History of Management Accounting Term Paper

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history of Management Accounting in a ten-page paper and review product costing, investment analysis and organizational performance evaluation over the past 150 years.

Read Relevance Lost: The Rise and Fall of Management Accounting and reference four other articles that describe the evolution of Management Accounting.

This paper examines the role of management accounting over the years as a system for determining an organization's performance and profitability. This paper further analyses the evolution of certain management accounting practices and their role in global competition and productivity.

Today's management accounting information, driven by procedures and the cycle of the organization's financial reporting system, is too late, too aggregated, and too distorted to be relevant for managers' planning and control decisions.

"In attempting to understand the genesis and scope of modern cost and management accounting systems, accounting historians adopting what has been labeled as a "Foucauldian" approach have been rewriting the history of the key 18th and 19th century developments in the United Kingdom and the United States in three ways: through new evidence, new interpretation and a refocusing of attention on familiar events whose significance has become obscured. This new history is a "disciplinary" history: the historical discontinuity between early attempts at costings and what may be seen as the modern managerial approach to, and a key source of the modern power of, accounting occurs when the focus shifts to applying expert knowledge to the construction of a new "human accountability." Accounting thereby shifts from objects and machines to men and new conceptions and writings of the organization of men and material," according to K.W. Hoskin and R.H. Macve.

Accounting is actually part of ancient history with some modern methodologies based on 10,000-year-old accounting practices. In the early days of civilization with the formation of towns and villages, scribes developed record keeping systems to track wealth, trade and land usage fees. These early ancestors set the stage for what would be come crucial skills and fundamental processes for management accounting in the 21st century.

Early accountants invented writing, developed money and banking and innovated the double entry bookkeeping system that fueled the Italian Renaissance, were needed by the Industrial Revolution inventors and helped develop the capital markets necessary for capitalism and today are essential to the information revolution that is now transforming the global economy.

Everyone from key corporate moguls to Fortune 500 companies depends on reports to understand current business performance and predict future potential of their business. That's where management accounting becomes important. Looking back in history, we can easily see how business practices and management accounting overlapped. For example, look at the emergence of monopolies and billion dollar companies. They all depended on using accounting information to shape a business's future. The real users of management accounting information internal users, the people who manage the business.

To understand the true value of management accounting, one needs to consider the importance that accounting has played in history. In some ways, accounting hasn't changed since Paciolli wrote the first textbook in 1494. On the other hand, accounting has led the information revolution. Understanding the role of financial needs to day as part of management accounting requires an understanding of the past. It is the survival of firms that requires innovation accounting and accurate and useful information for management accounting.

Management accounting is essentially the branch of accounting that focuses on providing useful financial information for internal business decision-makers, generally senior executive management. Creditors and investors are not concerned with the same kind of information as mangers. Managers use accounting information for three board purposes:

To determine the cost of products and services. A company must know the cost of each product it produces and each service it provides. Companies need this information for planning and controlling business operations and for external reporting.

To plan and control business operations. This includes evaluating the performance of people and activities.

To report to external parties the company's financial position and results of operations.

In Relevance Lost, Johnson and Kaplan feel "the management accounting system fails to provide accurate product costs. Costs are distributed to products by simplistic and arbitrary measures, usually direct-labor based, that do not represent the demands made by each product on the firm's resources."

Product costing is actually based on a fundamental accounting practice that dates back to ancient times. But as with Johnson and Kaplan, many modern academic types feel that there is need for improvement in the system. "The case for improvements in the design of product costing systems is often motivated by appealing to the potential impact of costs on pricing decisions. However, there has been scant, if any, empirical evidence on whether, and to what extent, cost influences prices, and whether full as opposed to variable costs are associated with prices.

Companies have always needed information on the costs of their products and some for of measurability to estimate the cost of the goods and pricing policy for those goods. The renowned Code of Hammurabi, handed down during the first dynasty of Babylonia (2285-2242 BC), for example, required that an agent selling goods for a merchant give the merchant a price quotation under seal or face invalidation.

Product costs refer to cost of producing products that will be sold. Basically, costs include any labor, materials, overhead and any other costs associated with this product throughout the value chain. Let's remember that the value chain represents those additional activities that add value to the product or service.

Understanding financial information gives senior managers the ability to consider both short-term and long-tern goals based on known expenditures and available funding for investments. Cash flow information has always been a key consideration for investment analysis.

Consider the early railroad industry and how it was tied into the Industrial Revolution and the development of capital markets to finance large business enterprises. The business people organizing the first railroads were big thinkers, planning the use of technology that did not exist.

Capital markets were expanded and new conceptual arrangements invented to finance railroad construction and operations.

The businessmen of this era were out-of-the-box thinkers, who initiated a logical plan of investment analysis. They had a vision and realized that the future of transportation and specifically, the railroad held great financial rewards.

Investment analysis also played a significant role for the inventors and entrepreneurs of the Industrial Revolution. The first mammoth monopoly was Standard Oil, organized as a holding company in 1870. Speculation and market manipulation are part of the big business story.

It's obvious that wise investing shaped the early rise of big business. And investment analysis continues to play a dominant part in management accounting. According to Gunther Friedl in "A Sequential Investment and Time to Build," "real world investment decisions are generally made sequentially over time. The possibility of subsequent decisions like suspending a project must be considered when an initial investment decision is made. The impact of lags between an initial investment decision and the completion of a project based on the value of an investment have important implications for management accounting, such as the relationship between short-term production and long-term investment decisions."

Cash flow information, net income and other financial statement information have always been critical to investment and credit analysis. To really understand a company's overall cash and investment position, managers must have complete and accurate operational information.

Managers under pressure to meet short-term profit goals can, on occasion achieve these goals by reducing their expenditures on discretionary investments. Thus, short-term profit pressures can lead to a decrease in long-term investment.

Look at the massive market failure in 1929 and the Great Depression that followed. Accounting practices and investment analysis created both successes and failures for many of this era's visionaries. British and American cost accountants developed calculations and reporting techniques that allowed the corporate moguls to control vast business empires from corporate headquarters. Part of the process was to buy out or destroy competitors.

Even now, businesses use investment analysis to help determine their financial status for raising capital for funding or buying out a competitor. This type of information also allows investors to evaluate management's decisions and to determine the company's ability to pay creditors, stockholders and identify cash flow for future endeavors.

Performance reports are integral part of management accounting systems. Again, we need to go back and look at the history of accounting and the role that financial information has played throughout history. With the rise of big business in the U.S. economy came the need to determine how well companies were doing, particularly after the 1929 market crash and the Great Depression. Companies realized they needed to be aware of possible obstacles and plan for potential problems and identified some deficiencies in the accounting system. The Roosevelt administration was the catalyst for many of the modern methods that business employs today as standard practices.

Today's performance reports provide manager's with an overview of actual results compared to the company's estimated or planned budget. Managers can evaluate operational effectiveness, determine actions…[continue]

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