Sample Marketing Paper on Management of Accounting Change

The impact of new technology and organizational change has resulted in significant changes in management accounting. Organizational changes have caused emerging variants of divisional sized corporation accompanied by shared centers. Organizations are consistently under pressure to find strategies to reduce production costs, manage complexities, and make proper use of their finance professionals, especially in areas that the professionals can add the most value. This article critically reviews activity-based costing (ABC), one of the change transformations in management accounting. Duran & Afonso (2020) explain that activity-based costing is a costing program in which both direct and overhead costs are assigned to products and services related to those costs. The role of SBC is that it seeks to optimize organizational resources, which is done by identifying and reducing cost drivers.

The emergence of management accounting techniques such as balanced scorecard (BSC), activity-based costing (ABC), and enterprise resource planning (ERP) provide managers and accounting practitioners with the ability to track down all costs to individual products accurately and to measure the value of assets (Macchia, 2019). The underlying principles of these notable contributions are to create a shift in traditional management accountants’ roles to enhance their competencies and ability to handle more sophisticated accounting requirements and generate organizational value in response to the contemporary business trends.

Activity-Based Costing (ABC)

Activity-based costing is a costing strategy or structure that helps companies identify each activity in an organization and assign the cost incurred to all products and services (Alsharari, 2019). ABC strategy assigns indirect costs and overhead costs to relevant products and services. In other words, ABC accounting strategy acknowledges the correlation between the cost of overhead activities and the manufactured products or the manufactured products and services. It is a less arbitrary accounting strategy compared to traditional costing techniques. In this case, ABC costing strategy focuses on factors or activities that drive the costs high. It differs from the traditional costing strategy because the conventional absorption costing is primarily focused on the factor that drives production volume, such as working hours. ABC costing strategy also includes transaction-based drivers. An example of a transaction-based driver is the number of orders a company receives. This allows management accountants to trace long-term overhead costs to individual products and services.

Origin and Necessity for Activity-Based Costing

Bruns and Kaplan first redefined the concept of activity-based costing in the late 1980s as an alternative to traditional absorption costing techniques. The ABC system can be viewed as a redefined cost accounting system that allows classification of more costs as direct to identify cost drivers and to increase the amount of in-direct costs. The cost drivers constitute the basis for assigning costs to other cost objects like products and services. According to Rajabi & Dabiri (2012),  the ABC accounting system stemmed from Kaplan and Johnson’s work on the ‘Relevance Lost’ of Management accounting (1987).  Pham, Dao, & Bui (2020) observe that Kaplan and Johnson looked for management accounting techniques to clarify the decision-making process. Based on their argument, Kaplan and Johnson pointed out four essential functions that must be fulfilled by a costing system for it to be considered excellent and effective. The first function is that a good cost system must provide relevant information to prepare the financial statement.

Second, a good cost system must make it possible for managers to control processes and activities within the organization. In this case, a good cost system must consider the timeframe within which organizational activities are completed. The organization, or departments, that produce several items every day must determine the cost per unit of every item or service produced. A good cost system must also allow management accountants to calculate both short- and long-term product costs. Calculation of the short-term costs must also consider the non-traceable costs and how scarce resources are used in the organization. On the other hand, calculating long-term costs requires understanding all cost variables since management decisions influence them. According to Kaplan and Johnson, the final function of a good cost system is to generate data that can be used for other special functions.

As a result, Kaplan and Johnson scrutinized organizational processes and activities to find context for establishing such methods. Second, they Kaplan and Johnson linked together operational and strategic management, which allowed them to propose or set the stage for developing the Balanced Scorecard and strategically oriented ABC. In other words, the development of ABC strategies is embedded in the streams of strategic management accounting.

The interest in strategic management has been growing since the early 1980s. The strategic management instruments exist in a firm if the company can link marketing and strategic decisions to operational decisions. In this context, ABC is one of the management accounting tools that consider management’s strategic aspects. The ABC accounting strategy is a crucial component of strategic management because it integrates the strategic aspects of the company’s drive. Strategic management accounting (SMA) provides a crucial avenue for analyzing the development of ABC. SMA is a process approach system of management accounting. In this case, an organization may be viewed as a network of flat, horizontal, and transverse structures in which activities are organized based on market imperatives. The developments at the bottom of the process make up a crucial driver to the integration. Therefore, the ABC strategy is a significant competency-based tool that relates to an organization’s processes or activities.

Cooper and Kaplan (1988) conceptualized the ABC strategy to correct the overhead costs’ misleading allocation. In this context, the development of ABC occurred in various stages. At first, it emerged as a response to correct the inaccurate standards of costing American methods. According to Ozçelik (2019), ABC’s application rapidly gained strategic and managerial (ABM) dimensions. ABC makes it possible for managers to have a better understanding of the profitability of products and customers. Many practitioners and scholars point out that there are reasons that lead to the development of ABC.

Factors that Led to the Development of ABC System

Several factors led to the need for an activity-based costing strategy. First, the traditional cost accounting strategies were disadvantaged because they allocate fixed arbitrary overhead costs to products and services, yet such costs are not directly or necessarily associated with production. Under a contemporary manufacturing environment, overhead application bases like working hours and a single pool of indirect costs are not considered adequate anymore, prompting the need for accounting management change (Wahab, Mohamad & Said, 2018). In most cases, organizational resources are not related to direct labor under the current manufacturing environment. Misallocation of costing and resources can cause the allocation of costs on the wrong product, leading to a miscalculation of profit margins.

It is also essential to note that companies have two options if they want to maximize their profitability. One option is to reduce the cost of production. However, focusing solely on cost reduction strategies can be dangerous to organizations since it inhibits growth and development chances. Overhead costs are a vital component of the production process. Therefore, cutting down the overhead costs may not be a suitable solution. The second option is for companies to appropriately allocate their product prices, which creates the need for ABC costing strategy.

The second reason leading to the need for accounting management change and the ABC system’s subsequent adoption is that the ABC costing strategy provides the required information to perform their cost management responsibilities effectively. As noted earlier, the current manufacturing environment is consistently dynamic, prompting the need for an accounting system that can be tailored to march the new processes’ requirements. ABC cost accounting strategy enables management accountants to effectively manage activities well, reducing production costs and making the products more competitive. The traditional cost accounting strategies do not offer avenues for managing activities well since they overly depend on financial accounting. This implies that the traditional cost accounting strategies provide little information that can be used to make product mix decisions, determine costs of products, or evaluate performance. Also, the development of information technology has contributed significantly to gathering and processing detailed information a reality. ABC offers better and accurate cost and product management strategies compared to traditional cost accounting methods.

The Process Flow of Activity-Based Costing

As mentioned earlier, activity-based costing is a management accounting system that assigns overhead costs to activities by assigning costs to objects that use those activities. The ABC takes place in various stages that enables managers to assign costs to activities. The first step of the process flow is identifying the cost that needs to be assigned (Menendez et al. 2018). It is the most critical step in the process since it prevents managers from wasting time on broad project scope. For instance, the distribution channel’s full costs can be determined by identifying warehouse and advertising costs associated with the distribution channel of interest. However, the research-based costs will be ignored since they are not directly related to the distribution channel.

The second step in the process flow of activity-based costing is loading secondary cost pools. This entails creating a common pool for the company’s costs when providing service to other organization segments, which do not directly support the company’s products or services. Some of the secondary cost pools may include administrative salaries and computer services and similar costs that need to be allocated or added to other cost pools related to the product or service (Hofmann & Bosshard, 2017). The third step is loading the primary costs. The primary costs refer to the costs directly associated with the production process, such as procurement costs, research and development, distribution channel, and advertising costs.

The fourth stage of the ABC process flow measures the drivers of organizational activities. The data collection system can collect the necessary information to help management accountants understand the activity drivers, which is then used to allocate secondary cost pools to primary cost pools (Jalalabadi et al. 2018). This step helps management accountants add real-time information to the decision-making process, making ABC more effective, more necessary, and more effective than traditional accounting systems.  This is how the ABC accounting system enables managers to use timely and relevant accounting information to make better decisions that can support proper management of resources or increase its competitiveness in profitability, quality, and quality (Wang et al., 2019). Management accountant must have access to real-time information to make timely and relevant decisions regarding the allocation of organizational resources to enhance the organization’s profitability and competitiveness. The subsequent step in the process is charging the identified direct costs to cost objects using activity drivers. It is important to note that each cost pool has its activity driver, making it necessary to divide the cost obtained from each cost pool by the sum of activities in the activity driver to find the cost of every unit of activity (Yun et al., 2016).

Critical Evaluation of Activity Based Costing and the Untended Consequences

This section critically evaluates the benefits of using activity-based as well as the consequences that emerge as a result of using the ABC program. As noted earlier, one of the reasons that led to the development of the ABC accounting program is that the traditional accounting systems are not accurate when it comes to the allocation of costs. In this case, the traditional cost accounting strategies can distort accounting information on the cost of products and services. One of the benefits of using ABS strategy is that it does not misrepresent actual resource usage like the traditional cost accounting system. ABS allows the management accountants to accurately understand the true costs of individual products and services, which can benefit many.

There are many ways through which companies can benefit from activity-based costing. For example, the ABS program enables organizations to identify unprofitable products. In this case, since management accountants can appropriately allocate the cost of production, they can trace the return 0on investment on individual products. In this way, they can identify the return earned from each product or service, which can, in turn, be compared to the cost incurred to produce the product or provide the service. Second, ABS helps companies to improve the efficiency of their production processes. ABS helps companies identify resources and activities that must be available to produce final products or provide the intended service. This also entails providing appropriate product pricing strategies. ABS makes it easy to price different products and services since it provides the actual costs incurred to deliver those products and services to consumers. In this way, the ABS can help companies eliminate unnecessary costs that do not contribute to profitability.

However, the ABS model comes with several unintended consequences, which, as Namazi (2016) observes, has reduced the usage of the ABC system over recent years. Many companies are still struggling to experience the befits of the ABS model. As a result, many questions have been asked regarding the ABS model’s relevance to its users. Bazrafshan & Karamshahi (2017) argue that the ABS model only benefits companies with high overhead manufacturing costs. In other words, this implies that the ABS model is criticized for only benefiting companies that have high marketing, sales, and distribution costs. For this reason, many companies that have tried to implement this strategy have not been able to enjoy its substantial benefits. Besides, most companies have not been able to implement the ABS model because it is presumed that then the implementation process is complex and time-consuming

Despite making significant management accounting changes, the ABC system is marred by a number of shortcomings that may impede its implementation. According to Gregório, Russo & Lapao (2016), many organizations implement ABC systems only to eventually realize that a high proportion of ABC projects lapse into disuse or fail. The first challenge of the ABC system is that it is difficult to install. It takes a lot of time to install since it requires multi-layer installation, especially in organizations with multiple product lines or facilities (Pietrzak, Wnuk-Pel, & Christauskas, 2020). ABC systems are not only time consuming to install but are also expensive and hard to adjust in organizations that require comprehensive installation. It also high maintenance costs since it requires huge budgetary support to install and sustain.

In conclusion, it has evaluated the management accounting change along with the frameworks of contingency theory. The contingency theory is a systematic approach that links organizational and its subsystems with the broader internal and external environmental factors that affect an organization’s processes, performance, and activities. In this case, the management accounting change attempts to streamline organizational properties with the environmental factors that affect the organization’s performance. In this light, management accounting change is viewed in the light of contingent factors that influence the change. The process of change has been analyzed in light of the broader context of the organization. In this way, this paper has demonstrated that management accounting change relies on the broad range of contextual factors and the implementation process’s nature. In most cases, these aspects are often beyond the control of the organization. The socio-cultural aspects of the organization have been highlighted as well.

 

 

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