While the fundamentals of management accounting have not changed over the past 100 years, changes in manufacturing and production processes have pushed management accounting to update its practices. Integration of technological advances into the accounting department have made it easier and less expensive for small-business owners to make data-driven decisions about their companies. Understanding how management accounting has been updated in the modern era can help you leverage technology to improve your business.
Standard costing is a method of recording accounting transactions at their expected costs and then analyzing any differences between the standard costs and actual costs. While this technique is certainly not new, the speed in which this information can be analyzed has definitely changed. Using modern accounting information systems, small-business owners are able to examine variances between actual and standard costs in real-time as soon as materials are purchased and products are manufactured. In the past, these techniques would require calculations by an accountant. Now, some of this functionality is built into popular software packages. While this is certainly more convenient, small-business owners should be careful. Interpretation of standard costing variances still requires understanding of how the process works.
The balanced scorecard is a performance management tool that combines financial and non-financial measures to give a more holistic snapshot of firm or individual performance. In the history of management accounting, the balanced scorecard is fairly new, with the technique only being started in the 1990s. While use of the balanced scorecard technique is popular it does have limitations. Even though compensation is often tied to balanced scorecard results, this may have negative consequences. Bonus amounts are powerful motivators; if small-business owners are not absolutely positive that the metrics being used in the balance scorecard are correct, they should be cautious in using the scorecard to award compensation. Emphasizing incorrect behaviors could hinder performance instead of help improve it.
Real-time Inventory Management
The advent of radio-frequency identification (RFID) technology in the last decade has drastically changed inventory management. In the past, companies often chose between periodic and perpetual inventory systems. Periodic systems record purchases of inventory in bulk and the cost of goods sold is determined at the end of the month. Perpetual systems update the company’s cost of goods sold with every inventory transaction. By attaching RFID tags to products, businesses are able to track each individual inventory item throughout the company. Furthermore, as the company scans the RFID tags when the items are moved or sold, the accounting information system is updated on the fly.
Modern management accounting techniques have also made great changes in process management. Management by exception, the process of only focusing management attention on processes when there is reason to believe that the process is not working correctly, can be applied much more efficiently using modern quality tracking techniques. For example, in the past a company assessing the quality of finished goods might measure every 100th unit produced to ensure that the product met specifications. Now machinery can measure any unit that falls outside of specifications and immediately remove the item from the assembly line.
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