Management Accounting and Developed Costing Systems

Management Accounting and Developed Costing Systems

The following sections describe the unique developments which have changed the very way of functioning and role of management accounting professionals.

E-Business

The rapid growth of e-commerce and e-business witnessed the rapid electronic transformation of the business environment. The depth of the e-commerce had an impact throughout the spectrum of the business environment. One can order anything online in consumer-to-business e-commerce channels; businesses can order raw materials and supplies using businessto-business networks. Further, supply chain management, a tool for coordination of order generation, order taking, order fulfillment and distribution of products and services, has increased online transactions to a larger volume across the globe. e-Commerce may be defined as buying and selling over digital media, and e-business is a broader concept.

Managerial professionals have moved fast toward e-accounting by harnessing the power of online communications to streamline the procedures of managerial accounting. For example, e-budgeting is now used by hundreds of companies to quickly and effectively transmit the information needed to construct a budget from far-flung business units around the globe. e-Business is here to stay and it will affect our lives and our jobs in ways we cannot even imagine today.

The Internet: A Revolutionary Change in Global Business

In today’s business environment, the wider use of internet has converted the large globe into a small room. It is in fact a lifeline for the business. The firms look internet as a cost-cutting tool and a new stream for generating revenues. The internet is also viewed as an effective tool for serving the customers, besides an efficient payment and settlement mechanism.

We reproduce here some of the examples as how firms are using the web to their advantages:

1. On a single day, Alibaba was able to generate double digit sales clocking an impressive $9 billion (Rs. 55,000 crores) and beating its own record of $5.9 billion last year.
   
   
2. A report on e-commerce states that a broking firm, Motilal Oswal, says that this is just the start of a multi-year growth for the e-commerce sector in India. Indian retailers, therefore, do not have to be too concerned as despite strong growth in US and China, e-tailing is still only 5%–6% of the total retail sales there.
   
   
3. India is almost 10 years behind China in the e-commerce space. China’s inflection point was reached in 2005 when its size was similar to India’s current market size. Thankfully, for India, the dynamics currently are similar to what existed in China then – growing broadband penetration, acceptance of online marketplaces and lack of physical retail infrastructure in many places.
   
   
4. Forget the Flipkarts, Snapdeals and Amazons, travel is where the real money in India’s e-commerce is. Online travel accounts for nearly 71% of e-commerce business in India. This business has grown at a compounded annual growth rate (CAGR) of 32% over 2009–2013.
   
   
5. Alibaba is an outlier when it comes to margins and making money in the e-commerce ecosystem. The Chinese company makes an operating profit of 40% compared to industry standard (US and China) of 8%–10%. Travel sites typically make 2.3%. Amazon, the industry pioneer, is yet to achieve healthy profitability even after two decades of dominance.
   
   Indian players, the report points out, are not even thinking of profitability yet. It’s a game of market share and market penetration, causing all serious players to have a war chest ready for, when the industry scales multiple times.
   
   
6. For every Rs. 100 spent on e-tailing, Rs. 35 is spent on supporting services like warehousing, payment gateways and logistics, among others. Delivery costs a platform owner 8%–10% implying significant burn. Though 50%–60% of delivery logistics today are handled by large e-tailers themselves, this proportion may reduce going forward as the participation of lower tier cities picks up.
   
   Presently, aggressive pricing in India is leading to e-tailers making losses on every segment. For every Rs. 100 sale of a book, the e-retailer incurs a loss of Rs. 24, a loss of Rs. 13 on mobiles and Rs. 8 on apparels.

Demand in India exists across 4,000–5,000 towns and cities, but there is no significant presence of physical retail in almost 95% of these. High real estate cost is one of the main reasons why organized retail is unable to expand at speeds expected earlier.

Increased Role of Service Sector

The market share of service sector has been growing across the globe. Several governments have made engagements and provided incentives to boost this sector. The telecommunications, financial services and airline industries are among them. As more and more firms provide financial, medical, communication, transportation, consulting and hospitality services, managerial accounting techniques must be adapted to meet the needs of managers in those industries.

As we are aware that the main difference between service and manufacturing firms is that most services are consumed as they are produced, the services cannot be inventoried like manufactured goods. It has been observed that many of the techniques developed for measuring costs and performance in manufacturing firms have been adapted successfully to service industry firms.

Increased Global Competition

Today the market place is in real sense a global one. A firm in London is just as likely to be in competition with a firm from US, Germany or France. The extensive global competition is forcing firms to strive for excellence in product quality and service, which was not the case earlier. Multi-national firms face several challenges that do not confront domestic firms.

Political systems, accounting rules for external reporting, legal systems and cultural norms vary widely among countries. Therefore, management professionals must be aware of various policies and practices to successfully carry out operations across the countries.

Stress on Cross-functional Groups

In past, managers used to stick to their own work area. Production managers focused on how best to manufacture a product or produce a service. Marketing managers concentrated on selling the product or service. Design engineers often emphasized engineering elegance rather than designing a product for manufacturability. Managerial accountants provided information for decision making, planning, control and performance evaluation.

Today, the things have changed drastically. The cross-functional approach has replaced this narrow managerial perspective. The functional groups bring together production and operations managers, marketing managers, purchasing and material handling experts, design engineers, quality management personnel and managerial accountants to focus their varied expertise and experience on virtually all management issues.

The managerial accounting professionals develop information system and provide data ranging across all aspects of the organizations internal operations and external environment. They also work as an integral member of the cross-functional team, interpreting information and analyzing the implications of decision alternatives. The cross-functional groups create value for the firm by understanding customer’s needs in the most effective manner possible.

Product Life Cycles and Diversity

In view of changes in technology at faster pace, the lifespan of most products is becoming shorter. In the computer industry, for example, product models are used only a few years before they are replaced by more powerful versions. To be competitive, manufacturers must keep up with the rapidly changing market place. The challenge before management accounting professionals is to have timely information about production costs and other product features in order to meet effectively to the competition.

Focus on Inventory Management

We are aware that in traditional manufacturing system, inventories of raw materials and parts, Work In Process (WIP) and finished goods were kept as a buffer against the possibility of running out of a needed item. Also, large buffer inventories consume valuable resources and cost heavily to a firm.

Therefore, many manufacturers have completely changed their approach to production and inventory management. These manufacturers have adopted a strategy for controlling the flow of manufacturing in a multi-stage production process. In a just-in-time (JIT) production system, raw materials and parts are purchased or produced just in time to be used at each stage of the production process.

Total Quality Management Concept

The concept of total quality management (TQM) has emerged very strongly in the recent past. If a component is to be produced just in time for the next production stage, it must be “just right” for its intended purpose. A slight delay in the inventory process may shut down the entire production line, entailing considerable cost. Therefore, managerial accountants have become involved increasingly in monitoring product quality and measuring the costs of maintaining quality. This information helps companies maintain programs of TQM.