Management Accounting Essay

Charles Harvey Chun Kiu Liu

ckl9@kent.ac.uk

“Management accounting has a very limited perspective which has usually resulted in a

short term, almost exclusively quantitative approach to management decision making.”

Why are these effects now sometimes thought to be a weakness of management

accounting? Is the criticism justified? In your answer discuss the characteristics of the

approach and methods traditionally used in management accounting which are the source

of this criticism.

Source 1

Title: Activity-based costing/management and its implications for operations management

Year: 2003

Author: Gupta,M.; Galloway,K.

Summary: Traditional cost accounting methods that have often been criticized for having a

‘limited perspective’ are often methods where overhead costs are only allocated on the

basis of one cost driver, such as direct labor. These methods have often been described as

‘inaccurate and misleading,’ (Gupta & Galloway, 2003) as an imbalance in emphasis often

exists between different products. As a solution to this problem, activity-based cost

accounting was introduced as an alternative method to more accurately reflect the cost

impacts of a variety of factors in the production of a product or service. Unlike traditional

cost accounting methods, activity-based cost accounting uses a variety of cost drivers

when allocating overheads and thus, is viewed as a more holistic and comprehensive

approach in comparison to traditional cost accounting methods. Like traditional accounting

methods, activity-based cost accounting also utilizes a quantitative approach to aid

management decision making, but unlike traditional cost accounting methods, quantitative

data used in activity-based cost accounting is extracted in a much more qualitative and

observational manner. ‘Cost drivers in activity-based cost accounting are identified by

actually reviewing the entire production process to uncover what activities cause those

costs.’ (Gupta & Galloway, 2003) In addition, increased emphasis on ‘the identification of

processes and their effects on costs’ (Gupta & Galloway, 2003) have also prevailed as a

modern focus in management accounting. Hence, as a result of its qualitative and

comprehensive approach, activity-based cost accounting is often exempt from criticism of

traditional cost accounting methods, which are often labeled as ‘limited’ and ‘exclusively

quantitative’.

Word Count: 248 (Excluding In-text Citations)

Source 2

Title: Management control systems and strategy: A critical review

Year: 1997

Author: Langfield-Smith,Kim

Summary: It is argued that in traditional business environments, accounting information

was often a major tool used by managers during the process of decision making, and ‘while

it created an external image of success, it concealed potentially damaging strategic

consequences.’ (Langfield-Smith & Kim, 1997) Traditionally, accounting controls within

management accounting often placed heavy emphasis on the planning and monitoring of

activities to predict future financial performance. Yet, this has inadvertently led to the

segmentation between management control, strategic control and operational control.

Management accounting has traditionally focused on ensuring the achievement of specific

Charles Harvey Chun Kiu Liu

ckl9@kent.ac.uk

outcomes based on monitoring, measuring and carrying out quantitative action, whether

that be budgetary or cost-related. As a result, it is often criticized for being intrinsically

autonomous and inflexibly rigid. In turn, this has the effect of encouraging unified conformity

and inefficient communication within the organization. Consequently, the requirements for

the effective implementation and execution of strategic plans are often disrupted and

ineffectual. Essentially, the rigid nature of accounting information was seen as an obstacle

to innovative, product-focused organizations, where flexibility and fluidity within different

hierarchal levels are often crucial to success. It is suggested that ‘innovation was more

suited to unstructured and organic organizations, where there was less reliance on formal

controls’ (Langfield-Smith & Kim, 1997).

Word Count: 203 (Excluding In-text Citations)

Source 3

Title: Issues arising from surveys of management accounting practice

Year: 1995

Author: Drury,Colin; Tayles,Mike

Summary: In 1987, Johnson and Kaplan conducted a case study on the implementation of

management accounting strategies within companies in the United States and United

Kingdom. At the end of the case study, it was concluded that as a result of an ‘excessive

focus on financial accounting, most firms are unwilling to operate more than one set of

accounts’. (Drury & Tayles, 1995) This was subsequently dubbed as the ‘financial

accounting mentality’ and as a consequence of this overwhelming mentality with companies

across the United States and United Kingdom, management accounting practices have

become submissive to financial accounting. In their case study, Johnson and Kaplan

discovered that 76% of companies that were surveyed in the United States and 79% of

those in the United Kingdom ‘used the same product cost information for decision-making

purposes that they used for financial statement inventory valuation.’ (Drury & Tayles, 1995)

Essentially, despite the irrelevance and inadequacy of methods and techniques used for

financial reporting, the same methods and procedures are widely applied to management

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