Has The Management Accounting Information in Malaysia

Losing Its Relevancy?

Siti Fatimah Bte Razak

Universiti Teknologi Mara, Malaysia

Abstract

Without knowing the management accounting history, changing in prior times, the growth may

be not able to understand in details. Prior to the Fall and Rise of Management Accounting, the

research on Management Accounting history, the fall and the rise of management accounting

have be explores. The research done by reviewing the article, thesis, journals, books that get

from library database system. The declining of management accounting have be found.

Keywords : Management Accounting History, Declining of Management Accounting, Production Cost,

Strategic Positioning, Activity Based Cost System,

Introduction

The author of Relevance Lost, Johnson Thomas and Kaplan Robert, have describe and

precisely talk about the history and the evolution of management accounting system during 19th

century. There are 11 chapters that story precisely the introduction, the history, evolution, the

obsolescence, and the future of management accounting in rapid modernization environmental

changes. The author hopes that the all the chapter will give the pictures of the history,

changing, and the idea of management accounting development. The author express the

organization financial reporting are drives by the procedure and cycle that provide by

management accounting information. Initially at early progression show the negative effect. It’s

too late, too aggregated and too distorted to be relevant for manager’s planning control

decision. The information given to the manager are not timely and detailed of information on

process efficiencies or by focusing on inputs such as direct labour that relatively are not

significantly in today’s’ development environment. Management accounting system fails provide

relevant information to manager and also distract the attention from factor that are critical for

production efficiency. The lack of accuracy product cost provide to manager also give big affect,

and finally its cause the cost are wrongly calculate. But, nowadays this can be overcome with

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the great advance in technology. The organization are able to design their own management

accounting system that give best cost effective and relevant with the need of the manager.

The book also pictures the history of nineteenth- century cost management system, which is

about the development of the cost accounting process and operating efficiency measure on the

single economic activity enterprise, such as manufacturing, transportation or distribution

whereby they converted their resources into products or services. Entrepreneur linked process

of the business in single activity organization because of believing, that the greater value will be

achieved by manage the process in centrally that are controlled by itself rather than exchanging

their output from the process in the market. It’s also tell, how the owner create entirely new

managerial accounting process to monitor and evaluate the output of internally directed towards

the process. It’s also discussed on demand of the new management information that wasn’t

provided by conversion cost systems which are needed by manufacturing to factory

productivity. The study of scientific management and efficiency will led to standard cost systems

and product costing system that could helps managers focus on important issues and make a

better decision.

It’s also discusses the management accounting developing are critically needed during early

1990s, due to multi activity organizations such manufacturing, purchasing, transportation, and

distribution were involved from independent firms became integrated. To overcome this

problem, the new solution comes with two new development in management accounting, which

is devising the budget to coordinate and balance internal resource flow from raw material to final

customer, the other solution is by developing a new measure, return on investment, to compare

performance in the firms’ diverse part per performance of the whole. This chapter also illustrates

the early uses of management accounting by Du Pont in vertically integrated organizational

environment. Beside that author focus on new organizational innovation which is transforming

the unitary, or centralized, organization into new structure , the multidivisional structure to

overcome the obstacle. The organizational if General Motor and accounting system that develop

to assist management in operating. The books also illustrated about the lost in relevance of

management accounting from 1920s, and the companies who are using the same cost system

that existed 20 or 30 years ago. The discussion of sequences use of direct labor as a base for

allocating overhead. It’s argues the new global competition facing many obstacle, during 1980s,

has demonstrated cost accounting and management control systems of most companies lead to

inaccurate product cost and to poor accounting system. Authors also give suggestion f0r the

functioning and design of cost system.

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Literature view

The literature review is designed with six purposes to be review. The first is the declining of

management accounting and rise of financial accounting. The second is the recommendation

for changing management accounting practice due to solving of failure of management

accounting and other problem induced by current management accounting. The third is the

relevance lost induces a renaissance. The forth is the area of organizational performance

measurement and management. Fifth is critical perspective on the promise of management

accounting. Finally is the different cost accounting principle in connection with decision making

for both short and long term production scheduling.

Declining of Management Accounting and the Rise of Financial Accounting

The argument by Johnson and Kaplan regarding the relevance of the accounting as a

managerial tool declined after about 1925 because of the inaccuracy of product cost

information. The roots of product costing are initially pioneered by the engineer manager of

metal- working shops. Johnson and Kaplan surmise that estimating the accuracy of product cost

with availability of technology are not worth the effort, and the external reporting demand are

thrive. The demand of financial accountant for integrated financial statement based upon on

completed transaction at face value, the practice of valuing inventories using from market price

was abandoned. Results, the accountant allocating the face value between cost of sales and

inventory. But Johnson and Kaplan are not agree of that method, because the accountants

arbitrarily allocate cost that can not be traced, and not accurate enough for managerial use. In

1920s, managers are consistently relied on information about the underlying process,

transactions, and event that produce profit. However in 1960 and 1970s the manager frequently

relied on financial number itself. Johnson and Kaplan believe that university department of

accounting should be blame on deterioration in management skill. We believe that university

department of accounting may be the major force in convincing modern managers to

“manage by the numbers. University accounting education has parallel the development

of financial reporting un this country. Accounting was virtually unknown in college

curricula before 1990; its subsequent development was shaped large by demand to train

students for public accounting. (p. 134). In 1950s, the managerial used accounting

information, but Johnson and Kaplan argue that the vision of academic was inadequacy. The

academics are tried to characterize management a decision in term of decision models which is

derived from economist neoclassical theory of firms. Johnson and Kaplan also put the blame on

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academic cost accountants; more than auditor or manager is play big contributions of relevance

for cost management, especially since World War II.

Recommendations for Changing Management Accounting Practice

Johnson and Kaplan distinguish between process control, short-term product costing and long

term product costing. Process control and long term product costing are two utmost. They

against all allocation of cost to cost centers because of the process control purpose. Johnson

and Kaplan able to maintain the most effective of product costing system is to estimate the long

run cost of production and selling for each product. In estimating long run cost, they upholder

that all cost are be assigned to product line.

Relevance Lost Induce a Renaissance

Inside of The Rise and Fall Of Management Accounting has been catalyst for change in

management accounting, it’s highlighted the growth different of extant manufacturing practice.

The Relevance Lost Paradigm can be to Kaplan analysis of the state of management practice

and its role of North America competitiveness in early 1980s. From his examination of

management accounting practice, he concludes that:

“Virtually all of the practices employed by firm today had been developed by 1925. Despite

considerable change in nature of organizations and dimensions of competition during past 60

years, there has been little innovation in the design and implementation of cost accounting

Johnson challenge traditional accounting history research which explain the development of

cost accounting as feedback to allocation problem that evolve due to the to increase in fixed

asset late 1800s. He was so glad that cost accounting developed due to the “need to evaluate

and control internally administered production process” that accompanied “new methods for

organize economic activities.

Johnson and Kaplan join a group to provide more complete picture of development of

management accounting. They do a research about cost accounting as a replacement for

market information, management accounting and changing economic condition, and relevance

lost. The paradigm provide an explanation on reason why cost accounting emerge and faltered

in the twentieth century

Beside that, the development of cost accounting that use assumption of economic rationalism

made the traditional historian to be re-examine due to publication of Relevance Lost. Based on

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Fleischman and Tyson, the cost accounting archives have to re –examined too. It’s to provide

the evidence growths of techniques are developed. They have contributed on economic

rationalist historian to that particular debate which is management accounting in textile mill and

management accounting in the Armoires.

The accounting historian are rely on Marxist perspective which is Marxist view if management

accounting history, the critique of the assumptions of relevance lost paradigm and the labour

process history of management accounting. he critique that management accounting evolved in

a wider context that include economic, political, cultural and institutional forces. Compare to

Marxist perspective the Foucauldian perspective on management accounting history which is

also adopting a broader context, he claims that managerialism was “one particular expression of

new kind of knowledge based disciplinary”. Foucauldian assuming that the set of knowledge

around which a society is organized at any point of time is essentially arbitrary.

Critical Perspectives on the Promise of Management Accounting

The questioning on the relevance of management accounting is due of the limited evidence of

technical development within management accounting practice in response to the major

changes in manufacturing technology. The changes give greatly impact on increasing of

productivity, flexibility and quality, together decreasing with time lead, inventory, none of these

are been interested by management accounting and be report. The conflict arrives when

management accounting was only interested on financial reporting. Its result, damage in short

term of business outlook, together with problem of cost allocation technique that are not support

with stock valuation and over reliance on historical information for process control. The desire

with single cost system was claim to provide information too distorted, too aggregate and too

late to be much value to management.

Accounting for strategic positioning lead the generation of accounting information, which buoy

up the management to achieve, and sustain, a strategic, in order to commanding, position in

market place relative to competitor. It’s also closely associated with the determination and

exploitation of competitive advantage. In addition, it is a development that extends the

prospectus of management accounting knowledge, worthy to complement the existing sub

branch of accounting to management, cost accounting, management accounting and

management control. The development can be shown in term of a succession of phase. The

emergence of critical accounting is played by the development of accounting for strategic of

positioning from management accounting. Even though, misleading declares that management

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accounting has been the sole proving ground for the project, it’s a principal one. Critical

accounting did not produce a singular perspective on accountancy, but as regulation of

sociology which gives a major underpinning critical accounting enfold a range of ways of seeing.

Constructionism continue serve many critical accounting research too in a creating a critical

accounting project, its involved significant number that interested. In mid 1960s, Weberian

interpreter the alternative to the dominant positivistic structural functionalism associate with

Parson which challenged itself sociologist who take Marx as their model. However there is a

critical commentary on accounting for strategic positioning because there is perimeter critical

literature on accounting for positioning has emerged to date. Randomly, most of the theoretical

perspective identifies the previous section represent here, with contribution being outstanding

level of accounting scholarship.

The Differentiation Cost Accounting Principle in Connection with Decision Making for

Both Short and Long Term Production Scheduling

Today, product line and marketing channel have reproduce increase. The direct labour

represent only a small amount of corporate cost, while the expenses cover factory support

operation, marketing, distribution, engineering and other overhead function have burst. Although

those costs only play small part in production volume, most companies still allocate these rising

overhead and bear the cost by volume oriented base. Some activities as marketing and

distribution cost allocation are often not made at all. A significant new contribution acquire from

the ABC philosophy is the growth of procedures for detailed analysis of overhead cost to identify

the real cost drivers. There are different approaches to figure out the cost accounting. For the

traditional cost accounting, the broad majority of that current particular accounting system is

based on principle established in the first half of century. The Relevance Lost: The Rise and Fall

Management Accounting give an excellent presentation of origin and growth of current cost

accounting. It does uncover some illustrating inherent problem in paradigm, the controversy

between full cost and variable cost accounting approaches. Some how, after decades pass, the

disagreement exist whether about the product cost should be treated as full or by variable cost.

In order to ranking the product profitability from an OPT point of view, they have to use term

“return per factory hours, “cost per factory hour” and throughput accounting ratio”. The return

per factory hour can be define as the amount of money earned through sales of particular

product per hour of critical factory time spent making the product. The product can develop the

following formula:

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return per factory hour = sales price - material cost

time on the key resources

That formula will support a ranking of products making it possible to identify the most profitable

product mix to be manufactured by the bottleneck resources.

Compare to the ranking profitability that follows to the activity based cost accounting method;

the cost will vary with its unit produced or in a varied, multiproduct environment with equivalent

measurement such as labour hours, machine hours, material cost and quantities, or time

elapsed for producing. Other cost that arise from overhead support and marketing department,

vary with the diversity and difficulty in the product line. ABC system, incorporate the long term

variable cost of manufacture and marketing to each product, should provide a much bettor

basis for managerial decision on price, introduction, discontinue, and re-engineer product line

than systems base on the traditional. Essentially all company activities existed are to support

the production and delivery of today’s good or services, as a result they should evaluate the

product cost. The analysis should result in detailed information about the activities, cost and the

relations to specific product or product lines come.

The limit in use of OPT accounting philosophies has been found are:

a) OPT Philosophy is mainly useful under conditions of capacity constraints,

b) The identification of bottleneck relies on pragmatic criteria.

c) The OPT accounting principles are likely to have their greatest prospective influence for

companies with fairly homogenous product and activity spectrum

d) The present use of OPT principle is vulnerable due to its reliance on possible mishap od

process time information from existing PPC system.

e) Decision made by using the OPT accounting philosophy should be flexible to strategic

priorities.

The possible critical factors in the use of ABC accounting philosophies have been found are:

a) An ABC analysis presents no obvious or noncontroversial action alternative

b) There could have danger those ABC analysis drive traditional techniques that are

possible damage in light of the future competitive environment.

c) In some recent ABC case studies from Sweden the cost of WIP and other inventory cost

are neglected

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d) The possible influence if ABC philosophy is not limited to tong term strategies.

Research Method

The study was conducted by article review that can be finding in library database. Mostly all the

article using the book, other article, journals and paper for reviewing and give their opinion.

There graph was given to show the relationship between changing in amount or anything. The

diagrams usually show the relationship between numbers or amount. The diagram will attract

the reader, and much easier to understand compare to large table. There is some equitation

that explains the detail how to get the proper answer of question.

Findings

Factor declining of Management Accounting

The result of obtaining the article review on the Rise and Fall Management Accounting are:

1. We believe that university departments of accounting may been major force in

convincing modern manager to “manage by the number” University accounting

education has parallel the development of financial reporting in this country.

Accounting virtually unknown in college curricula before 1900, it subsequent

development was shaped largely by the demand to train students for public

accounting (p, 134)

Base on the above statement , the declining of Management Accounting are because of the

management accounting are focusing on the financial figure not the production or

management figure which is more important, on tracing the cost to avoid spend the money

in something what they can reduce or spend more money on the thing are more important.

2. I am agreeing that university department can be blame on deterioration in management skill

because some of university are too focus on the financial reporting and ignore some other

subject that relate on management which the company are tremendously need for reducing

their overhead cost and make their operation going smoothly.

3. There is uncertainty of accuracy of management information that might be effect to the

production cost. Because the information given to the manager are not timely and detailed

of information on process efficiencies or by focusing on inputs such as direct labour that

relatively are not significantly in today’s’ development environment. Management accounting

system fails provide relevant information to manager and also distract the attention from

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factor that is critical for production efficiency. The lack of accuracy product cost provides to

manager also give big impact to their total cost production.

4. The limited evidence of technical development within management accounting itself to

response to the major changes in manufacturing technology. Because of the limited

evidence, any changes or will give greatly impact on increasing of productivity, flexibility and

quality, together decreasing with time lead, inventory, none of these are been interested by

management accounting and be report.

Critics

The result of reviewed and analysis of obtaining respondents on critics’ of management

accounting.

a) The responsibility of management accounting as host to a second substantial project,

the critical accounting project. The management accounting should know the process of

the project rather than structure, from the process he will more understand deeply not on

the surface of the process.

b) Marxist view of management accounting are criticism focus on the micro economic and

transaction cost theories and second criticism is from the labour point of view, that focus

on changing shop floor management practices and adopts an empirical approach. The

theory is not only focus on specific research but cumulatively and reflectively. How ever

Marxist theory are false on a measure of analysis, and have potential of damage on

trend towards formulating critiques of postmodern rather than accounting issue itself.

c) The limited critical literature on accounting strategic positioning has been turn out. The

literatures have a tendency to be in negative tone, possible to be understand.

d) The critical factor when using the ABC accounting philosophy when to bring out a correct

analysis of overhead cost into the product mix decision the information of ABC is not

give prescriptions in details.

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The Current Management Accounting Practice

Base on the studies I found that there 28 listed management accounting techniques from 4

stages of management accounting evolution that were done by questionnaire by researcher.

The studies ask the respondents to rank the various the techniques that are currently utilised in

their organization using 5 – point liker scale ranged from “5 = always use techniques” and “ 1 =

never used techniques”

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It’s have shows that the top 18 of management accounting techniques are the techniques that

had mean score above 2.00. So there are 18 management accounting techniques are being

adopted and practice. The rest of 10 techniques (rank from 19 to 28) has mean score less that

2.00, it implicate or non utilization of the techniques from the studies.

Summary and Conclusion

To summarize, the objective of Relevance Lost are know the history, the growth of management

accounting. Management accounting system is crucial nowadays especially with the rapid

technological changes and the global market competition. There is no doubt that at earlier, the

management accounting doesn’t is no relevance, because of the failing of the accuracy of the

information that given to manager, it’s due to lack of attention from factor that are critical to the

productivity efficiency. With the lack of accuracy the information given, will give the big impact

towards the cost product. But with the now days technology advance the organization are able

to design their own management accounting that give the best cost effective and relevant with

the need of the manager. Based on the research paper, I found that out of 156 companies that

participate on the questionnaire that done by the researcher, majority of the selected Malaysian

Company which is 101 companies were the non listed companies, and another 42 companies

were public listed companies. Futhermore, about the same ratio of the studies by researcher are

shown that the existence of separate management accounting in the company. 41 companies

have a separate management accounting unit and 101 companies are not practice the separate

management unit in its organization. Studies found that 46.5% were SME companies, while

53.5% of the ratio is from large companies. The improvement and new technique from

management accounting are successfully attract the most companies to apply and practices to

their production. This also shown from the distribution of companies according to their type of

industry, which are 41.1% companies were classified under manufacturing, while the non

manufacturing shows that they are interested which is 58.9%. the management accounting have

to come out with the new techniques which can help the companies to improve their productivity

efficiency with the rapid modernization environmental changes due the technology

development.

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