ABSTRACT The more the development of the market economy, the more the significance of management accounting. To keep pace with this increasing market economy, it becomes imperative for the organizations organizations to adopt new management accounting accounting tools and techniques. It is also important important for the Bangladeshi organizations. This paper seeks to obtain an overview of the management accounting practices in the listed manufacturing companies of Bangladesh. Data has been gathered gathered by a questio questionnai nnaire re survey survey from eight manufac manufacturi turing ng sectors. sectors. The analysi analysiss has revealed that though there is difference in extent of practices among the sectors, all sectors fail to practic practicee some some newly newly develope developed d techniq techniques. ues. If this this trend trend continue continues, s, Banglad Bangladeshi eshi organi organiza zatio tions ns will will lag lag behin behind d in the the race race of global global compe competi titiv tiven eness ess and compa comparat rative ive advantages. It is therefore, some policy recommendation has been made to improve and fasten the management accounting practices. This thesis attempts to examine the status of use of management accounting techniques practice in Bangladesh. A list of traditional and modern management accounting tools was identified and the extent of their use was evaluated. It is discovered that modern techniques like Activit Activity-B y-Based ased Costing Costing,, Target Target Costing, Costing, Just-inJust-in-Tim Time, e, Total Total Quality Quality Manageme Management, nt, Process Reengineering and The Theory of Constraints, are not used in public and private sector manufacturing enterprises but a few Multinational Corporations, are using some of techniques like JIT and TQM. However, traditional techniques like Financial Statement Analysis, Standard Costing, and Cash Flow Analysis are found widely used followed by CVP Analysis, Marginal Costing, and Fund Flow Analysis etc. Respondents enterprises use the management management accounting techniques in Bangladesh Bangladesh is either moderate (30%) or unsatisfactory unsatisfactory (45%). 15% of the respondents consider it satisfactory satisfactory and another 15% consider it not at all satisfac satisfactory tory.. All responde respondents nts consider consider the use of managem management ent accounti accounting ng techniqu techniques es is necessary but pointed out a number of reasons of its limited use such as lack of awareness by top management, more emphasis on financial information, involvement of extra cost etc. However, they suggested some measures to improve the situation like taking measures to create awareness among top management, organizing seminar, symposium, ensuring trained personnel etc. In the current global competitive market enterprises must be cost and quality conscious where the role of management accounting cannot be over emphasized. Thus the extent of use of management accounting techniques specially the new ones be emphasized and all concerned authorities authorities need to give attention to this matter. This thesis seeks to obtain an overview of the management accounting practices in the companies of Bangladesh. Data has been gathered by a questionnaire survey from eight sectors. The analysis has revealed that though there is difference in extent of practices among the sectors, all sectors fail to practice some newly developed techniques. If this trend continues, Bangladeshi organizations will lag behind in the race of global competitiveness and comparative advantages. It is ther theref efor ore, e, some some poli policy cy reco recomm mmen enda dati tion on has has been been made made to impr improv ovee and and fast fasten en the the management accounting practices. This Th is thesis thesis expla explains ins the use of targe targett costi costing ng as a strat strategi egicc profi profitt plann plannin ing g and cost managem management ent tool. tool. This This will will identif identify y its key principles principles,, contrast contrast it with with traditi traditional onal cost management tools, show the critical steps in the process, and demonstrate its functioning in practice.
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CHAPTER 1: INTRODUCTION
ORIGIN OF THE REPORT This report has been prepared to make a study on the “An overview of the management accounting practices in the listed manufacturing companies of Bangladesh’’. as a part of the fulfillment of thesis program required for the completion of the BBA program of the Accounting Faculty of Business Administration of Stamford University Bangladesh. The report was prepared under the supervision of Mahmuda Nasrin, lecturer of Business Administration, Stamford University Bangladesh. I am very much thankful to him for assigning me such types of project work.
BACKGROUND OF THE REPORT Globalization or Free market economy is now world’s major challenge to every business industry. Recent business world as well as Bangladesh faces highly economic recession, with this situati situation on the present present economy economy of Banglade Bangladesh sh demands demands immedia immediate te developm development ent of business technique, tools and proper decision making policy. This report has been prepared in the light of emerging management accounting technique “An overview of the management accounting practices in the listed manufacturing companies of Bangladesh’’. as a part of the fulfillment of thesis program required for the completion of the BBA program Major in Acco Accoun unti ting ng unde underr the the Facu Facult lty y of Busi Busine ness ss Admi Admini nist stra rati tion on of Stam Stamfo ford rd Univ Univer ersi sity ty Bangladesh. This thesis This thesis report report is a manda mandato tory ry requi requirem rement ent of my BBA BBA progr program am,, and prepar prepared ed by supervision of thesis supervisor. The report was prepared under the supervision of Mahmuda Nasrin, lecturer of Business Administration, Faculty of Business Administration, Stamford University Bangladesh. The thesis supervisor authorized me to submit the report of “An overview of the management accounting practices in the listed manufacturing companies of Bangladesh’’ PURPOSE OF THE STUDY:
The purpose of the study is to make an analysis of Financial Statements Statements of The companies in terms of the Paints Industry. This study attempted to understand the financial conditions of The companies on different segments such as liquidity, profitability & solvency. The purpose is also to make recommendations for improving the financial stability and soundness of diffe differen rentt servi services ces provi provided ded to the share sharehol holder derss of BPBL BPBL.. It is also also the the purpos purposee of the researcher to help the management by providing an idea to take appropriate decisions about t he quality of t he investing & financing in future.
OBJECTIVES OF THE REPORT The main objectives of the study are to see whether the business enterprises in Bangladesh are using management management accounting technique in order to assist the managers with information information
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relevant to decision making and day-to-day day-to-day operational activities activities and the extent or degree of such use. In broader sense the objectives to be covered under the study are:
To find out the using status of Management Accounting Techniques;
To evaluate the conception of managers as to importance of use and problems, problems, if any, they face in using the techniques;
To identify the Management Accounting information structure; and
To highlight suggestive measures to the users of management accounting information information for its extensive use.
SCOPE OF THE REPORT The scope of this study was strictly confined to the annual report & personal contact with the employees of Bangladeshis companies. To collect the information I worked in the finance section & cost & budget section of those companies. All other data related to the financial analysis was collected from web sites of those companies & other related co. Investigative study method is used in writing this report. This study method was significant for me because before this study I have not enough understanding to proceed with such type of research project also on this topic. This study is characterized by flexibility and resourcefulness with respect to the methods, formal research method employed by investigating investigating various business industries industries in Bangladesh Bangladesh and obtaining information by asking question to qualified personnel. The study involves structured questionnaire, large sample and probability sampling plans. Under the study once a new idea or insight is discovered, they may shift their exploration in that direction. Observation method is used to complete this qualitative research. Finally the purpose of this study is to determine whether management accounting technique is used by the Bangladeshi Bangladeshi manufacturing manufacturing companies companies and whether those companies using the technique apply the application process in their customer expectation, profit margin, cost and price determination, cost reduction and management operations.
METHODOLOGY For smooth and accurate study every one have to follow some rules & regulation. The study impute were collected from two sources:
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Primary sources Practical desk work Face to face conversation with the officer Direct observations Face to face conversation with the client Secondary sources Annual report of companies Files & Folders Daily diary (containing my activities of practical orientation of companies) maintained by me, Various publications of companies, Website
The details of the work plan are furnished below: Data collection method: Relevant data for this report has been collected primarily by direct investigations of different company personnel. Data sources: The information and data for this report have been collected from primary sources. The secondary sources of information are article reports, websites and different manuals. Some textbooks, journals, newspapers etc. have bee consulted in order to build up the framework of the study.
Data collect collected ed from from seconda secondary ry sources sources have have been proces processed sed manual manually ly and Data processing: processing: Data qualitative approach in general and quantitative approach in some cases has been used throughout the study. Data analysis and interpretation: Qualitative approach has been adopted for data analysis and interpretation taking the processed data as the base.
LIMITATIONS OF THE REPORT On the way of my study, I have faced some problems that termed as the limitations of the study. In all respect following limitation and weakness remain within which I failed to escape by any means. These are follows: Budgeted time limitation : - It was one of the main constraints that hindered to cover all aspects of the study. Confidentiality of data: - Because of some divisional and confidential problem, I could not get enough information. Every organization has their own secrecy that is not revealed to others. While collecting data some company personnel did not disclose enough information for the sake of confidentiality of the organization. Data Insuffic Insufficienc iency: y: - Especially there is a lack of information about the determination of the compan companies ies applyin applying g differ different ent costin costing g method method and the level level of costin costing g applica applicati tions ons in these these companies. companies. Sufficient Sufficient books, publications, publications, fact and figure figure are not available. available. These constrains constrains narrowed the scope of accurate analysis. If these limitations had not been there, the report would have been more useful and attractive.
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CHAPTER 2:
OVERVIEW OF MANAGEMENT ACCOUNTING TECHNIQUE
OVERVIEW OF MANAGEMENT ACCOUNTING: Management accounting is concerned with the provisions and use of accounting information to manage managers rs within within organi organizat zation ions, s, to provid providee them them with with the basis basis in making making inform informed ed busine business ss decisions that would allow them to be better equipped in their management and control functions. Unlike financial accountancy information, management accounting information is used within an organization “typically for decision-making” and is usually confidential and its access available only to a select few. According to The Chartered Institute of Management Accountants (CIMA) - Management Accounting Accounting is the process process of identifica identification, tion, measurement measurement,, accumulation accumulation,, analysis, analysis, preparation, preparation, interp interpret retati ation on and commun communica icatio tion n of inform informati ation on used used by manage managemen mentt to plan, plan, evalua evaluate te and control within an entity and to assure appropriate use of and accountability for its resources. Management Management accounting accounting also comprises the preparation preparation of financial financial reports reports for non-management non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. states that management management The America American n Institu Institute te of Certifi Certified ed Public Public Accoun Accountant tantss (AICPA (AICPA)) states accounting practice extends to the following three areas: Strategic Management— advancing the role of the management accountant as a strategic partner in the organization. •
Perfor Performan mance ce Managem Management ent— — develop developing ing the practi practice ce of busine business ss decisi decision-m on-maki aking ng and managing the performance of the organization.
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Variable Variable costing— costing— contributi contributing ng to frameworks frameworks and practices practices for identifyi identifying, ng, measuring, measuring, managing and reporting risks to the achievement of the objectives of the organization.
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states - "A managem management ent The Institut Institutee of Certifie Certified d Managem Management ent Account Accountants ants (ICMA) (ICMA) states accountant applies his or her professional knowledge and skill in the preparation and presentation of financial and other decision oriented oriented informati information on in such a way as to assist management management in the formulation of policies and in the planning and control of the operation of o f the undertaking." Management Accountants therefore are seen as the - "value-creators" amongst the accountants. Management accounting knowledge and experience can therefore be obtained from varied fields and functi functions ons within within an organi organizat zation ion,, such such as inform informati ation on managem management, ent, treasu treasury, ry, effici efficiency ency auditing, marketing, valuation, pricing, logistics, etc. •
Formulating strategies;
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Planning and constructing business activities;
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Helps in making decision & Optimal use of resources;
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Supporting financial reports preparation; and Safeguarding asset 5
Management Management accounting accounting is concerned concerned with the provisions provisions and use of cost accounting accounting informati information on to managers within organizations, to provide them with the basis to make informed business decisions that will allow them to be better equipped in their management and control functions. From different significance - management accounting information is used within an organization, typically typically for decision-mak decision-making. ing. In contrast contrast to financial financial accountancy accountancy informati information, on, management management accounting information is: Design Designed ed and intend intended ed for use by manager managerss within within the organi organizat zation ion,, wherea whereass financi financial al accounting information is designed for use by shareholders and creditors.
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Usually confidential and used by management, instead of publicly reported;
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Forward-looking, instead of historical;
Computed by reference to the needs of managers, often using management information systems, instead of by reference to financial accounting standards.
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The distinction between ‘traditional’ and ‘innovative’ management accounting practices can be illustrated by reference to cost control techniques. Cost accounting is a central method in management accounting , and traditionally, management accountants’ principal technique was variance analysis, which is a systematic approach to the comparison of the actual and budgeted costs of the raw materials and labor used during a production period. While some form of variance analysis is still used by most manufacturing firms, it nowadays tends to be used in conjunction with innova innovativ tivee techni technique quess such such as life life cycle cycle cost cost analys analysis is and activi activityty-bas based ed costin costing, g, which which are designed with specific aspects of the modern business environment in mind. Life-cycle 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 life-cycle, since small changes to the product design may lead to significant savings in the cost of manufacturing the product. Activity based costing recognizes that, in modern factories, most manufacturing costs are determined by the amount amount of ‘acti ‘activit vities ies’’ and that the key to effect effective ive cost control control is theref therefore ore optimizi optimizing ng the effici efficienc ency y of these these activi activitie ties. s. Activi Activityty-bas based ed account accounting ing is also also kno known wn as Cause Cause and Effect Effect accounting. Both lifecycle costing and activity-based costing recognize that, in the typical modern factory, the avoidance of disruptive events reducing the costs of raw materials. Activity-based costing also deemphasizes direct labor as a cost driver and concentrates instead on activities that drive costs, such as the provision of a service or the production of a product component.
HISTORY OF MANAGERIAL ACCOUNTING:ACCOUNTING:Managerial accounting has its roots in the industrial revolution of the 19th century. During this early period, most firms were tightly controlled by a few owner-managers who borrowed based on personal relationships and their personal assets. Since there were no external shareholders and little unsecured debt, there was little need for elaborate financial reports. In contrast, managerial accounting was relatively sophisticated and provided the essential information needed to manage the early large scale production of textile, steel, and other products. After After the turn turn of the century century,, financi financial al account accounting ing requir requireme ements nts burgeo burgeoned ned becaus becausee of new pressures placed on companies by capital markets, creditors, regulatory bodies, and federal taxation 6
of income. Many firms needed to raise funds from increasingly widespread and detached suppliers of capital. To tap these vast reservoirs of outside capital, firms' managers had to supply audited financial repo report rts. s. And And beca becaus usee outs outsid idee suppl supplie iers rs of capi capita tall reli relied ed on audi audite ted d fina financ ncia iall stat statem ement ents, s, independent accountants had a keen interest in establishing well defined procedures for corporate financial reporting. The inventory costing procedure adopted by public accountants after the turn of the century had a profound effect on management accounting. As a consequence, for many decades, management accountants accountants increasingl increasingly y focused focused their efforts on ensuring ensuring that financial accounting requirements requirements were were met met and and fina financ ncia iall repo report rtss were were rele releas ased ed on time time.. Th Thee prac practi tice ce of mana manage geme ment nt accounting stagnated. In the early part of the century, as product line expanded operations became more complex, forward looking companies saw a renewed need for management-oriented reports that was separate from financial reports. But in most companies, management accounting practices up through the mid-1980s were largely indistinguishable from practices that were common prior to World War I. In recen recentt year years, s, howev however er,, new new econ econom omic ic forc forces es have have led led to many many impo import rtan antt innov innovat atio ions ns in management accounting.
HISTORICAL DEVELOPMENT:-
Management ent account accounting ing has a short short but excitin exciting g histor history: y: - While While Maher states: Managem management accounting concepts can be traced back at least to the beginning of the Industrial Revolution, management accounting as a teaching discipline appears to have got off the ground in the late1940’s. Parker concurs: - Management accounting has historical antecedents that stretch back longer than we might expect and certainly accounting historians have not yet concluded their investigations of its earliest genesis. Cunagin and Stancil believe:
Management accounting with its lack of generally accepted accounting practice has not yet had the exposure exposure afforded afforded to financial financial accounting. accounting. The history history of management management accounting accounting is one of innovation based on necessity. Innovation therefore continues without constraints imposed by preconceived ideas of what constitutes “proper” accounting.
MANAGEMENT ACCOUNTING PRINCIPAL: To achieve the above objectives Management Accounting employs three principal devices from cost accounting 1. Forward loo looking pri principle: Based on the past and all other available data, forecasting, the future and recommending wherever appropriate the course of action for the future.
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Fixation on of an optimu optimum m target target which which is variou variously sly known as 2. Target setting principle: Fixati standard, budget etc. and through continuous review ensuring that the target is achieved. Instead ad of concent concentrat rating ing on volumi voluminous nous masses masses of data data 3. The principle of exception: Inste manage management ment account accounting ing concen concentra trates tes on deviat deviation ionss from from target targetss and continu continuous ous and prompt prompt analysis of the causes of these deviations on which to base management action.
OBJECTIVES OF MANAGEMENT MANAGEMENT ACCOUNTING: THE BASE OBJECTIVE of management accounting is to assist the management in carrying out its duties efficiently. The objectives of Management Accounting are: -
The comput computati ation on of plans plans and budgets budgets covering covering all aspects aspects of the busine business. ss. Example: Example: production, selling, distribution, research and finance. •
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The systematic allocation of responsibilities for implementation of plans and budgets.
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The organization for providing opportunities and facilities for performing responsibilities. responsibilities.
The analysis of all transactions, financial and physical, to enable effective comparison to be made between the forecasts and actual performance.
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The presentations of up to date information, at frequent intervals, to management in the form of operating statements.
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The stati statisti stical cal interp interpret retati ation on of such such statem statement entss in a manner manner which which will will be of utmost utmost assistance to management in planning future policy and operation.
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accounting is to enable the management THE FUNDAMENTAL OBJECTIVE of management accounting to maximize profits or minimize losses. The evolution of management accounting has given an approach to the function of accounting. The main objectives of management accounting are as follows:
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Plan Planni ning ng and poli policy cy form formul ulat atio ion: n:
Planning involves forecasting on the basis of available information, setting goals; framing polices dete determ rmin inin ing g the the alte altern rnat ativ ivee cour course sess of acti action on and and deci decidi ding ng on the the prog progra ram m of activ activit itie ies. s. Managem Management ent account accounting ing can help help greatl greatly y in this this direct direction ion.. It facil facilita itates tes the prepar preparati ation on of statements in the light of past results and gives estimation for the future. 2. Interpretation process:
Managem Management ent account accounting ing is to presen presentt financ financial ial inform informati ation on to the manage managemen ment. t. Financi Financial al information is technical in nature. Therefore, it must be presented in such away that it is easily understood. It presents accounting information with the help of statistical devices like charts, diagrams, graphs, etc.
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3. Assists in Decision-making process:
With With the help help of variou variouss modern modern techni techniques ques manage management ment account accounting ing makes makes decisi decision-m on-maki aking ng process more scientific. Data relating to cost, price, profit and savings for each of the available alternatives are collected and analyzed and provides a base for taking sound decisions. 4. Controlling:
Management accounting is a useful for managerial control. Management accounting tools like standard costing and budgetary control are helpful in controlling performance. Cost control is affected through the use of standard costing and departmental control is made possible through the use use of budge budgets ts.. Perfo Perform rman ance ce of each each and and ever every y indi indivi vidu dual al is cont contro roll lled ed with with the the help help of management accounting. 5. Reporting:
Management accounting keeps the management fully informed about the latest position of the conce concern rn thro through ugh repo report rtin ing. g. It help helpss mana managem gemen entt to take take prop proper er and and quick quick decis decisio ions ns.. Th Thee performance of various departments is regularly reported to the top management. 6. Facilitates Organizing:
“Return “Return on Capital Capital Employed” Employed” is one of the tools of management management accounting. accounting. Since management management acco accoun unti ting ng stre stressses ses more more on Resp Respon onsi sibi bili lity ty Cent Center erss with with a view view to cont contro roll cost costss and and responsibilities, it also facilitates decentralization to a greater extent. Thus, it is helpful in setting up effective and efficiently organization framework. 7. Facilitates Coordination of Operations:
Management accounting provides tools for overall control and coordination of business operations. Budgets are important means of coordination.
NATURE AND SCOPE OF MANAGEMENT ACCOUNTING: ACCOUNTING: Management Management accounting involves furnishing furnishing of accounting accounting data to the management management for basing basing its decisions. decisions. It helps in improving improving efficiency efficiency and achieving achieving the organizatio organizational nal goals. The following following paragraphs discuss about the nature of management accounting. 1. Provides accounting information:
Management accounting is based on accounting information. Management accounting is a service function and it provides necessary information to different levels of management. Management account accounting ing involv involves es the presen presentat tation ion of inform informati ation on in away it suits suits manager managerial ial needs. needs. The accounting data collected by b y accounting department is used for reviewing various policy decisions. 2. Cause and effect analysis:
The role of financial accounting is limited to find out the ultimate result, i.e., profit and loss; management accounting goes a step further. Management accounting discusses the cause and effect rela relati tion onsh ship ip.. Th Thee reas reason onss for for the the loss loss are are probe probed d and and the the fact factor orss dire direct ctly ly infl influen uenci cing ng the the profitability are also studied. Profits are compared to sales, different expenditures, current assets, interest payables, share capital etc. 9
3. Use of special techniques and concepts:
Management accounting uses special techniques and concepts according to necessity to make accounting data more useful. The technique usually used include financial planning and analyses, standard costing, budgetary control, marginal costing, project appraisal, control accounting, etc. 4. Taking important decisions:
It supplies necessary information to the management which may be useful for its decisions. The historical data is studied to see its possible impact on future decisions. The implications of various decisions are also taken in to account. 5. Achieving of objectives:
Management accounting uses the accounting information in such away that it helps in formatting plans and setting up objectives objectives.. Comparing Comparing actual performance performance with targeted targeted figures figures will give an idea to the management about the performance of various departments. When there are deviations, corrective measures can be taken at once with the help of budgetary control and standard costing. 6. No fixed norms:
No specific rules are followed in management accounting as that of financial accounting. Though the tools are the same, their use differs from concern to concern. The deriving of conclusions also depends upon the intelligence of the management accountant. The presentation will be in the way which suits the concern most. 7. Increase in efficiency:
The purpos purposee of using using account accounting ing inform informati ation on is to increa increase se effici efficienc ency y of the concern concern.. The performance appraisal will enable the management top in-point efficient and inefficient spots. Effort is made to take corrective measures so that efficiency is improved. The constant review will make the staff cost–conscious. 8. Supplies information and not decision:
Management accountant is only to guide and not to supply decisions. The data is to be used by the management for taking various decisions. ‘How is the data to be utilized’ will depend upon the caliber and efficiency of the management. 9. Concerned with forecasting:
The management accounting is concerned with the future. It helps the management in planning and forecasting. The historical information information is used to plan future course of action. The information information is supplied with the object to guide management for taking future decisions.
ADVANTAGES OF MANAGEMENT ACCOUNTING: One of the most significant steps to improve managerial performance is the development of the new discipline. Management accounting it is still very much in a state of evolution. However, the following advantages are claimed for it:10
Thee main Th main contr contrib ibut utio ion n of mana manage gemen mentt acco account untin ing g is the the elim elimin inat atio ion n of init initia iati tive ve 1. manage management ment.. With With the help help manage managemen mentt account accounting ing,, the busines businesss activi activitie tiess are regula regulated ted systemati systematically cally by means of efficient efficient planning and organizatio organization n thereby thereby avoiding avoiding over working in busy periods and slackness in slump periods. It enables the business to get the maximum return on capital by helping it in planning, 2. distribution and controlling activities. It helps the management to improve its service to its customers by resorting to a continuous 3. method of comparing the results with the standards. It helps helps in impr improvi oving ng the the rela relati tions ons betwe between en the the mana managem gement ent and and labo laborr by avoi avoidi ding ng 4. unreasonable standard of work which is the main cause of labor unrest.
Limitations of Management Accounting: Management Accounting is in the process of development. Hence, it suffers form all the limitations of a new discipline. Some of these limitations are: 1. Limitations of Accounting Records:
Management accounting derives its information from financial accounting, cost accounting and other records. It is concerned with the rearrangement or modification of data. The correctness or other wise of the management accounting depends upon the correctness of these basic records. The limitations of these records are also the limitations of management accounting. 2.
It is only a Tool:
Management accounting is not an alternate or substitute for management. It is a mere tool for manage management ment.. Ultima Ultimate te decisi decisions ons are being being taken taken by manage management ment and not by manage managemen mentt accounting. 3.
Heavy Cost of Inst Instal alllatio tion
The instal installat lation ion of managem management ent account accounting ing syste system m needs needs a very very elabor elaborate ate organi organizat zation ion.. This This results in heavy investment which can be afforded only by big concerns. 4. Personal Bias:
The interpretation of financial information depends upon the capacity of interpreter as one has to make a personal judgment. Personal prejudices and bias affect the objectivity of decisions. Psychological Resistance
The installation of management accounting involves basic change in organization setup. New rules and regulations are also required to be framed which affect a number of personnel and hence there is a possibility of resistance form some or the other. 4.
Evolutionary stage:
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Management accounting is only in a developmental stage. Its concepts and conventions are not as exact and established as that of other branches of accounting. Therefore, its results depend to a very great extent upon the intelligent interpretation of the data of managerial use. 7. Provide sonly Data:
Management accounting provides data and not decisions. It only informs, not prescribes. This limitation should also be kept in mind while using the techniques of management accounting. 8. Broad-based Scope:
The scop The scopee of mana manage geme ment nt accou account ntin ing g is wide wide and and this this crea create tess many many diff diffic icul ulti ties es in the the implementations process. Management requires information from both accounting as well as nonaccounting sources. It leads to in exactness e xactness and subjectivity in the conclusion obtained through it.
MANAGEMENT ACCOUNTING TASKS: Management accounting may be said to include all activities connected with collecting, processing, interpreting and presenting information to management. The management accounting satisfies the variou variouss needs needs of managem management ent for arrivi arriving ng of approp appropria riate te busine business ss decisi decisions ons.. They They may be described as modification of data, analysis and interpretation of data, facilitating management control control,, formul formulati ation on of busine business ss budgets budgets,, use of qualit qualitati ative ve inform informati ation, on, and satisf satisfact action ion of informational needs of management. Listed below are the primary tasks performed by management accountants generated by different cost accounting tools. The degree of complexity relative to these activities is dependent on the experience level and abilities Variance Analysis Rate & Volume Analysis Product Profitability Cost Analysis & Cost Benefit Analysis Cost-Volume-Profit Analysis Life cycle cost analysis Capital Budgeting Strategic Planning Strategic Management Advise Internal Financial Presentation and Communication Sales and Financial Forecasting & Annual Budgeting Cost Allocation Resource Allocation and Utilization
EMERGING THEMES OF MANAGEMENT ACCOUNTING: ACCOUNTING: Customer Orientation Cross-functional Perspective Global Competition 12
Total Quality Management Time as a Competitive Element Advances in Information Technology Advances in the Manufacturing Environment Deregulation and Growth in the Service Industry Activity-based Management
CODE OF CONDUCT FOR MANAGEMENT ACCOUNTANTS: Practi Practiti tioner onerss of manage managemen mentt account accounting ing and financi financial al manage management ment have have an obliga obligatio tion n to the publi public, c, their their profes professio sion, n, the organi organizat zation ion they they serve, serve, and themse themselve lves, s, to mainta maintain in the highes highestt standar standards ds of ethica ethicall conduct conduct.. In recogn recogniti ition on of this this obliga obligati tion, on, the Insti Institut tutee of manage management ment Account Accountant antss has promul promulgat gated ed the follow following ing standa standards rds of ethica ethicall conduct conduct for practi practitio tioner nerss of management accounting and financial management. Adherence to these standards internationally is integr integral al to achiev achieving ing object objective ive of manage managemen mentt account accounting ing.. Standa Standards rds of Ethica Ethicall Conduct Conduct for Management Accountants are:Competence Confidentiality Integrity Objectivity
Competence:
Practitioners of management accounting and financial management have a responsibility to: Maintain Maintain an appropriate appropriate level of professional professional competence competence by ongoing development of their their knowledge and skills. Perform their professional duties in accordance with relevant laws, regulations and technical standards. Prepar Preparee comple complete te and clear clear report reportss and recomm recommenda endatio tions ns after after approp appropria riate te analysi analysiss of relevant and reliable information Confidentiality:
Practitioners of management accounting and financial management have a responsibility to: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so.
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Inform Inform subordinat subordinates es as appropriat appropriatee regarding regarding the confidentia confidentiality lity of informati information on acquired acquired in the the cour course se of thei theirr work work and and moni monito torr thei theirr acti activi viti ties es to assu assure re the the main mainte tena nanc ncee of that that confidentiality o
Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.
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Integrity:
Practitioners of management accounting and financial management have a responsibility to: Avoid Avoid actual actual or appare apparent nt conflic conflicts ts of intere interest st and advise advise all appropr appropriat iatee partie partiess of any potential conflict. Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically. Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. Refrain Refrain from either activity activity or passively passively subverting subverting the attainment of the organizatio organization's n's legitimate and ethical objectives. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Communicate unfavorable as well as favorable information and professional judgment or opinion. Refrain from engaging or supporting any activity that would discredit the profession. Objectivity:
Practitioners of management accounting and financial management have a responsibility to: ♦
Communicate information fairly and objectively
Disclose fully all relevant information that could reasonably be expected to influence an intended user's understanding of the reports, comments, and recommendations presented.
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RESOLUTION OF ETHICAL CONFLICTS:
In applying the standard of ethical conduct, practitioners of management accounting and financial management management may encounter encounter problems problems in identifyi identifying ng unethical unethical behavior or in resolving an ethical ethical conflict. When faced with significant ethical issues practitioners of management accounting and financial management should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such practitioner should consider the following course of action. 14
Discuss such problems with immediate superior except when it appears that superior is involved, in which case the problem should be presented to the next higher managerial level. If a satisfactory resolution cannot be achieved when the problem is initially presented, submit the issue to the next higher managerial level.
If the immedi immediate ate superi superior or is the chief chief execut executive ive office officerr or equival equivalent ent,, the accept acceptabl ablee reviewing authority may be a group such as the audit committee, executive committee, board of directors, board of trustees, or owners. Contact with a level above the immediate superior should be initiated only with the superior's knowledge. Assuming the superior is not involved. Except where where legall legally y prescr prescribe ibed, d, commun communica icatio tion n of such such proble problems ms to author authorit ities ies or indivi individual dualss not employed or engaged by the organization is not considered appropriate.
Clarify relevant ethical issues by confidential discussion with an objective adviser to obtain a better understanding of possible course of action
Consult your own attorney as to legal obligations and rights concerning the ethical conflict.
If the ethical conflict still exists after exhausting all levels of internal review, there may be no other other recour recourse se on signif significa icant nt matter matterss than than to resign resign from from the organi organizat zation ion and to submit submit an informati informative ve memorandum memorandum to an appropriate appropriate representat representative ive of the organizatio organization. n. After resignation, resignation, depending on the nature of the ethical conflict, it may also be appropriate to notify other parties.
ETHICS & THE MANAGEMENT ACCOUNTANT: When management accounting information is used for control, management accountants may find themselves in complex situations, fraught with conflict.
Especially when it is used for performance evaluation
Pressure may be exerted to influence the numbers to make a favored product, customer, or line of business appear more profitable than it actually is. Department managers may distort information so that unfavorable factors are not revealed in a management accounting report.
The cost of inefficient processes
The existence of substantial amounts of excess capacity
Senior executives executives whose incentive incentive compensation compensation is based on the reported reported financial financial numbers may put pressure on accountants.
To recognize revenue from a customer early
To defer until subsequent periods the recognition of an expense
In some circumstances, to recognize certain expenses early so that much higher earnings may be reported in future periods. All of these behaviors were evident in the frauds dominating the financial news in recent years. Organizational leadership plays a critical role in fostering a culture of high ethical standards. 15
The way an individual responds to pressure derives from inner values and beliefs, but individuals are strongly influenced by their view of organizational standards. If individuals see unethical or illegal behavior practiced by the organization’s leaders and superiors or coworkers, they may feel that such behavior is accepted and sanctioned. An individual without a strong set of personal beliefs and values may find it difficult to withstand the pressure to “go along with the flow” and participate in this behavior when a difficult or conflicting situation arises.
Such as being asked to misrepresent misrepresent an organizatio organization n unit’s unit’s performance performance potential potential when the unit is being offered for sale. Beyond the example set by senior executives, companies may use two types of control systems to foster high ethical standards among their employees.
Beliefs systems
Boundary systems
A beliefs system is the explicit set of statements, communicated to employees, of the basic values, purpose, and direction of the organization: •
Credos
•
Mission statements
•
Vision statements
•
Statements of purpose or values
The statem statements ents in a belief beliefss syste system m are intend intended ed to inspir inspiree and promot promotee commi commitme tment nt to the organization’s core values and its purpose for being in business. When conflicting situations arise, however, the lofty rhetoric in the statements will only have true meaning and serve as guides to actions if employees observe senior managers acting according to the statements. In this way, employees learn that the company’s stated beliefs represent deeply rooted and actionable values. Articulate and actionable beliefs systems may inspire people to higher values and aim at higher missions but they may not communicate clearly what behavior and actions are unacceptable. Companies also need boundary systems that communicate what actions must never be taken. Boundary systems are stated in negative terms, or in minimal standards of behavior
NEED FOR MANAGERIAL MANAGERIAL ACCOUNTING INFORMATION: Every organization-large and small-has managers. Someone must be responsible for making plans, organizing resources, directing personnel, and controlling operations. Every where, mangers carry out three major activities-planning, directing and motivating, and controlling. Planning:
Planning involves selecting a course of action and specifying how the action will be implemented. The first step in planning is to identify the alternatives and then to select from among the 16
alternatives the one that does the best job of furthering the organization's objectives. While making choices, management must balance the opportunity against the demands made on the company’s resources. The plans of management are often expressed formally in budgets, and the term budgeting is applied applied to genera generally lly descri describe be the planni planning ng proces process. s. Budget Budgetss are usuall usually y prepar prepared ed under under the direction of controller, who is the manager in charge of the accounting department. Typically, budgets are prepared annually and represent management's plans in specific, quantitative terms. Directing and Motivating:
In addition to planning for the future, managers must oversee day-to-day activities and keep the organization functioning smoothly. This requires the ability to motivate and affectively direct people. Managers assign tasks to employees, arbitrate disputes, answer questions, solve on-the-spot problems, and make many small decisions that affect customers and employees. In effect, directing is that part of the manager's work that deals with the routine and the here and now. Managerial accounting data, such as daily sales reports are often used in this type of day-to-day decision making. Controlling:
In carrying out the control function, managers seek to ensure that the plan is being followed. Feedback, which signals operations are on track, is the key to effective control. In sophisticated organizations, this feedback is provided by detailed reports of various types. One of these reports, which compares budgeted to actual results, is called a performance report. Performance report suggests where operations are not proceeding as planned and where some parts of the organization may require additional attention. The Planning and Control Cycle:
The work of management can be summarized in a model. The model, which depicts the planning and control cycle, illustrates the smooth flow of management activities from planning through directing and motivating, controlling, and then back to planning again. All of these activities involve decision making. So it is depicted as the hub around which the activities revolve.
Tools for Management Support: A wide variety of accounting tools address that “why” and “how” of entity success or failure. Many tools are proactive, helping us make sound decisions, and some are predictive, peering into the future. When one develop an understanding of cost and revenue structure, the interaction of encounters with revenue and expenses, and the amount and rate of change from volume changes. Cost-Volume-Profit:-
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The single most important concept for management is cost-volume-profit. Understanding the cost structure of an organization allows proper management decisions. Standard financial statements do not provide the proper cost separation, that is - variable costs versus fixed costs. Variable cost : a cost that moves up or down as volume of service changes Fixed cost: a cost that remains the same despite volume (within a relevant range)
A typical fixed cost is space rental. Whether five patients a day or 50 a d day ay for lease is probably the same amount. A typical variable cost is medical supplies. The more patients cause the more supplies use. In real life some of these costs are considered “mixed” but for most management purposes we consider only two cost behaviors.
Break-even point:-
Break-even point becomes a key benchmark; being defined as the point at which fixed and variable costs equal revenue, or the point at which profit is zero. The break-even formula is as follows: (Revenue – variable cost) = fixed costs Contribution margin = fixed costs As volume grows we get to leverage the fixed costs, revenue climbs but variable costs climb little and fixed costs not at all.
CVP is critical for decision making, for example adding a new service. Usually the only relevant numbers are the new revenue versus the new expenses, assuming adequate capacity. Understanding which numbers are relevant is the key to a sound decision. With a relatively low variable cost line, additional services require very little incremental spending.
Cost-Benefit Issues:-
There are plenty of accounting tools at for one’s disposal, but those tools should only used when there is a positive cost-benefit relationship. Modern systems and one’s own creativity allow us plenty of information options, but not all options are worth the work involved. The ideal is to create create enough information information to improve improve management, management, without without spending so much as to wipe out the benefit. Cash Flows:-
Any business organization exists for one reason, to generate positive cash flow for the owners. The devil of business is in the details. Effective cash flow management is a key task for senior management, and anticipating cash flow ups and downs is critical. Budgeting:-
A bud budget get is a manage managemen mentt plan plan expres expressed sed in number numbers. s. Decisi Decisions ons are more more import important ant than than calculations. Spreadsheets have made budgeting much easier and more flexible. Once a budget model is developed, numerous options can be calculated very quickly. Budgets should be flexible 18
rather than static. If one budget for 10,000 patient visits and you reach 15,000 patient visits, his static budget is worthless.
Chapter 4:
Analysis of management accounting Technique
Challenges of Managerial Accounting in the Global Context:Trend in Management Accounting:The useful usefulnes nesss of the managem management ent account accounting ing inform informati ation on syste system m has been been challe challenged nged by a changing economic environment coupled with increased global competition and the emergence of new manufa manufactu cturin ring g techno technolog logies ies.. Manage Managemen mentt account accounting ing contrib contributi ution on is going going to loss loss the competitiveness of Bangladesh in the global economy. It has been said about the management accounting practices utilized in some of the developing economies of the Asian-Pacific region. At present the challenge for management accounting techniques and practices by globally situated manufacturing firms faced critically.
Over the last decade, critics of management accounting have questioned the relevancy of many traditional techniques and practices. Traditional accounting techniques may no longer be valid as the productio production n process changes. changes. These techniqu techniques es fail to to provide provide relevant, relevant, useful, useful, and timely timely information about processing activities that management needs for planning and control purposes. Traditional Traditional management management accounting accounting systems systems are are often conside considered red incompat incompatible ible with with modem modem production. Also, traditional traditional systems systems have typically typically used direct labor as an allocation allocation base, often inappropriately. Nowadays managerial accounting analysis is considered so crucial in managing an enterprise that in most cases, far from playing a passive role as information providers, managerial accountants take a proactive role in both the strategic and day-to-day decisions that confront an enterprise. Although much of the information they provide is financial, there is a strong trend toward the presentat presentation ion of substantia substantiall non-financi non-financial al data as well. Moreover, Moreover, the business business environment is changing rapidly. For managerial accounting to be as useful a tool in the future as it has been in the recent past, managerial accounting has to be studied and improved. In the 21st century the business environment is changing very rapidly. These changes are reflected in global competition, rapidly advancing technology, and improved communication systems, such as the Internet. The activities that make an enterprise successful today may no longer be sufficient next year. A crucial role of managerial accounting is to continually assess how an organization stacks up against the competition, with an eye towards continuously improving. In fact, moving away from a historical cost accounting perspective and towards a proactive cost management is the challenge that an enterprise has to face. Assigning the costs to a larger number of cost pools that better represent those activities that are responsible for their birth, portrays the general idea upon which future managerial accounting will evolve. One result of the changing chang ing economic environment has been the emergence in the literature of cost management technique. Cost management as an integrative area & combines elements 19
from three other fields: fields: management management accounting, accounting, production, production, and strategic strategic planning. planning. This broadening broadening of the traditiona traditionall management management accounting accounting environment environment involves involves emphasis emphasis on activity activity based costing, costing, cost management management systems, systems, advanced manufacturing manufacturing technologies technologies,, cost planning and control, quality costs, costs, performance measurement, and strategic cost management. Challenges for Managerial Accounting System:-
The new challenges facing management accounting systems have been a subject of vivid debate in recent years. Much of the literature seems unfortunately to have ignored such noteworthy issues as the specific domestic competitive settings or economic conditions like recessions, which may ultimately prove to be nation specific in their consequences. Moreover, these studies have largely tended to discuss market changes and competition in a new environment Another concern raised here is the interaction occurring between corporate cultural changes and accounting. Cultural change is actually a phenomenon which might be assumed to occur more commonly than is generally assumed, for instance, when companies strive for a true customerorientation. How to successfully implement corporate cultural change, or of how to respond to except exception ionall ally y aggress aggressive ive market market attacks attacks by domest domestic ic compet competito itors rs may prove prove fatal. fatal. Mod Modern ern Management Ideas like TQM, BPR, and ABM have been proposed as feasible solutions to these new challenges. Especially in conditions of large scale changes, these ideas may indeed possibly provide potential parts for new manuscripts to be used in a novel situation. As regards corresponding information needs, it seems to be justifiable to argue that under these conditions management accounting information plays an even more important role than usual. The new challenges and requirements for management accounting and control systems are actually experienced by the organizational actors in a complex multidimensional change setting. Another major issue examined was the role of management accounting and control systems, particularly in a cultural-ideological change process.
Challenge for Merging Management Accounting Tools with Different Discipline:-
With the competitiveness of today’s business world, several of new model going to developed for using many useful management accounting tools with human resource management, that create the challenges for management accounting tools as self-governing technique . For some insufficiency of management accounting technique, merging developed by following process:Step 1: Identifying relevant product profitability models. Product profitability models come in all shapes and sizes. The relevant product profitability models to use in human resource management should involve sales productivity as a key element in determining total profitability. Step 2: Applying marginal profitability to actual sales results. Product profitability models that break down the product's profitability on per unit of sales basis can then be applied to actual sales production. Step 3: Using regression techniques to analyze trends and predict future sales. Historical sales and profitability information provide a basis for careful examination of trend. Regression analysis,
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especially especially represented represented in a graphical graphical format, enables management to quickly quickly grasp the true trend direction of sales production and efficiencies Comparing ing regres regressio sion n foreca forecasts sts to manage management ment object objective ives. s. If the foreca forecaste sted d sales sales Step 4: Compar Step produ producti ction on develop developed ed by the regres regressio sion n analys analysis is falls falls short short of manage managemen mentt object objective ives, s, then then management needs to take pro-active steps to meet revenue objectives or revise their projections downward. Working with human resources resources to resolve resolve projected projected revenue revenue variances. variances. Recognizing Step 5: Working revenue variances using management accounting tools is one thing; identifying the cause of the variances is quite another. Carefully analyzing the characteristics surrounding sales production trends could suggest reasons behind the variances. Different management accounting tools is used to help better understand business, but we shouldn't limit using our tools to just management accounting. Many techniques used to other functional areas, but certainly not limited at one root, in fact, the applications are limitless. Taking the initiative to use these tools outside of the accounting and finance area can have a profoundly positive impact on the value of the management accounting profession.
Challenges for Managerial Accounting Research: -
With With the the cont contin inui uing ng devel developm opment ent of busi busines nesss proc proces esse ses, s, whet whethe herr the the chang changee in vario various us manufa manufactu cturin ring g proces processes ses,, or the automa automatio tion n of most most busine business ss activi activitie ties, s, the cost cost account accounting ing procedures that companies use to calculate for the cost of an individual product, service or activity have also become outdated. From From a manage manageria riall account accounting ing perspe perspecti ctive, ve, the changes changes in the econom economy, y, in indust industrie riess and individual firms alike, must be supported by the firm's accounting and control infrastructure. Accounting is a financial model of business. When changes occur in the business, accounting should change to reflect them. Managers of companies that fail to make appropriate modifications in their accounting systems will find they have inaccurate product/service/activity cost figures and lack data for making decisions. They may lose their competitive edge because they do not have the necessary information for operating in the constantly changing business environment. System Systemss for account accounting ing for costs costs date date back back severa severall centur centuries ies.. Account Accounting ing for manage managemen mentt accounting done for management to meet its information needs. One basic difficulty in costing is that an individual product, service or activity does not drive all the company expenses. Even within a factory, there are many questionable costs, not directly driven by the type, number or volume of products. In addition, there are costs that are driven by substantial material material vendors and customers. How to go about calculating the cost of an individual product, service or activity, in par with the marked changes in the field of management accounting to maximize the benefits that effective costing has to offer. New Challenges for Managerial Accounting Research:- The traditional cost accounting model developed for mass production of standardized products needs to be updated to support new operating concepts such as just-in-time, zero defects, zero inventory, a cooperative workforce, flexib flexible le manufa manufactu cturin ring g syste systems, ms, comput computer er aided aided design design and manufa manufactu cturin ring, g, and comput computer er integrated manufacturing.
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Management accounting must serve the strategic objectives of the company & emphasizes on financial measurements, needs to include an explicit recognition of the need for information and measurements in such soft areas as product quality, productivity, product innovation, employee morale, and customer satisfaction. If management accounting research is to progress, information needs to be collected from company various updated sources.
Challenges in Organizational Performance:-
Under the discipline of management accounting - how budgets, cost models, management control panel and continuous improvement are used today and what needs to change:The challenges in organizational performance related to budgets, cost models, management control panel and continuous improvement experienced at present by a variety of firm & how effective the management accounting techniques contribute to organizational performance management. The rati The ration onal alee for for the the mana manage geme ment nt acco account untin ing g techn techniq iques ues tende tended d to hold hold the the obje object ctiv ives es of organization by the four techniques –
Budgets were frequently used solely to project financial results; their contribution to the implementation of corporate strategy was very weak.
The cost models were reduced to simple pricing systems intended to evaluate inventories, rather than true models representing the organization's activities.
Indicators found in management dashboards are identified and developed by the company functions and are in no way integrated in financial management.
The same The same is true true of cont contin inuou uouss impr improv ovem emen entt proj projec ects ts or Kaiz Kaizen en proj projec ects ts,, whic which h are are implemented completely outside the finance function. The challenge in this regard was to encourage organizations to use budgets to apply corporate strategy. Two major roles associated with budgets: monitoring financial projections and managing strategy, it involve - in forecasts and plans. The budget also has an impact on manager motivation in that budget targets are often used to establish compensation. Budgets are used to monitor financial results in nearly all companies. Only when the anticipated results are stable and easily predictable were, this would not change anything. The budget thus contributes to managing financial resources by tracking financial projections. One such practice that was evaluated favorably is that of the continuous budget, whereby at the end of each month, not only are the projections of the following months adjusted but the budget of the twelfth following month is added.
However, the data we gathered shows that, for the majority of companies, costs are calculated as part part of financ financial ial account accounting ing,, and compan companies ies haven't haven't develop developed ed or imple implement mented ed a system system of manage management ment account accounting ing disti distinct nct from from financi financial al account accounting ing.. In additio addition, n, in the context context of an innovation and growth strategy that centers on acquisitions, executives aren't aware of the potential benefits of a cost model that goes beyond associating direct production costs with products. In addition, executives at companies that have implemented an integrated management information system don't feel the need for other cost-related information. Problem Foundations in Management Accounting:-
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Fundamental objective of management accounting is to facilitate and support all the aspects of an organization's decision making. To accomplish this objective, management accountants should be aware of the kinds and levels of problems and decisions involved in order to identify those particular areas where management accounting techniques and information would be most relevant and useful. For this purpose, different conceptual frameworks for viewing problems, decisions, and decision systems have been proposed in the management, accounting, and information systems literature. They provide a good basis for viewing the types of problems, decisions and decision systems, the types of information needed, and the useful u seful role of management accounting. It is a fact that accounting executives spend a great proportion of their time defining, formulating, classifying, and solving problems The concept of a problem in business, management accounting, or any other context lends itself to three major phases - Problem definition, Problem formulation, and Problem classification, which precede the problem solving. The way executives approach each of these phases can substantially affect information processing, decision making, and behavior. A moderating effect on this impact is management accounting playing a crucial role of facilitator by providing the right information needed for the execution of each of the three stages. Without the right execution of three phases management accounting facing challenges to exist their acceptance. Faced with new wealth creation creation standard, standard, triggered triggered by technology technology and relentless relentless globalizatio globalization n of markets, increasing number of companies are becoming becoming knowledge-based enterprises. Internet and e-commerce have changed forever the way companies conduct their businesses. Virtual enterprise and effici efficient ent supply supply chain chain manage managemen mentt syste systems ms will will shape shape the future future of these these enterp enterpri rises ses.. Organizations are trying to become agile enterprises with the help of strategic alliances of firms and integration using information technologies. Five challenges are identified for management accounting, and in particular for planning and control
The first is to foster multiple perspectives
The second is the coordination of complexity
The third concerns competitor analysis and
The fourth concerns resource allocation
The fifth is to overcome centrifugal tendencies, developing a clarity of strategic intent, binding managers together worldwide and rewarding behavior in the corporate, as opposed to local interest. Traditional performance and cost measures are no longer suitable for developing and managing enterprises in the so-called new environment. In order to remain relevant and to add value, cost and perfo performa rmance nce measur measures es must must be design designed ed and system systemati atical cally ly evaluat evaluated ed to reduce reduce the oftenoftenunnoti unnoticed ced mismat mismatch ch betwee between n strate strategic gic goals goals and operati operational onal tacti tactics. cs. Manage Manageria riall accoun accountin ting g researchers and practitioners should develop new costing and Performance Measurement Systems (PMS) taking into account the new enterprise environment. Pushing the Art of Management Accounting: -
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Management accounting practice has developed substantially over the past century, but it suggests that the practice is no longer making the strides that it once did. Unless management accountants take a hard look at the effectiveness of current practice, this situation isn’t likely to improve. In some companies, radical changes are needed to the structure of the finance function, the nature of the interactions management accountants have with other managers and the performance metrics used to guide the function itself. Today’ Today’ss manage managemen mentt account accounting ing inform informati ation, on, driven driven by the procedu procedures res and the cycle cycle of the organization’s financial reporting system, is too late, too aggregated and too distorted to be relevant for managers’ managers’ planning and control decisions. Management accounting reports are of little help to operating managers as they attempt to reduce costs and improve productivity. Strategic cost management techniques, such as attribute costing, seem little known outside academia. The majority of firm’s measures apparently don’t use them significantly. Balanced Scorecard researchers have concluded that most users make little attempt to link their non-financia non-financiall performance performance to strategy strategy and that only a small minority minority attempt to validate validate the cause and effect linkages included in their models. Moreover, Balanced Scorecard practice seems to have developed developed an independent independent momentum, momentum, excluding excluding the finance finance function function altogether altogether in some organizations. There is even pressure for managemen t accountants to do less. These indications of a slowing pace of management accounting change may be due to a range of factors. In some cases, new management accounting tools aren’t adapted to organizational strategy or structure and can’t be used. And in some cases, innovation has failed due to implementationrelated factors. However, the main problems aren’t technical or structural; they lie in the need for a better management of the management accounting process itself. Last the management accounting process requires new metrics. Most accounting functions measure timeliness, in terms of the delay between the end of the reporting cycle and the issuing issuing of the report, report, and many measure measure the the cost cost of the finance finance function function relati relative ve to revenues. revenues. Few organizati organizations ons measure measure the use or the usefulness usefulness of the management management accounting accounting information provided. The absence of such measures guarantees that things will remain the same.
Application of Inefficient Techniques in Decision Making: -
As time went on, standard cost lost its usefulness for management decision making due to a variety of reasons:The practice of paying workers workers on a set-piece basis changed in favor of paying on an hourly rate. Modern companies tend to have relatively low truly variable costs and very high fixed costs. Equipment has become more complex and specialized and may be a very significant proportion of total costs. Changes in the level of full cost inventory create swings in profitability that is difficult to explain or understand. An increase in inventory can "absorb" costs of production and increase profits, while a decrease in inventory level will decrease profits. Organizations with a wide range of products or services have proce processe ssess which which are common common to severa severall finish finished ed items, items, making making cost cost allocat allocation ion irrel irrelevan evantt or misleading.
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As a result of the above, using standard cost accounting to analyze management decisions can distort the unit cost figures in ways that can lead managers to make decisions that do not reduce costs or maximize profits. Weaknesses of management accounting : - Management accounting discipline is still very much in a state of evolution. It comes across the same obstacle as a relatively new discipline has to face sharpening of analytical tools and improvements of techniques creating uncertainty about their application.
1. There is always a temptation to make an easy course of arriving at decisions by intuition rather than taking the difficulty of scientific decision making. 2. It derive derivess its inform informati ation on from from financ financial ial account accounting ing,, cost cost account accounting ing and other other record records. s. Theref Therefore ore streng strength th and weaknes weaknesss of managem management ent account accounting ing depends depends upon the strengt strength h and weakness of basic records. 3. It is one thing to record, interpret and evaluate an objective historical event converted into money figures, while it is something quite different to perform the same function in respect of past possibilities, future opportunities and unquantifiable situation. Execution of the conclusions drawn by the management accountant will not occur automatically. Therefore, a continuous effort to achieve the goal must be made at all levels of management. 4. Management Accounting will not replace the management and administration. It is only a tool of management. management. Of course, course, it will save the management management from being immersed immersed in accounting accounting routine and process the data and put before the management the facts deviating from the standard in order to enable the management to take decision by the rule of exception. An alternative view of management accounting : - A very rarely expressed alternative view of management accounting is that it is neither a neutral or benevolent influence in organizations, rather rather a mechanism mechanism for management management control through observation. observation. This view locates locates management management acco account untin ing g speci specifi fica call lly y in the the cont context ext of mana manage geme ment nt cont contro roll theo theory ry.. Stat Stated ed diff differ eren entl tly y Management Accounting information is the mechanism which can be used by managers as a vehicle for the overview of the whole internal structure of the organization to facilitate their control functions within an organization. Throughput Accounting: - The most significant, recent direction in managerial accounting is throughput throughput accounting; accounting; which recognizes the interdependen interdependencies cies of modern modern production production processes. processes. For any given product, customer or supplier, it is a tool to measure the contribution per unit of constrained resource. Transfer pricing: - Management accounting is an applied discipline used in various industries. The specific functions and principles followed can vary based on the industry. Management accounting princ principl iples es in banking banking are specia specializ lized ed but do have some some common common fundam fundament ental al concept conceptss used used whether the industry is manufacturing based or service oriented.
For example, transfer pricing is a concept used in manufacturing but is also applied app lied in banking. It is a fundamental principle used in assigning value and revenue attribution to the various business units. Essentially, transfer pricing in banking is the method of assigning the interest rate risk of the bank to the various funding sources and uses of the enterprise.
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Chapter 5:
Findings of the Study
Findings:Management decisions are basically based on some measures/techniques traditionally designed based on quantitative data. However, in recent past to cope with global business environment, change in business, business, increase in competition and complexity of decision making some advanced quantitative techniques like Activity – based Costing and Target Costing and some improved programs like Just-in-Time (JIT), Total Quality Management (TQM), Process Reengineering and Theory of Constraints (TOC) have been introduced for application. Now both traditional and advanced management accounting techniques are shown in the following chart:-
Traditional Techniques
Advanced Techniques
Financial Statement Analysis Fund Flow Analysis Cash Flow Analysis Marginal Costing Absorption Costing Differential Costing Standard Costing Opportunity Costing Budgetary Control Inter-firm Comparison Cost-Volume Profit Analysis Management Reporting Chart Showing the Management Accounting Techniques
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Activity-Based Costing Target Costing Just-in-Time (JIT) Tota otal Qualit lity Management (TQM) Process Reengineering Thee Th Th Theo eory ry of Constraints(TOC)
Extent of Use of Management Accounting Techniques
Against the background of identification of generally used management accounting techniques the following table shows the use of management accounting techniques in the sample manufacturing business firms in Bangladesh. A list of techniques was provided to the respondents and they were asked to point the techniques they use and which they do not use. The responses have been tabulated and the summarized picture is shown in the table. The table shows the extent of use of different management accounting techniques in sample firms. It is seen seen that that the tradi traditio tional nal techni technique quess like like financ financial ial statem statement ent analysi analysis, s, cash cash flow flow analys analysis, is, budgetary budgetary control and management management reporting reporting are being widely widely used (100%) by all types of firms followed by standard costing and absorption costing (80% in public, 90% in private and 100% in MNC). Marginal costing and cost-volume-profit analysis are used to some extent by the 50% in public sector enterprises, 60% by private sector and 70% by multinational corporations (MNC). Some enterprises of public (30%) and private (20%) sectors use fund flow statement analysis though it has now been almost replaced by cash flow statement analysis. Modern techniques yet to be introduced by Bangladeshi firm – both in public and private sector. Few MNC uses JIT (40%) and TQM (20%). None of public or private Bangladeshi enterprises or MNC found to use some traditional technique like differential costing, opportunity costing and inter-firm comparison as well as the modern techniques like activity-based costing, target costing, process reengineering and the TOC. Thus it is seen that management accounting techniques yet to get a firm footing in Bangladeshi firms and thus depriving these firms in better decision making.
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Techniques
PB PV (N = (N = 15) of Management Accounting 15) “Table Showing the Summarized Picture Techniques Used
MNC (N = 5) the by
Financial Statement Analysis
100%
100%
100%
100%
100%
100%
Cash Flow Analysis
100%
100%
100%
100%
100%
100%
80%
80%
80%
80%
80%
80%
50%
50%
50%
50%
50%
50%
30%
30%
30%
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Budgetary Control Management Reporting Standard Costing Absorption Costing Marginal Costing CostVolume-Profit Analysis Fund Flow Analysis Just-in-Time (JIT) Total Total Quality Quality Management (TQM) Differential Costing Opportunity Costing Inter-firm Comparison ActivityBased Costing Target Costing Process Reengineering The Theory of
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Now a discussion about the techniques in brief and extent of the use of the same is being examined below: i) Financial Statement Analysis
Financial statement is essentially historical document which provides organized data according to logica logicall and consis consisten tentt account accounting ing procedu procedure re and convey conveyss an und unders erstan tandin ding g of some some financi financial al aspects of a business firm. Careful analysis of financial statements can help decision makers to evalua evaluate te an organi organizat zation ion’s ’s past past perfor performan mance ce and predic predictt its future future financ financial ial health health.. Financi Financial al statem statement ent theref therefore ore,, refers refers to such such a treatm treatment ent of the inform informati ation on contai contained ned in the Income Income Statement and the Balance Sheet so as to afford full diagnosis of the profitability and financial soundness of the business. This analysis an alysis is accomplished by examining trends in key financial data, comparing financial data across companies, and analyzing key financial ratios. All the sample firms use it. ii) Fund Flow Analysis
Fund flow flow analysi analysiss does does not carry carry any extra extra meanin meaning g basica basically lly after after the imple implement mentati ation on of Intern Internati ational onal Account Accounting ing Standa Standards rds (IAS)– (IAS)–7 7 in revise revised d form. form. Nevert Neverthel heless ess,, some some busine business ss organization organizationss are still considering considering this as an important important tool for managerial managerial and financial decision making. Working capital being life-blood of the business, analysis of fund flow is thus extremely useful. Financial analysts also have an understanding of changes in the distribution of resources between two balance sheet dates by analyzing the fund flow statements. Few sample firms (30% in public and 20% in private sector) still use this statement. iii) Cash Flow Analysis
Until recently, recently, many decision makers focused primarily primarily on the income statement statement and the balance sheet. But in the IAS-7 (revised), FASB has prescribed for compulsory reporting of another important statement, the statement of cash flows. A statement of cash flows reports the cash receipts and cash payments of an organization during a particular period. It is widely used as a tool for assessing the financial health of an organization. Other important purposes of maintaining this statement are to predict future cash flows, to evaluate management’s generation and use of cash and to determine a company’s ability to pay interest, dividends, and to pay debts when they are due. All the sample enterprises found to use it. iv) Marginal Costing
Marginal costing is a technique where only the variable costs are considered while computing a cost of a product. The fixed costs are met against the total fund arising out of excess of selling price over total variable variable cost. This fund is known as ‘contribution’ ‘contribution’ in marginal costing. Marginal costing system is however not a system of cost finding such as job, process or operating costing, but it is a special technique concerned particularly with the effect of fixed overheads on running the business. It is an important decision making tool. However, it is found not being widely used in sample enterprises. Over 50% of public and 60% of private sector enterprises and 70% of MNC found to use it. v) Absorption Costing
Though Though absorp absorptio tion n costin costing g is a tradit tradition ional al approa approach ch for costi costing ng produc products ts for the purpos purposes es of valuing inventories and cost of goods sold, the vast majority of companies throughout the world use this technique for managerial accounting purposes. Absorption costing, which is also known as 29
Total, or Full costing, treats all costs of production as product costs, regardless of whether they are variable or fixed. It allocates a portion of fixed manufacturing overhead cost to each unit of product, along with the variable manufacturing costs. It is found widely used in sample firms (80% in public, 90% in private and all MNC) followed by some traditional techniques like financial statement analysis, cash flow analysis etc. vi) Differential Costing
In decision-making, the management always compares two or more alternative courses of action. Making or buying decision, accepting or rejecting certain orders, deciding whether to discontinue an existing product or launce new one, expanding the existing business etc. are the decisions required to be taken by the management. In such a case the best alternative that will maximize profi profitt or minimi minimize ze loss loss can be obtain obtained ed by determ determini ining ng the differ different ential ial costs costs and revenu revenues. es. Differential cost (revenue) is the difference difference in total cost (revenue) (revenue) between two alternatives. alternatives. The use of this technique found absent in sample enterprises. vii) Standard Costing
A standard is a benchmark or “norm” for measuring performance. Standards are found everywhere and are also widely used in managerial accounting where they relate to the quantity and cost of inputs used in manufacturing goods or providing services. Standard costing is a budgetary control technique with three components: a standard, or predetermined, performance level; a measure of actual performance; and a measure of the difference, or variance, between the standard and the actual. All sample MNCs, 90% of private sector enterprises and 80% of public sector enterprises reported to use it. viii) Opportunity Costing
Sometimes a proposed investment project may use the existing resources of the firm for which explicit, or adequate, cash outlays may not exist. The opportunity costs of such projects should be considered. Opportunity costs are the expected benefits which the company would have derived from from those those resource resourcess if they they were not commit committed ted to the propose proposed d projec project. t. In addition addition to the accounting costs that are explicit as labor, raw materials, supplies, rent, interest and utilities, some implicit costs are also required for managerial decision making purpose. The objective in such case is to determine the present and future costs of resources associated with various alternative courses of action. Such an objective requires that one considers the opportunities foregone/ sacrificed whenever a resource is used in a given course of action. The implicit costs, however, consist of the opportunity opportunity costs of time and capital that the owner-manager owner-manager has invested invested in producing producing the given quantity of output. But none of sample enterprises use it. ix) Budgetary Control
Budgetary control is the system of management control in which all the operations, as sales, purchase, production etc. are forecasted in advance and the results, when known, are compared with the planned targets. The difference between the planned targets and actual results are analyzed and corrective steps are taken according to the original causes. By budgetary control attempts are made to make the best uses of resources under the circumstances and all efforts are coordinated by pin-pointing responsibility. The Budget Performance and Variation Reports act as communication in between top management and financial management as also in between functional management and sub-ordinate management. The system makes everyone conscious and responsible, and thus it is also termed as Responsibility Accounting. All the sample enterprises reported to use it. But some 30
research report indicated that this technique is not rigorously followed and thereby the enterprises are deprived of its benefit. x) Inter-firm Comparison (IFC)
IFC IFC is anot anothe herr techn techniq ique ue of Mana Managem gemen entt Acco Account untin ing g which which is made made by some some inte interr-fi firm rm comparison ratios based on the financial and other records of the business. Top management can make decision by applying this technique and comparing the performance of two or more similar types of industry. The idea of inter-firm comparison was felt in the year 1889 when the National Association of stove manufacturer in U.S.A introduced first the scheme of Uniform Costing. In order to know whether one business/firm is making sufficient profit or not; whether it is efficient in pur purch chas ase, e, sale saless and and produ product ctio ion, n, it is requ requir ired ed to comp compar aree its its own own perfo perform rman ance ce with with the the performances of other similar concerns and it is easily possible by applying the technique IFC. But this technique is found not in use by the sample enterprises. xi) Cost-Volume-Profit Analysis
The relationship between cost-volume-profit is ascertained by the technique “Cost-Volume- Profit Analysis”. This technique attempts to find out the impact of change in price, cost, and volume on the profitabilit profitability y of the business. business. It aids management management to take its decision decision on planning planning and control. The CVP analysis is also termed as Break-even Analysis which determines the equilibrium point of cost and revenue. The equilibrium point indicates “no profit no loss” stage. 50% of sample public sector enterprises, 60% of private sector enterprises and 70% of MNC reportedly use the technique. xii) Management Reporting
Mana Managem gemen entt repo report rtin ing g acts acts as a ‘med ‘media ia’’ whic which h help helpss the the manag managem emen entt to take take its its deci decisi sion on accordingly. It is an organized method of providing each manager with all the data which he needs for his decisions. A good management reporting will include six factors: a)
Evaluation of each manager’s area of responsibility,
b)
Proper flow of information,
c)
Proper form & Proper time,
d)
Cost benefit analysis, and
e)
Flexibility. Large concerns found to have a separate Management Information Division.
This division may be headed by the Accountant himself or the Management / Cost Accountant or Information Manager, depending on the size of the business. All the samples reported to use it in the form of performance report. But the contents found to vary and in many cases one report includes a variety of information like production, procurement, sales, financial aspects i.e. these are not segregated and thus pin point reporting for specific responsible persons is being hampered. This adversely affects intent of the reporting. xiii) Activity-Based Costing
Activity-b Activity-based ased costing (ABC) developed to provide provide more accurate ways of assigning assigning the costs costs of indirect and support resources to activities, business processes, products, services, and customers (Kapla (Kaplan n and Atkins Atkinson, on, 200 2001:9 1:97). 7). Activi Activity ty-bas -based ed costin costing g is a method method of assign assigning ing costs costs that that calculates a more accurate product cost by identifying all of an organization’s major operating 31
activities. The goal of ABC is not to allocate common costs to products but to measure and then price out all the resources used for activities that support the production and delivery of products and services to customers. For this why, ABC is important to activity-based management. Since its introd introduct uction ion as a viable cost cost alloca allocatio tion n techni technique que,, organi organizat zation ionss in the United United States States and throughout the world have adopted ABC. This modern technique is found not in use by sample enterprises. xiv) Target Costing
Target costing is a costing tool for decision making. making. Stratton defined target costing as a cost management tool for making reduction a key focus throughout the life of a product. They added that the target cost is based on the product’s predicted price and the company’s desired profit. Managers must then try to reduce and control costs so that the product’s cost does not exceed its target cost. Target costing is most effective at reducing costs during the product design phase when the vast majority of costs are committed. None of the sample firms use this modern technique. xv) Just-in-Time (JIT)
One of the management-forged operating philosophies for the new manufacturing environment is JIT. The JIT approach can also be used in merchandising companies. The JIT operating philosophy requires that all resources, including materials, personnel, and facilities, be acquired and used only as needed. It has most profound effects on the operations of manufacturing companies, which maintain three classes of inventories – raw materials, work-in-process, and finished goods. goods. That means according to JIT concept raw materials are received just in time to go into production, manufactured parts are completed just in time to be assembled into products, and products are completed just in time to be shipped to customers. Only 40% of sample MNCs use it and none of Bangladeshi sample firms found to use it. xvi) Total Quality Management (TQM)
The most popular approach to continuous improvement is known as total quality management. There are two major characteristics of total quality management (TQM): (I) a focus on serving customers and (ii) systematic problem solving using teams made up of front-line workers. TQM is an appr approa oach ch to impr improv ovin ing g the the compe competi titi tiven venes ess, s, effe effect ctiv ivene eness ss and flexi flexibi bili lity ty of a whole whole organization organization.. It is essentiall essentially y a way of planning, planning, organizing organizing and understandi understanding ng each activity, activity, and depends on each individual at each level. TQM is also a way of ridding people’s lives of wasted effort by bringing everyone into the process of improvement, so that results are achieved in less time. The methods and techniques used in TQM can be applied throughout any organization. They are equally useful in the manufacturing, public service, health care, education and hospitality industries. Only 20% of sample MNCs reported to use it but none of Bangladeshi sample firms use it. xvii) Process Reengineering
Process reengineering focuses on simplification and elimination of wasted effort. A central idea of process reengineering is that all activities that do not add value to a product or service should be elimin eliminate ated. d. Basica Basicall lly, y, in proces processs reengi reengineer neering ing a busine business ss proces processs is diagra diagramme mmed d in detail detail,, questioned, and then completely redesigned in order to eliminate unnecessary steps, to reduce opportunities for errors, and to reduce costs (Garrison and Noreen, 2004-2005:20). None of sample enterprises use it. 32
xviii) The Theory of Constraints (TOC)
A constra constraint int is anythi anything ng that that prevent preventss one from from gettin getting g more more of what he/she he/she wants. wants. Every Every individual and every organization faces at least one constraint. The Theory of Constraint (TOC) maintains that effectively managing the constraint is a key to success (Garrison and Noreen, 20042005:22). In TOC, an analogy is often drawn between a business processes – the weakest option is always identified first and then improvement efforts are shifted over to that option in order to bring the biggest benefit. This simple sequential process provides a powerful strategy for continuous improvement. None of sample enterprises reported to use it. The above findings reveal that some traditional techniques are being used by sample enterprises. Modern techniques are yet to be introduced. In the use of management techniques MNCs rank high followed by private sector and public sector enterprises. Due to utmost importance of use of modern techniques, concerned authorities need to pay attention to this. Against the backdrop of the extent of use of management accounting techniques, means status of management accounting pra pract ctic icee in Bang Bangla lades desh, h, now now an atte attempt mpt is made made below below to show show the the atti attitu tude de of conce concern rned ed management personnel, the reasons for low use and prospect of improving the situation in the following: 5.00.2 Extent of Use of Management Accounting Information by the Sample Enterprises for Various Decision Making Decision areas
MAI (%)
FAI (%)
OI (%)
Production
10
30
60
Purchase
5
30
65
Sales
10
25
65
Control
30
20
50
Direction
20
10
70
Motivation
10
15
75
(MAI=Manage (MAI=Management ment accounting accounting Informatio Information, n, FAI=Financia FAI=Financiall accounting accounting Informatio Information, n, OI= Other Information)
5.00.3 The Respondents as to Use Status of Management Accounting Information Techniques in Sample Firms
It was desired to know from the respondents as to whether management accounting information syst system emss are are sati satisf sfac acto tori rily ly used used in Bang Bangla lade desh sh,, what what are are the the prob proble lem m of optim optimum um use use and suggestions they can offer for adequate use of the techniques. The summarized version of their opinion is tabulated below. Satisfactory
Moderate
r
33
Unsatisfactory
15(14.28%)
30(28.57% )
45(42.85%)
The table above clearly depicts that the respondents consider the use of management accounting techniques in our manufacturing business firms as very much unsatisfactory. Only 14.28% of them consider it satisfactory and 28.57% considers it moderately satisfactory and seemingly most of them them belong belong to MNC group. group. The majori majority ty (42.85% (42.85%)) consid considers ers it unsati unsatisfa sfacto ctory ry and 14.28% 14.28% considers the position as precarious/worse. They put forwarded some reasons for low use of management accounting techniques. Reasons for Low Use of Management Accounting Techniques
Respondents recognize the importance of the use of management accounting techniques in the factories. But they pointed out some reasons that act as barriers to this. The reasons pointed out by them are shown in the following table. Reasons
N
%
more more
2 0
Lack Lack of awar awaren enes ess, s, unde unders rsta tand ndin ing g the benefit of its use
2 5
2 6 . 6 7
Consider involvement of extra cost
2 0
Hist Histor oric ical al Info Inform rmat atio ion n importance
is
give given n
Lack of trained and experienced personnel Reluctant to use it and base decision on personal experience
1 5 3 5
Lack of skilled personnel
2 2
3 3 . 3 3 2 6 . 6 6 2 0 4 6 . 6 7 2 9 . 3 3
34
(N=Frequency of the respondents) (%to total respondents)
The above table indicates that reluctance of use is the main cause. This contradicts the opinion as to considering the importance of management accounting as an important tool of decision- making. This indicates that actually our business firms do really not feel the importance of management accounting information for decision-making. Only lip service is given to it.
5.00.5 Suggestions to Overcome the Problem of Low Use
The respondents also offered some suggestions in the way to overcome the flaws and improvement of the positions. These are now shown in the following table. Suggestions
N
%
Organiz Orga nizing ing semi seminar nar,, symp symposi osium um of professional bodies
7 0
Crea Creati ting ng awar awaren enes esss by resp respec ecti tive ve Manufacturing Association
4 0
9 3 . 3 3
Ensuring development
skill
4 0
Introducing management audit more extensively
3 0
Crea Creati ting ng aware warene ness ss management
3 0
training
and
amon among g
top top
5 3 . 3 3 5 3 . 3 3 4 0 4 0
(N = Frequency) (%= To total respondents)
Summary of the Findings:After the analysis analysis and review the role of various various management management accounting accounting costing technique technique in various Bangladesh industries the following findings are observed during the study:-
35
Rather than Textile & food manufacturing industries, the percentage of implementation of new management accounting technique in Bangladesh is very poor.
Chemical & Pharmaceutical industries are unaware of the new useful technique. Electronics, Construction, Telecom & beverage industries use little bit of new technique, whether this sector is the most useful prospect for using other costing technique.
Lacking of using the wrong or inefficient technique, almost fifty percent of the respondent business under the survey faced high risk for the competition in their business at home & abroad, they are poorly satisfied with their current management accounting technique.
Whether the users who use new costing techniques are highly satisfied & they express that this is very much efficient, & they strongly agreed that they will stay with new costing techniques. Almost all the respondent company under the survey agreed with that a developed management accounting technique helps in achieve business growth.
Majority percent of respondent who don’t use new costing techniques mention that they are unknown about the all developed new technique, others mention that new are costly & take excessive time.
Problem-Solving Tools for the Challenge of Management Accounting:Management Management accountants accountants should should conduct frequent frequent analyses analyses of their their communicat communications ions processes. processes. Tools for the challenge of management accounting, the management accountant mush solve the following questions include: •
What changes to management accounting practice initiated in the recent years?
How many accounting personnel are committed to real change & do accounting personnel regard themselves as members of the operating team?
•
•
How much time do management accountants spend with non-financial personnel?
Is management accounting personnel physically located in such a way as to bring them in regular contact with non- financial managers?
•
•
Do management accountants have a reporting responsibility to operational managers?
Are accountants given responsibilities that can only be discharged by working with operational people & the accountants who have these responsibilities have sufficient status to maintain working relationships on the basis of mutual respect? •
•
How many accounting personnel do not have significant routine reporting responsibilities?
How much financial training is provided for operating management? Does this training explain the links between financial and operational events?
•
Are operating managers required to systematically prepare and present the financial analysis of their unit? •
36
Do performanc performancee measures measures other than cost and timelines timelinesss accounting function? •
exist
for
the
management management
The more The more manag managem emen entt acco account untan ants ts can can resp respond ond posit positiv ivel ely y to thes thesee quest questio ions ns,, the the bette better r organization organizationss will become at managing managing the communicati communications ons processes processes that underlie underlie management management accounting. This will create a better understanding of the role that management accountants can play in achieving success and it is in this context that significant management accounting change will occur. Every organization wants to initiate an accounting system and strategies for effective decision on derive profit by maintain the organization’s capability, strength and competitiveness. The dramatic changes and advances in communications and information technology facilitated the way towards a sustained progress in the international business and finance environment. The low cost and the efficiency as well as the attractiveness of conducting and entering any business venture – local or international in nature were made available by these technological advances which characterize the global marketplace. Today, greater challenges are faced by accountants as opportunities for growth as well as possibilities of risks increase in the current and more attractive business world. Management accounting generates the proper flow of accounting information that are accumulated, analyzed, and presented in the organization. Furthermore, this information are used in making imperative decisions, served as basis for predicting and solving specific problems, and utilized in the daily operations in business management. Management accounting is more oriented toward internal decision making and purposively channels relevant and timely information to internal managers. As to its relationship with financial management, both are production processes of different accounting data for different problem-solving situations. Managem Management ent account accounting ing,, howeve however, r, reflec reflects ts the use of techni techniques ques from from differ different ent discip disciplin lines, es, including accounting, for internal problem solving. Therefore, management accounting techniques may differ differ from from Genera Generally lly Accept Accepted ed Account Accounting ing Princi Principle pless techni technique quess and from from one firm firm to another. They do not conform to any set of prescribed rules, and much may be left to the decisionmaker's philosophies. Management accounting should go beyond cost accounting and integrate various materials from organization theory, behavioral sciences, information theory, and so on, in a multidisciplinary approach aimed at facing challenge & facilitating the production of information for internal decision making.
Chapter Chapter 06: MANAGE MANAGEMEN MENT T ACCOUN ACCOUNTING TING DEVELO DEVELOPME PMENT NT AND PRACTI PRACTICES CES IN BANGLADESH
The more the development of the market economy, the more the significance of management accounting. To keep pace with this increasing market economy, it becomes imperative for the organization organizationss to adopt new management accounting accounting tools and techniques. techniques. It is also important important for the Banglad Bangladesh eshii organi organizat zation ions. s. This This paper paper seeks seeks to obtain obtain an overvi overview ew of the managem management ent accounting practices in the listed manufacturing companies of Bangladesh. Data has been gathered by a questionnaire survey from eight manufacturing sectors. The analysis has revealed that though there is difference in extent of practices among the sectors, all sectors sectors fail to practice some newly developed techniques. If this trend continues, Bangladeshi organizations will lag behind in the race of glob global al comp compet etit itiv iven enes esss and and comp compar arat ativ ivee adva advant ntag ages es.. It is ther theref efor ore, e, some some poli policy cy 37
recommendation has been made to improve and fasten the management accounting practices. The challenge in implementation of management accounting change constitutes much more than the selection of what may be perceived as being optimal accounting systems and techniques following by a technical process of implementation. Selecting and implementing the right accounting systems and techniques and the technical aspects of impl implem ement entat atio ion n are are impor importa tant nt,, but but chall challeng enges es for for chang changee impl implem ement entat atio ion n and and chang changee management also involves important behavioral and cultural issues that must be understood and addressed. The challenge of management accounting change is on understanding the processes involved in the implem implement entati ation on of managem management ent account accounting ing change change and the comple complexit xities ies of and diffic difficult ulties ies involved in changing management accounting systems, techniques and roles in the world. Modern techniques are being used to face complex situation. Bangladeshi manufacturing business firms remain far behind the expected situation due to lack of awareness as to benefit of using the management accounting techniques for better decision making. All concerned people need to realize the situation and take appropriate action from every corner to overcome this unwarranted situ situat atio ion. n. To keep keep pace pace with with the the world world chan changi ging ng mana managem gemen entt acco accoun unti ting ng envir environ onme ment nt,, Bangladeshi firms should use the newly developed techniques such as target costing. The soon it is done, the better it will be, otherwise we shall perish in this competitive world. To solv solvee the the prob proble lem, m, a fram framew ewor ork k need need for for inte interp rpre reti ting ng and und under erst stand andin ing g mana manage geme ment nt accounting change as an on-going process and a range of case studies are used to point up both successful and unsuccessful implementations, drawing out the various cause-effect analyses that can be learned and suggesting some pointers for those embark on a program of management accounting change. Though privatization and authoritative authoritative pronouncement has contributed a lot in the development of management management accounti accounting ng in Bangladesh, Bangladesh, the the practices practices of management management accounti accounting ng technique technique in listed manufacturing sector reveals that state of use of developed techniques techniques (like target costing, throughput costing, life cycle costing) is not satisfactory.
QUARE G ROUP OVERVIEW OF S QUARE
Square Pharmaceuticals Ltd is the flagship company of Square Group. In stark contrast to its present stature, Square had a rather humble beginning. In 1958, the Company started out as a small scale pharmaceutical venture at Pabna, a small town in Northern Bangladesh. It was a partnership effort of four young and enterprising men under the leadership of the Chairman, Mr. Samson H Chowdhury, whose determination and passion saw it through the turmoil of the early days.
38
In 1964, the Company was turned into a Private Limited Company. After the independence of Bangladesh, 1975 was quite a significant year for Square as it established a technical collaboration with with Jansse Janssen n Pharmac Pharmaceut eutical icalss of Belgiu Belgium; m; a subsid subsidiar iary y of Johnso Johnson n & Johnso Johnson, n, USA. In its relentless quest for higher technology, Square signed a technological collaboration agreement with F. Hoffman-La Roche & Co. Ltd in 1982. 1985 was another historical year for Square as the Company gained the market leadership for the first time in Bangladesh pharmaceuticals market and since then it has been maintaining its position as the the lead leadin ing g phar pharma mace ceut utic ical al Comp Company any of the the coun countr try. y. In 198 1987, 7, Squa Square re beca became me the the firs firstt Bangladeshi company to export its product abroad. The Company stepped into a new era when it was transformed into a Public Limited Company in 1991 and subsequently it was publicly listed at both the stock exchanges in the year 1995. Square Pharmaceutical Ltd has been successfully retaining its market leader position in Bangladesh for the last consecutive 22 years and its current market share is approximately 16%.
About Square Pharmaceuticals Limited SQUARE today symbolizes a name – a state of mind. But its journey to the growth and prosperity has been no bed of roses. From the inception in 1958, it has today burgeoned into one of the top line conglomerates in Bangladesh. Square Pharmaceuticals Ltd., the flagship company, is holding the strong leadership position in the pharmaceutical industry of Bangladesh since 1985 and is now on its way to becoming a high performance global player. SQUARE Pharmaceuticals Limited is the largest pharmaceutical company in Bangladesh and it has been continuously in the 1st position among all national and multinational companies since 1985. It was established established in 1958 and converted converted into a public public limited company in 1991. The sales turnover of SPL was more than Taka 7.5 Billion (US$ 107.91 million) with about 16.92% market share (April 2006– March 2007) having a growth rate of about 23.17%. SQUARE Pharmaceuticals Limited has extended her range of services towards the highway of global global market market.. She pionee pioneered red exports exports of medici medicines nes from from Bangla Banglades desh h in 1987 and has been been exporting exporting antibiotic antibioticss and other pharmaceuti pharmaceutical cal products. products. This extension extension in business business and services services has manifested the credibility of Square Pharmaceuticals Limited.
VISION, MISSION, AND OBJECTIVES VISION
We view business as a means to the material and social wellbeing of the investors, employees and the society at large, leading to accretion of wealth through financial and moral gains as a part of the process of the human civilization.
39
MISSION
Our Mission is to produce and provide quality & innovative healthcare relief for people, maintain string stringent ently ly ethica ethicall standa standard rd in busine business ss operat operation ion also also ensuri ensuring ng benefi benefitt to the shareh sharehold olders ers,, stakeholders and the society at large. OBJECTIVES
Our objectives are to conduct transparent business operation based on market mechanism within the legal & social frame work with aims to attain the mission reflected by our vision.
S quare’s quare’s Quality Policy SQUARE is committed to ensure better life through quality medicine. Ensure strict compliance with WHO standards and local regulatory norms in every phase of sourcing & procuring quality materials, manufacturing, quality assurance and delivery of medicines.
Ensure all act Ensure activi iviti ties es thr throug ough h doc docume umente nted d Qua Quali lity ty Man Manage agemen mentt Sys System tem (QMS) (QMS) com comply plying ing Intern Int ernati ational onal Sta Standa ndard rd req requir uireme ements nts of ISO 900 9001 1 thr through ough cont continu inuous ously ly dev develo elopin ping g Hum Human an Resources by regular training and participation. SQUARE is committed to undertake appropriate review, evaluation and performance measurement of processes, business activities and Quality Management System for continual improvement to ensure highest standard, customer satisfaction, developing human resources and company's growth.
Overview of Variable Costing and Absorption Costing At least two methods can be used in manufacturing companies to value units of product for accounting purposes - absorption costing and variable costing. These methods differ only in how they treat fixed manufacturing overhead costs.
Variable Costing Variable costing includes only variable production costs in product costs. Direct materials, direct labor and variable manufacturing overhead costs would ordinarily be included in product costs under variable costing. Fixed manufacturing overhead is not treated as a product cost under this method. Rather, fixed manufacturing overhead is treated as a period cost and is charged against income each period. This costing system is used for the internal purpose. So, variable costing considered the following— •
Under variable costing, no fixed overhead is assigned to inventory
Fixed overhead is a period expense which enters the income statement as a line item every period regardless of the number of units sold •
40
•
Variable costing excludes fixed manufacturing overhead from inventorial costs.
Absorption Costing Absorption costing treats all production costs as product costs, regardless of whether they are variable or fixed. Under absorption costing, a portion of fixed manufacturing overhead is allocated to each unit of product. Absorption costing is treated as full cost and this costing system is used for the external purpose. So, variable costing considered the following— Under absorption costing, fixed overhead is assigned to units of inventory and shows up in the income statement as part of the cost of goods sold (COGS) when the units u nits are sold.
•
•
When units are produced and not sold, fixed overhead stays in finished goods inventory
•
Absorption costing includes fixed manufacturing overhead in inventoriable costs.
COST CLASSIFICATIONS Cost Classifications—Absorption costing versus Variable Costing
Under absorption costing and variable costing, cost can be classified into two ways, 1. Product cost, and 2. Period cost
The cost categories under this two cost classification in case of absorption costing and variable costing.
Under absorption absorption costing method, all manufactur manufacturing ing costs, costs, variable variable and fixed, are included included when determining the unit product cost. Direct materials, direct labor, variable manufacturing overhead, fixed fixed manufa manufactu cturin ring g overhea overhead d costs costs are includ included ed for determ determini ining ng the produc productt costs costs under under absorp absorpti tion on costin costing, g, and variab variable le selli selling ng and admini administr strati ative ve expens expenses es and fixed fixed sellin selling g and administration expenses are are included for determining the period costs.
Under the variable costing method, only the variable manufacturing costs are included in product costs and fixed manufacturing overhead, variable and fixed selling and administrative expenses are included for determining the period costs. 41
Comparison between Absorption Costing and Variable Costing Rating: When comparing absorption costing and variable costing income statements, a number of points should be noted: 1. Deferral of fixed manufacturing costs under absorption costing
Under Under absorp absorptio tion n costi costing, ng, if invent inventori ories es increa increase se then then a portio portion n of the fixed fixed manufa manufactu cturin ring g overhead costs of the current period is deferred to future periods in the inventory account. When the units are later taken out of inventory and sold, the deferred fixed costs flow through to the income statement as part of cost of goods sold. 2. Differences in inventories under the two methods
The ending ending invent inventory ory figure figuress und under er the variab variable le costi costing ng and absorp absorptio tion n costin costing g methods methods are different. Under variable costing, only the variable manufacturing costs are included in inventory. Under absorption costing, both variable and fixed manufacturing costs are included in inventory. 3. Suitability for CVP analysis
An abso absorp rpti tion on cost costin ing g inco income me stat statem ement ent is not not well well suit suited ed for for prov provid idin ing g data data for for CVP CVP computations since it makes no distinction between fixed and variable costs. In contrast, the variab variable le costin costing g method method classi classifie fiess costs costs by behavi behavior or and is very very useful useful in setti setting-u ng-up p CVP computations. Extended Comparison of Income Data
The comparative income statement’s effects under the variable costing and absorption costing are as follows— 1. Production equals sales (no change in inventories)
When production equals sales, inventories do not change. If inventories do not change, then there is no change in the fixed manufacturing overhead costs in inventories under absorption costing. Therefore, under both costing methods all of the current fixed manufacturing overhead will flow through through to the income statement statement as an expense. expense. In the case of absorption absorption costing costing it will be part of cost of goods sold. In the case of variable costing, it will be a period expense. 2. Production exceeds sales (inventories increase)
When production exceeds sales, inventories grow. If inventories grow, then some of the current fixed manufacturing overhead costs will be deferred in inventories under absorption costing. Since all of the current fixed manufacturing overhead costs are expensed under variable costing, the net operating operating income reported reported under absorption absorption costing will be greater greater than the net operating operating income reported under variable costing. 3. Sales exceed production (inventories decrease)
42
When sales exceed production, inventories shrink. If inventories decrease, then some of the fixed manufacturing overhead costs that had been deferred in inventories in previous periods will be released to the income statement as part of cost of goods sold as well as all of the current fixed manufacturing overhead costs. Since only the current fixed manufacturing overhead costs are expensed expensed under variable costing, the net operating income reported reported under absorption absorption costing costing will be less than the net operating income reported under variable costing. Relation Between Production and Sales for the Period
Effects on Inventories
Production = Sales
No change
Production > Sales
Increase
Production < Sales
Decrease
Relation Between Absorption and and Vari Variab able le Costing Net Operating Income Absorption cost costin ing g NOI NOI = Variable costing NOI Absorption cost costin ing g NOI NOI > Variable costing NOI Absorption cost costin ing g NOI NOI < Variable costing NOI
Figure: Comparative income effects— Absorption Costing and Variable Costing 4. Long-term differences in income
Over an extended period of time, the cumulative net operating income figures reported under absorption costing and variable costing will be about the same; they will differ only by the amount of fixed manufacturing overhead cost in ending inventories under absorption costing. Cumulative net operating income figures will be identical whenever ending inventories are reduced to zero. 5. Changes in production volume
Variable costing net operating income is not affected by changes in production volume. On the other hand, absorption costing net operating income is affected by changes in production volume. For any given level of sales, net operating income under absorption costing will increase as the level of output increases and hence hen ce inventories increase.
The Matching Principles & Advantages of Variable Costing
The Matching Principles 43
Account Accountant antss and manage managers rs have been been arguin arguing g for decades decades concernin concerning g the relati relative ve merit meritss of absorption and variable costing. In practice, absorption costing is used far more than variable costing even for internal reports. The reasons for this are not entirely clear, although the perception that that absorp absorptio tion n costin costing g is requir required ed for extern external al report reporting ing undoubt undoubtedl edly y plays plays a key role. role. The argument for using absorption costing in external reports seems to be based on the matching principle. 1. Argument for absorption costing
Advocates of absorption costing argue that all manufacturing costs must be assigned to units of product so as to properly match costs with revenues. They argue that fixed manufacturing overhead costs are essential to the production process and must be included when costing units of product, regardless of how the cost behaves. 2. Argument for variable costing
Advocates of variable costing argue that fixed manufacturing overhead costs are incurred in order to have the capacity to produce. Moreover, they will be incurred regardless of whether anything is actually produced. Since these costs are not caused by any particular unit of product and are incurred to provide capacity for a particular period, the matching principle would dictate that fixed manufacturing overhead costs must be expensed in the current period.
Advantages of Variable Costing Advantages of Variable Costing and the Contribution Approach
There are a number of advantages to using variable costing (and the contribution approach) in internal reports and analysis. 1. More useful for CVP analysis
Variable costing statements provide data that are immediately useful for CVP analysis since they categorize costs on the basis of their behavior. In contrast, it is often difficult to rework absorption costing data so that they can be b e used in CVP analysis and in decisions. 2. Income is not affected by changes in production volume
Under absorption costing, reported net operating income is affected by changes in production since fixed costs are spread across more or fewer units. units. This can distort income and may even result in income moving in an opposite direction from sales. This does not occur under variable costing. 3. Avoids misunderstandings concerning unit product costs
Absorption costing unit product costs can be easily misinterpreted as variable costs since they are stated on a per unit basis. Such a misperception can lead to serious errors in making decisions. Variable costing avoids this problem since unit costs include only variable costs. 4. Fixed costs are more visible
44
The impact of fixed costs on profits is emphasized because the total amount of such costs for the period appears separately and is highlighted in the income statement rather than being buried in cost of goods sold and ending inventory. 5. Understandability
Managers should find it easier to understand variable costing reports because data are organized by behavior and because variable costing is much closer to cash flow. 6. Control is facilitated
Variable costing ties in with cost control methods such as flexible budgets. 7. Incremental analysis is more straight-forward
Variable cost corresponds closely with the current out-of-pocket expenditure necessary to produce and sell products and services and can therefore be used more readily in incremental analysis than absorption costing data. And since variable costing net operating income is closer to net cash flow than absorption costing net operating income, it is likely to be more useful to companies that have cash flow problems. However, variable costing is not generally accepted by auditors for external financial reports and is not permitted by the IRS in the United States and by tax authorities in many other countries for income income tax calcul calculati ations ons.. There There is some some questio question n about about whether whether variab variable le costin costing g is actual actually ly prohibited in the United States by official pronouncements and some companies do use some form of variable costing in their external reports, but absorption costing must be considered the most generally accepted practice.
Impact of Just in Time JIT & Absorption Costing Variable Costing
Impact of (just in time) JIT Impact of JIT Inventory Methods
When companies use JIT methods for controlling their operations, the distortions of income that can occur under absorption costing largely (or completely) disappear. 1. The cause of distortions in net operating income
Erratic movements in net operating income under absorption costing and the differences in net operating income between absorption and variable costing can be traced to changing levels of invent inventory ory.. When When invent inventory ory levels levels are constan constantt or neglig negligibl ible, e, absorp absorpti tion on costi costing ng and variab variable le costing methods yield the essentially same net operating income. 2. The JIT solution
Under an ideally functioning JIT system, goods are produc ed strictly to customers’ orders. Finished goods inventories almost disappear and work in process inventories are kept to a minimum. With 45
little or no inventories, fixed manufacturing overhead costs cannot be shifted between periods under absorption costing. As a result, both variable and absorption costing will show essentially the same net operating income figure, and the net operating income under absorption costing will move in the same direction as movements in sales. Absorption Costing (External reporting) and Income Taxes
Absorption costing is required for external reporting for a company. A company that attempts to use variable costing on its external financial reports runs the risk that its auditors may not accept the financial statements statements as conforming conforming to generally generally accepted accepted accounting accounting principles principles (GAAP). (GAAP). Tax law on this issue is cleat cut. A company must use absorption costing for its external reports; a manage managerr can also also use variab variable le costin costing g income income statem statement entss for intern internal al report reports. s. No partic particula ular r accounting problems are created by using both costing methods- the variable costing method for internal reports and the absorption costing co sting method for external reports. Top executives e xecutives are typically evaluated based on the earnings reported to shareholders on the company’s external financial reports.
Format Differences Under Two Methods Format (Technical) Differences
Absorption costing makes a primary classification of costs according to manufacturing and non manufacturing functions, emphasizing the gross margin (that is, Sales COGS) available to cover all fixed and variable selling and administrative expenses. Direct Direct costi costing ng makes makes a primar primary y classi classific ficati ation on of costs costs into into variab variable le and fixed fixed catego categorie ries, s, emphasizing the contribution margin (that is, sales ? variable costs) available to cover all fixed costs. Report Formats
The formats for profit reporting under direct costing and absorption costing are different.
ABSORPTION COSTING
Revenues ………………………… *** Less cost of goods sold ………….. *** 46
Gross margin ………………..…… ***
Less selling and administration expenses:
Variable ……………………….. ***
Fixed …………………………... ***
Net operating income (NOI)
***
VARIABLE COSTING
Revenues ………………………… *** Less variable cost: Manufacturing cost …………..….. *** Selling and administration cost ….. ***
Contribution margin (CM) ....….… ***
Less fixed costs:
Manufacturing costs ………….. *** Selling and administration costs.. ***
47
Net operating income (NOI)
***
The figures under the two approaches will not always be the same.
Interpretation of the Difference
The difference between the two income measurement approaches is essentially the difference in the timing of the charge to expense for fixed factory overhead cost. In the absorption costing method, fixed factory overhead is first charged to inventory; thus, it is not charged to expense until the period in which the inventory is sold and included in cost of goods sold sold (an expense). In contrast, in the variable costing method, fixed factory overhead is charged to expense immediately, and only variable manufacturing costs are are included in product inventories. Therefore, if inventories inventories increase during during a period period (i.e., (i.e., production production exceeds sales), the variable variable costing method will generally generally report less operating income than will the absorption costing method; when inventories decrease, the opposite effect will take place.
Rules & Calculation of Absorption Costing Versus Variable Costing ules Regarding Absorption Costing Versus Variable Costing R ules Rules about unit sales and production under the two costing methods are as follows: If sales are variable and production constant
a. When production is equal to sales, then absorption costing and variable costing will give the same amount of net income. b. When production is greater than sales, then Net Income under absorption costing will be greater than net income under variable costing because a portion of the fixed costs was deferred to other years under the absorption method. c. When production production is less than sales, then Net Income under absorption absorption costing costing will be less than net income under variable costing because a portion of the fixed costs that were deferred from previous years will be absorbed into this year’s cost of goods sold. d. The value of inventory will be greater under the absorption method because of the deferred costs; however the total unit count will be the same for each accounting method. e. Over the long-term, net income will be equal under both methods. If sales are constant and production is variable then
48
a. Net income under variable costing is not influenced by the fluctuations in sales (given a constant production) because none of the fixed manufacturing costs are deferred. b. Net income under absorption costing is influenced by the fluctuations in sales (given a constant production) because a portion of the fixed manufacturing costs are deferred and may be used each year to increase costs.
CALCULATION OF PRODUCT AND PERIOD COST OF S QUARE QUARE PHARMACEUTICALS LTD.
Calculation of product and period cost of SQUARE PHARMACEUTICALS LTD. by using both Absorption Costing and Variable Costing Methods for the 2007 are shown in the following two tables:
Calculation of Product Cost under Absorption Costing and Variable Costing:
Particulars
Total (TK.)
Per Unit Cost (TK.)
Production in units
3,076,850,000
Absorption
Variable
Costing
Costing
Direct Material note1
3,569,146,000
1.16
1.16
215,379,500
0.07
0.07
Variable Manufacturing Overhead
523,064,500
0.17
4,307,590,000
1.40
Fixed Manufacturing Overhead note-2 Total
Calculation of Period Cost under Absorption Costing and Variable Costing:
49
1.23
Particulars
Total (TK.)
Per Unit Cost (TK.)
Sales in units
3,076,620,000
Absorption
Variable
Costing
Costing
523,064,000
-----
0.17
399,960,600
0.13
0.13
615,324,000
0.20
0.20
92,298,600
0.03
0.03
307,662,000
0.10
0.10
1,938,309,200
0.46
0.63
Fixed Manufacturing Overhead note-2
Variable sell elling ing and and distribution expenses
Fixed Fixed sellin selling g and distribution expenses Variable administrative expenses Fixed administrative expenses Total
Note-1 Direct material includes the raw materials, packaging materials, and p urchase of finished goods. Note-2 Fixed manufacturing includes the salaries, allowances and wages, factory employee’s fees lunch, rental expenses, depreciation and others.
R econciliation econciliation of Net Operating Income 50
The reconciliation of the variable costing and absorption net operating income are shown in the following figure -
Particulars
Amount
Amount
(TK.)
(TK.)
Year
2007
2006
Variable costing net operating income
1,968,998,200
1,627,059,370
Add Add fixed fixed manuf manufac actur turin ing g overh overhead ead costs costs 31,452,210 deferred in inventory under absorption costing
31,413,110
Deduct Deduct fixed fixed manufac manufacturi turing ng overhea overhead d costs costs relea release sed d from from invent inventor ory y under under absor absorpt ption ion 31,413,110 costing
29,356,500
Absorption costing net operating income note-1
1,969,037,300 1,629,115,980
Note-1
Abso Absorp rpti tion on cost costin ing g inco income me stat statem ement ent show show that that the the Net Net oper operat atin ing g Inco Income me of SQUARE PHARMACEUTICALS LTD. for the year 2007 is tk. 1,969,036,800 but in reconciliation it shows that the company’s company’s Net Operating Operating income is 1,969,037,300. 1,969,037,300. This difference difference is tk. (1,969,037,30 (1,969,037,300 0 — 1,969,036,800) =500 and in 2006 absorption costing Net Operating Income is tk. 1,629,116,436 but in reconciliation we see that this is tk. 1,629,116,436. Difference is tk. (1,629,116,436— 1,629,115,980) = 456. These differences occurred due to the fractions in different figure.
Summary Result at a Glance
The total result of our calculation for the comparison of net effect on net operating income under both methods Absorption Costing and Variable Costing are shown in the following:
Particulars
Year-2007
Year-2006
Costing me method
Absorption
Variable
Absorption
Variable
Product cost
1.40
1.23
1.4181865
1.23
51
Period cost
0.46
0.63
0.4933804
0.6823099
Ne Net ope operati ating incom come
1,969 ,969,0 ,03 36,80 6,800 0
1,968 ,968,9 ,998 98,2 ,20 00
1,62 ,629,11 9,116, 6,4 436
1,627 ,627,0 ,05 59,37 9,370 0
Effects Inv Invent entori ories
Net operating income Net Net oper operat atin ing g inco income me
Incr Increeased sed during ring the year
Inc Increa reased sed duri during ng the year year
Absorp Absorpti tion on costi costing ng net net opera operatin ting g Absorp Absorpti tion on costi costing ng net net opera operatin ting g inco income me > Vari Variab able le cost costin ing g net net inco income me > Vari Variab able le cost costin ing g net net operating income operating income 1,96 1,969, 9,03 036, 6,80 800> 0>1, 1,96 968, 8,99 998, 8,20 200 0
1,62 1,629, 9,11 116, 6,43 436> 6>1, 1,62 627, 7,05 059, 9,37 370 0
Overall Comments From the calculations of net operating income of variable costing and absorption costing of Square Pharmaceuticals Limited we see that, in 2006 their net operating income under absorption costing is Tk. 1,629,116,436 and under variable costing net operating income is Tk. 1,627,059,370. Here a question arise that why this difference is occurred. This difference is occurred due to use of different accounting method. We know that if inventory increase during the year then the net operating income is increased under absorption costing than that of viable costing net operating income statement. Because when inventory increase then fixed manufacturing overhead cost of these ending inventories is deferred to the next period, as a result total cost during the year is decreased. Here fixed manufacturing overhead cost is treated as product cost, but in case of variable costing method fixed manufacturing overhead cost is treated as period cost. So total manufacturing overhead cost is charged in the period regardless their sales volume. As a result net operati operating ng income income under this method method is lower than that of absorp absorpti tion on costin costing g method method.. In 2006 opening inventory is 173,850,000 units and ending inventory is 184,783,000 units. Here we see that inventories are increased (184,783,000 – 173,850,000) = 10,933,000 units during the year, as a result net operating income is increased under the absorption costing method than the variable costing method. In the same way in 2007 opening inventory is 1847
RECOMMENDATION:-
To enhance the management accounting practices and to gain competitiveness of the Bangladeshi compan companies ies the foll followi owing ng recomm recommend endati ations ons have have been been made made after after analy analyzin zing g all majo majorr and associated findings52
1. Higher percentage of labor in Jute, Paper & Printing, Printing, Tannery and Textile sectors implies implies that the factory is not automated enough. So, automation is recommended in order to reduce production costs and to increase profitability. 2. A higher percentage of firms firms in all sectors use use absorption or full costing costing principle for product costing but absorption costing is not useful for internal decision-making. S o it is suggested to use variable costing for internal decision making. 3. Throughput costing and target costing should should be used to increase the competitiveness competitiveness of the firms within the industry and in the global market. 4. A larger percentage of firms firms in Cement, Food and Allied, Jute, Jute, Paper & Printing and Tannery do not distinguish between fixed and variable overhead costs, which sometimes lead to misleading decision. It is recommended to make proper distinction between fixed and variable portion of manufacturing overhead. 5. As the factories are not automated to a larger extent, it will be appropriate to use direct labor hours as overhead allocation basis instead of machine hours. 6. Some of the firms do not use CVP for short- term term decision-maki decision-making. ng. It will be helpful to use CVP to analyze break-even, margin of safety and to increase profitability. 7. It is suggested to assign assign operational budgetary systems to the controller or directordirector- finance and accounts accounts instead instead of managing director director because managing managing director director may not have enough expertise expertise in this area. 8. Frequency of revision of operational budget should be increased to evaluate efficiencies of the operational level managers and control costs.
9. Instead of actual costing, firms firms are suggested used. If standard costing is used individual individual variance can be helpful for performance evaluation and initiate cost reduction program. 10. Standards are usually set based on average past performance but past is not always the the reflection of future as future is always uncertain. So, it is suggested to set standards based on expected actual or estimation of future circumstances. 11. Very few firms review standard costs when materials or technology changes or variances indicates problem. It is recommended to review standard costs under above situations unless standard costs will become absolute and performance evaluation will not make sense. 12. Very few firms use residual income as a performance indicator but from the goal congruence per persp spec ecti tive ve it is benef benefic icia iall to use use resi residu dual al incom incomee inst instea ead d of retu return rn on inve invest stme ment nt.. So it is suggested to use residual of the sectors may be enhanced through compulsory enactment of cost and management accounting audit in Bangladesh.
53
CONCLUSION
Globalization and the increasing complexity of business, together with high-powered computing technology, have contributed to the development of new management accounting techniques all over the world. The present study shows that though privatization and authoritative pronouncement has contributed a lot in the development of management accounting in Bangladesh, the survey result of the present practices of management accounting in listed manufacturing sector reveals that state state of use of sophisticated sophisticated techniques (like target target costing, costing, throughput costing, life cycle costing and probabilistic CVP) is not satisfactory. Modern techniques are being used to face complex situation. Bangladeshi manufacturing business firms remain far behind the expected situation due to lack of awareness as to benefit of using the management accounting techniques for better decision making. All concerned people need to realize the situation and take appropriate action from every corner to overcome this unwarranted situ situat atio ion. n. To keep keep pace pace with with the the world world chan changi ging ng mana managem gemen entt acco accoun unti ting ng envir environ onme ment nt,, Bangladeshi firms should use the newly developed techniques such as target costing. The soon it is done, the better it will be, otherwise we shall perish in this competitive world. In Bangladesh until 1994 there was no statutory enactment as to maintenance of cost accounting records of any sort and audit thereof by manufacturing companies. Two sections have been provi provided ded in the Compan Companies ies Act, Act, 199 1994 4 requir requiring ing certai certain n compan companies ies to mainta maintain in specif specific ic cost cost accounting records and audit of the same as and when desired by the overnment. So long, as there was no statutory obligation regarding maintenance of specific cost accounting records and audit of the same, companies particularly manufacturing companies are maintaining their cost accounting records to suit the purposes and equirements of their internal management and the requirements requirements of their external financial audit by chartered accountants. accoun tants.
Section Section 220 of Companies Companies Act 1994 speaks about cost audit of records, records, maintained maintained under section section 181 (1) (d) of the Act. Gazette Notification/ Government order dated 11.12.2001 having number Commerce Ministry PTM/AP/17/87/397 made it mandatory for mills under Bangladesh Sugar and Food Industries Corporation and for all Public Limited Companies, required to maintain cost accounting records as per the above stated section. The report is to be prepared and submitted in accordance with Cost Audit (Report) Rules (1997). In line with the above Gazette Notification the government issued another order dated 26.12.2002 to do cost audit in 5 companies of fuel and power sector and in 6 companies c ompanies of Jute sector. In pursuant to the above Government orders all the mills of Bangladesh Sugar and Food Industries Corporation (BSFIC) have already brought under cost audit. Some other companies as specified in the order-dated 26.12.2002 had also completed cost audit of its cost books for one or more years.
REFERENCES
54
[1]
McWatters, C.S., Morse, D.C.
[2] Johnson, Johnson, H. T., & Kaplan, Kaplan, R. S., Relevance lost, Harvard Business School Press, Harvard, USA (1987). [3] Ashton, Ashton, D., Hopper, Hopper, T. and and Scapens, Scapens, R.W., Issues Issues in in Management Management Accounti Accounting, ng, PrenticePrenticeHall, Hemel Hempstead, (1991) [4]
Parker, L. D., Budgetary incrementalism in a Christian bureaucracy.
Management
Accounting Research, 13, 71-100, (2002).
[5.I] Longmuir, p.” Recording and interpreting foundry costs”, costs”, Engineering Magazine, pp. 887-894, (1902). [5.II] Garry,
H.S. “Factory Costs”,
[5.I 5.III] II] Whitm hitmor ore, e, [6]
J.
,pp. 954-961, (1903) The Accountant pp.
“Shoe Shoe Fact Factor ory y Cost Cost Acco Accoun untts”, s”, Jour Journa nall of Acco Accoun unta tanc ncy y, (190 (1908) 8)..
Solomon, D., “The historical development of costing”, Studies in Cost Analysis, 2nd
Edition, Sweet and Maxwell, pp. 3-49, (1965). [7]
Russell, K.A., Siegel, G.H. & Kulesza, C.S. Counting more, counting less.
Strategic Finance 81, 9, 39-46, (1999).
[8] Boer, G.B., G.B., Managemen Managementt accounting accounting educatio education: n: Yesterday Yesterday,, today, today, and tomorro tomorrow. w. Issues in Accounting Education, 15, (2), 313-333, (2000) [9]
Harris JN. , What did we earn last month? N.A.C.A. Bulletin 17 (Sect. 1):
1–527, (1936). [10] Kohl, C.A. “What is wrong with with most most profit and loss statements?”, N. A. C. A. Bulletin, July, pp. 1207-1219, (1937). [11] Smith, M.,
Management Accounting for
(First st Ed Edit itio ion n ). Sydn Sydney ey:: LBC LBC Competitive Advantage (Fir
Info Inform rmat atio ion n Serv Servic ices es,, (199 (1999) 9)..
[12] Björnenak, Björnenak, T., & Olson, Olson, O., Unbundling Unbundling management management accounting accounting innovations innovations.. Management Accounting Research, 10 pp. 325-338, (1999) [13] [13] Governme Government nt of Banglades Bangladesh, h, “Presi “Presiden dent's t's Order Order No.27. The Bangla Banglades desh h Indust Industria riall Enterprises (Nationalization Order)”, The The Bang Bangla lade desh sh Gaze Gazett ttee Ext Extra raor ordi dina nary ry, Ministry of Law and Parliamentary Affairs, (Govt. (Govt. of Bangladesh, 26 March, 1972). [14] Ghafur, A., “On the Nationalized Industrial Industrial Sector Controversy”, Political Journal of Bangladesh Economic Association, Vol.2, No.1, pp.5- 10, 1976.
Econo,my
[15] Jones, C. S. & Sefiane, C. S., “The “The Use of Accounting Data in Operational Decision Making in Algeria”, Accounting Auditing and Accountability Journal , Vol.5, No.4, pp.71-83, 1992. [16. [16.I] I]
Uddi Uddin, n, S.N S.N.. and and Hopp Hopper er,, T.M T.M., ., “A Bang Bangla lades deshi hi Soap Soap Ope Opera ra:: Pri Privat vatiz izat atio ion, n, 55
Accounting, and Regimes of Control in a Less Developed Country”, Accounting, Organizations and Society, Oxford; Vol. 26, Nos. 7/8, pp. 643-672, Oct/Nov 2001. Internet:• • • • • •
www.accountingweb.co.uk www.icmab.org.bd www.cimaglobal.com www.focusmag.com.au www.scribd.com www.allbusiness.com
APPENDIX SURVEY QUESTIONNAIRE
56
I am Md. Shafaet Jamil , student of Stamford University Bangladesh conducting a survey for thesis report to completion completion of BBA program. You are inviting to join join a part of the survey of “The tools of management accounting - Practice, implements & Challenge in Bangladesh” whose mission is to analyzing and finding the effectiveness of management accounting tools in various industries of Bangladesh.
Before you do, I want you to know that: “Your Company confidentiality will be maintain and participation is entirely voluntary”
Name of Institution: Type of Institution: Contact Person: Address: Telephone Number: Email: [If your organization doesn’t have practice of various management accounting tools, please do not complete the following questions & avoid the survey] [Mark the Box] 1. In which of the following industries are the core activities of your company positioned?
Cement & Ceramic Automobile Food & Allied Electronics and communication equipment Construction and engineering Pharmaceutical & Chemicals Tannery Textile
engage d with this business? 2. How long have you engaged Less than 1 Year
2-3 Year
3– 5 Year
5-10 Year
Over 10 Year
3. Does your company have any competitors?
Yes No 4. If YES, - how do you rate the competition? •
Very Very low low
.Low .Low
Mode Mo dera rate te 57
High High
Very Very High High
5. (a). Does your institution have a variable costing system?
YES
NO
(b). If yes, (i).Who is heads the variable costing department? (Job Title)………………………
(ii).Who does s/he report to?.......……………………………… to?.......………………………………………………………… …………………………… …
6.
(a) List the variable cost faced by your institution:
……………………………………………………………………………………….……..
………………………………………………………………………………………..……
(b) Which new/additio new/additional nal variable variable costing, costing, other than those covered covered in the Variable Variable costing costing department Guidelines, does your institution face? ……………………………………………………………………………………………… ……………………………………………………………………………………………………
7. (a). Has your institution developed variable costing Manuals an d Programmers for all the
risks listed in 2(a) and (b) above?
YES
NO
(b). If yes, how often are the variable variable costing costing assessment assessment procedures procedures in the manuals manuals and programmers
Reviewed by your institution? ……………………………………………………………………………………………………… ……………………………………………………………………………………………………
(c). who reviews the procedures? ............................................................................................................................................... 58
...............................................................................................................................................
8.
(a) which challenges did your institution experience during the formulation and
Implementation stages of the variable costing function? ……………………………………………………… ………………………… ……………………………………………………… ………………………………………............ ……………............ ...............................................................................................................................................
(b) Which strategies did your institution put in place to overcome the challenges stated in
(a) above? ……………………………………………………………………………………………………… ……………………………………………………………………………………………………
9. (a). Is your institution’s variable costing function centralized or decentralized?
Centralized
Centralized
me means it
falls
under a
department/section with staff involved full-time in variable costing.
Decentralized
Decentralized means respective business units handle risk management
. (b). If decentralized, describe how your institution institution is undertaking overall variable costing. ……………………………………………………………………………………………………… ……………………………………………………………………………………………………
10. What mechanisms have been employed by the management of your institution to ensure
that the variable costing culture penetrates to all levels of staff? ……………………………………………………………………………………………………… 59
……………………………………………………………………………………………………
11. Does your institution have a management information system that facilitates effective risk
identification, measurement, control, reporting and monitoring?
YES
NO
If yes, a) the
What What vari variab able le cost costin ing g moni monito tori ring ng repo report rtss are are avail availabl ablee with within in your your inst instit itut utio ion; n; what what is
frequency of such reports and who are they issued to?
60
Monitoring Reports
b) b)
Frequency of issue
Who are the report portss issue sued to?
How How doe doess you yourr ins insti titu tuti tion on measu easure re the the var varia iabl blee cos costi ting ng??
Stress Testing Back Testing Contingency Planning Value at Risk Others(Specify) 12. Mention the Extent of Use of Management Accounting Techniques …………………………………………………………………………… ………..……………………………………………………………………
13. How long has your company been using the technique?
Less than 1 Year Over 10 Years
2-3 Years
3– 5 Years
5-10 Years
14. Which changes have been experienced by your institution arising from the introduction of the variable costing framework?
………………………………………………………………………………………………… …………………………………………………………………………………………………
i s spent purely in the variable costing? 15. What proportion of your institution’s budget is
………………………………………………………………………………………………… ……………………………………………………………………………………………..........
16. Does your institution have in place an independent function that reviews the effectiveness of the Variable costing function?
YES
NO
If yes, indicate the department/function responsible...........................................................
17. Which plans and strategies has your institution put in place to change or enhance the variable costing function?
………………………………………………………………………………………………… …………………………………………………………………………………………………
18. What changes would you propose to the Variable costing Guidelines?
………………………………………………………………………………………………… ………………………………………………………………………………………………… 19. What are the Reasons for Low Use of Management Accounting Techniques?
Historical Information is given more importance
Lack of awareness, understanding the benefit of its use
Consider involvement of extra cost
Lack of trained and experienced personnel
Reluctant to use it and base decision on personal experience
Lack of skilled personnel
20.What are the main benefits of the current use of technique?
Cost reduction
Customer satisfaction
Quality control
High Margin
Others
