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Corporate and Management Accounting Systems Are Inadequate for Todays Environment: A Critical Analysis

Autor:   •  April 3, 2011  •  Case Study  •  1,003 Words (5 Pages)  •  2,056 Views

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CORPORATE AND MANAGEMENT ACCOUNTING SYSTEMS ARE INADEQUATE FOR TODAYS ENVIRONMENT: A CRITICAL ANALYSIS

Managers of organisations make decisions that have significant impact on the organisations survival. Their decision can either make or mar the organisation, and so they strive to make appropriate decisions based on the information available at their disposal. In doing this, they make use of both finance and management accounting information.

However, there is growing concern for the adaptive nature of management accounting system in relation to the speedy changes occurring in the business world today. As organisations are growing and diversifying, they are often faced with huge challenges stemming from competition, globalisation, economic fluctuations etc. Therefore, managers who aim for success must be proactive in decision making, which could be aided by prompt, accurate and flexible accounting system. Therefore the question arises as to whether the traditional accounting system can match the swiftness of the prevailing business climate.

In the words of Johnson and Kaplan (1987), corporate and management accounting systems are inadequate for today's environment. They further stated that management accounting information driven by the procedures and cycle of the organization's financial reporting system is too late, too aggregate and too distorted to be relevant for managers planning and control decision. Their view was based on the traditional accounting practice which was structured to carter for the mass production era. The traditional accounting information are usually produced by attributing cost to products and services, which always produce aggregate values, neglecting the various activities that contributed to the making of the product. And so, such aggregate values are usually misleading. They also argue that given the speed of development and increased competition as a result of globalisation, the traditional accounting system which has its strong hold on product/labour driven costing may not be suitable in meeting the accounting needs of our time.

Supporting this argument is Hoque (2005), who stated that in a highly technical manufacturing environment like ours, the labour content is rapidly declining, consequently, product costing based on traditional costing system involves very high overhead allocation rate. He argued that the use of traditional accounting system in today's environment could yield misleading values. However, he tended to support the ABC system which is an acronym for activity-based costing, as an alternative to the perceived inadequacies of the traditional system. Unlike the traditional system, the activity based costing system incorporates activities that goes into the production of goods and services and attempts to identify the cost associated with such activities.

The diagram below shows the contrasting manner in which the Activity

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