managers use to maintain or alter patterns in organizational activities”. Management control system plays an important role in management accounting, it helps the directors to make decisions in daily operation and give good strategies of the business. In general, this system collects and uses information to aid and coordinate the planning and control decision. Moreover, the main point of management control system is to guide the behavior of the managers and employees to achieve the goal. In addition, management control system collects both financial and non-financial information inside and outside of the company. Management control system could depart as formal and informal control system. However, according to Simons’ definition of management control system the formal management control system much more helpful to aid the company achieve the goal. Because to the formal management control system itself, it includes the explicit rules, procedures, performance measures and incentive plans so that it could guide the behavior of its managers and employees. The formal management control system consists of some systems and management accounting is one of the formal systems that provide information about revenue, cost and income, and according to this information. The manager could create the strategies and improve the working performance. This kind of system referred as a technical control system. However, only the technical control system is not good enough to guide the manager and employees achieving the goal. Hence, human resource system becomes another formal management control system which prepares the information on recruiting, training, absenteeism and accidents. It also supports a quality system that provides the information on scarp, defects, rework and late deliveries to customers. This kind of system is facing to the public which is referred as a sociological control system. The main function of management control system is to sufficiently combine these two system so that to help the business improve the performance and achieve the goal more effectively. (Horngren, et al, 2003, p754)
Technical control system
As management accounting system is one of the formal management control system, and planning is one of the management process phase. Planning is used by management to develop the organization’s objective or goal, and set a plan that how to achieve it. For example, one organization set its objective to increase the market share by 10% and introduce its new product. The organization might decide to three actions to achieve it, increased advertising budget, open a new sales territory, and increase the research and development budget. Strategic planning is one kind of planning which is used by management to develop long-run courses of action to achieve the goal. Usually, a strategic planning involves a period’s cove five or ten years. Therefore, the plan serves as the basis for the long-term commitment of organizational resources. A strategic plan is approved by senior management level; it should integrate all aspects of the enterprise’s operations to achieve the long-term objective. Strategic plan should be periodically reviewed and revised, because it could be changed by environment during the operating period. Furthermore, in the short-term, operational planning is a short-run planning for achieving the operational goal. The objective of the operational plan should absolutely support all strategic planning of the enterprise. Thus, operational plan sets a period from a week or a month to several years. (Robin Copper, Regine Slagmulder, 1998, p.16)
Operational plans are typically designed to achieve quality goal such as customer satisfaction, production and cost. In management accounting system, budget is a good tool for planning and achieving the operational objective.
Budget is a process of translating the planning and programming decisions into specific projected financial plans for short-run. It is a segment of action programs adopted that set out planned and estimate the resources to be applied for the budget periods in order to attain the accomplishments. It also includes financial and non-financial aspects of the plan and the blueprint of the company in the upcoming years. As a management accountant, usually spend a lot of time in preparing and analyzing the budgets. The reason is that the manager could get some advantages from budget. The first advantage is strategic planning and implementation of plans. The managers could set its effective strategic planning access budget and match its marketplace and its opportunities to accomplish the goal. In addition, framework for judging performance is also an advantage of budget. Budget can overcome two limitations of using past performance as a basis for actual result. The third advantage is motivating managers and employees. A lot of research shows that budgets could challenge to improve the working performance. Because if the company can not achieve the budget number, it is viewed as a fail operation. Most managers and employees will work hard to avoid the failure and try the best to achieve the goal. That means the budget could push the managers and employees to achieve the goal more active. (Horngren, et al, 2003, p176)
However, a successful of a business is not enough to be created by a good budget. Control is an important and necessary tool to meet the budget. It monitors the result between budget and actual to determine if the budget result is achieved or not. (Battistutta and Duncan, 1998, p355)
When the managers have planned the goals and directed the actions, there comes the need to assess how well the plan is working. “Control is taking actions that implement the planning decisions and deciding how to evaluate performance and what feedback to provide that will help future decision making.” (Horngren, et al, 2003, p6) Controlling monitoring the operating results of implemented plans and comparing the actual results with the expected results. This feedback allows manager to isolate significant departures from plan for further investigation and possible remedial action. It may also lead to a revision of future plans. This philosophy of controlling is sometimes referred to as management by exception. For example, if actual department costs incurred in maintaining a process significantly exceed expected costs, then an investigation may be conducted to determine the cause of the difference so that corrective action may be taken. (Robin Copper, Regine Slagmulder, 1998, p.17)
Today many industries are reaching capacity levels and enjoying increase the sales and profits, the most significant change for manufacturing environment is “by increased automation and computerization, reduced levels of direct labor and inventory, increased attention to product and production planning, and shorter product life cycles.” (Anonymous, 2004). Such these manufacturing philosophies were along with the changing technologies, and as for the traditional cost accounting model, it can not be matched. Because the traditional costing accounting gives too little attention to internal and cost controls and cost controls, matches revenue and expenses improperly. Thus an alternative to these suggested solutions is for the accounting system to adopt for new method of accounting for product costs under generally accepted accounting principles (GAAP). “Activity-base costing, technology, and JIT (Just-In-Time) system have been developed to update the traditional accounting model so it adequately reflects today’s manufacturing environment.” (Seed, Allen H, 1990) These methods focus on cost control and the elimination of the overhead allocation problems therefore to improving the value of management accounting system. The later paragraph will discussed in more detail below to show why and how the traditional cost accounting model should be changed.
“Activity-base costing Accounting accumulates product cost and other financial and operational information based on the activities required to manufacture the product or achieve a financial or operational goal.” (Dilts, David M; Grabski, Severn V., 1990) Today’s management accountants are not allocating overhead to production solely on the basis of direct labor rather than before. The first step in activity-base costing is to identify the products that are the chosen cost objects. Such as the company make the men’s shoes named M-47. Then the direct costs should be identified next, after they developed the all cost account, all the cost should be allocated to activities. For example, the machine costs are allocated on the machine hours, and the direct labor costs are allocated on the direct labor hours. The left steps for ABC system is select the cost allocation bases to use for allocating indirect cost to the products, and identify the indirect cost associate with cost allocation base. The last step is to compute the rate per unit and indirect cost allocated to the products. This method of allocation relates products costs directly to the resources used to produce them, comparing with the traditional model, they found that “overhead costs applied to their products could be as little as one-fifth or as much as 20 times the amounts applied under the traditional model.” (Dilts, David M; Grabski, Severn V., 1990)
Controls also are strengthened under activity accounting because costs are controlled at the activity level where they are being incurred. The traditional model emphasizes cost control at the finished product level after the goods have been produced and the costs have been incurred. Therefore, activity base costing can be improved the management accounting by the stage of cost allocating and controls.
The concept of JIT was defined of reducing inventories by working closely with supplies to co-ordinate delivery of materials just before their use in the manufacturing or supply process. This means JIT can minimize the inventory by supplying material and components to the production line directly before placement in to the product. Furthermore, in the ultimate JIT system, inventory is constant from year to year means that the cost of goods sold equals the cost of goods manufactured. However, normally, costs of goods, includes raw materials, work in process, finished goods inventory and cost of good sold. If cost of goods sold equals the cost of goods manufactured, then cost of goods sold will disappear, lead ending inventories to be immaterial.
On the other hand, JIT profoundly affect the unit cost concept. “A successful JIT system requires the just in time supply of defect-free inventories to all stages of production.” (Anthony A. Atkinson,CMA 1998)This is means to improving the productivity by reducing the waste and the production costs.
Sociological control system
It is not good enough for the company to achieve the goal for using technical system. Sociological control system could assist the company and achieve the goal easily. People may have problems from the planning and controlling. Of course, budgeting will bring a lot of benefits for operating the company in the future. However, budgeting could bring the stress to all employees to achieve the goal at the same time. For example, in order to be effective, budgeting need to built “honest” relationships been the lower-level managers and high-level managers even their bosses. Because the lower-level managers want to keep successful and they may give the wrong number to higher-level managers and their bosses. “Empowerment is the most recent management initiative aimed at getting more effort, commitment involvement, and output from employees throughout the organization.” (Macintosh, 1994, P1) Thomas Johnson is a proponent of employee empowerment person. He believes that the problem can be solute by lower-level employees. Because they deep understand of production processes and customer concerns so that they could use the accounting information to aid the organization achieve their objective.(Macintosh, 1994, P1) Johnson also argued that there was a problem by using “remote control management” in the past couple of years. He said,
Attention of management at all levels focused on costs, profit, ROI, leverage, and other financial results. Not shop floor organization and satisfaction of customer wants. Managers began to manipulate processes to achieve accounting results, instead of monitoring well-run processes by occasionally checking accounting results. Process management-intuitively understood by most managers before the 1950s-was quickly replaced by “managing by the number”. Worse, top managers increasingly identified and defined “process” in term of whatever it took to achieve desired accounting result. And that view of things was telegraphed throughout every level of almost every business in the nation. (Johnson, was cited by Macintosh, 1994, p10)
Johnson also believed that “remote control system misleads managers into chasing false imperatives…always sustain output at a level to cover all costs, and always persuade customers to buy output at prices high enough to earn the market’s required rate of return” (Johnson, was cited by Macintosh, 1994, p10). Remote control by the numbers merely encourages lower-level managers “to manipulate (or tamper with) processes in order to achieve accounting cost and revenue targets dictated by “top down” command and control information” (Johnson, was cited by Macintosh, 1994, p10). Such actions are the opposite of the responsiveness and flexibility needed in today’s global markets.” In fact, this kind of higher-level manager does not understand how to satisfy customers’ needs and wants at all. More disturbing is they did not care the employees who actually produce and market the products.
In summary, beside strategic management, many organizations are in order to gain and keep the competitiveness and they focus on their basic resources and employees. The competitiveness of the marketplace has placed a premium on productivity, quality and creativity. However, higher level of productivity and quality cannot be achieved by the employees who are alienated and disinterred. (Aryee, 1993, p227)
As a result of buttered by intense level of competition under globalization of the marketplace. Most organizations need to apply an effective management system to create a committed workforce. Hence, management control system links socialization practices to the business strategy so that it can improve the working performance and aid the employees achieve the goals.
Posneret al. (1985, p. 294) cited Watson (the legendary head) of IBM as saying:
I believe the real difference between success and failure in a corporation (can very) often is traced to the question of how well the organization brings out great energies and talents of its people. What does it do to help these people find common cause with each other? I think you will find that it owns resiliency…to the power of what call beliefs and the appeal these beliefs have for its people. In other words, the basic philosophy, spirit and drive of an organization have far more to do with its relative achievements than to technological or economic resources, organizational structure, innovation and timing. (Posneret, was cited by Aryee, 1993, p229)
“Human resource management can help a firm obtain competitive advantage lowering costs, by increasing sources of product and service differentiation or by both”. (Posneret, was cited by Aryee, 1993, p229) For example, human resource management should make their own employees happy so that the employees could work harder to help the firm achieve the goal. Active working behavior could improve the working performance, and it must reduce the costs and increase the sources of products and services. Oppositely, if the employees lost the commit and then, a negative working behavior will exist at the same time. It will cumber the development of the firm.
Therefore, “Strategic human resource management posits that organizations select human resource management practices that stimulate and reinforce specific employee behaviors required to successfully implement organizational strategy.” (Collins, was cited by Aryee, 1993, p234) For example, the strategic human resource management could include that the company could set a bonus to encourage the employees who did good job. This action could motivate the employee working harder.
The two parts, one is improving the value of management accounting system by technical model, and the other is sociological/behavioral perspectives. In the technical model, it was mainly talked about the ABC system, JIT system, and technology accounting as the tool to improve the value of the management accounting systems and practice. Furthermore, Sociological and behavioral also can lead the management accounting system value improve, based on their external and internal environment. Try to be more concentrate on the customers, as much as lower the input price, to get more competitive advantages, therefore, to improving the productivity and lower the production costs by applying the technical method, as a results to improving the value of the management accounting system. Therefore in conclusion, move to the successful organization, the group need to be brave in innovation, although the financial technical such as costing accounting system but some other perspectives like non financial perspectives sociological and behavioral is also important for an organization to move to successful. The main function of management control system is to combine technical method and sociological method, and aid the working performance lead to guide the employees achieving the objective.
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