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Evaluation the Role of Management Accounting

Introduction

The Chartered Institute of Management Accountants (CIMA) defines management accounting as the process of identifying, measuring, analysing, interpreting and communicating accounting information to the managers of an organization so that they can be able to plan and control the resources of a company. Management accounting within an organization deals with the use of accounting information by managers of an organization so that they can be able to make informed decisions on the running of the company. Management accounting is different from financial accounting because the financial information is mostly meant for managers of instead of the shareholders and employees of a company (Roberts 2003)

The practice of management accounting according to CIMA and the American Institute of Certified Public Accountants (AICPA) covers three disciplines which include strategic, performance and risk management where management accounting in strategic management highlights the role of the management accountant as a strategic partner within the organization. Performance management in management accounting deals with developing policies that will be used in performance improvement while risk management in management accounting deals with the activities that are used in identifying, measuring and managing risk to ensure that the organization is able to meet its objectives and goals (Anthony 2003).

A knowledge based organization (KBO) or a knowledge-intensive organization is one that is primarily characterised by the intensity with which it produces its products and services. If the knowledge that exists within an organization is focused more on the core of the product or service, then such an organization is referred to as knowledge based since most of the information will be focused on more on a product or service (Zack 2003). The knowledge aspect that exists within a KBO is therefore what is used to define such an organization as it encompasses the use of invisible assets held by the organization. Knowledge management plays an important role in many knowledge based organizations as it enhances the value-creation capabilities of a company through the effective use of knowledge (Huotari and Iivonen 2004).

Evaluation of the Role of Management Accounting

The role of management accounting within an organization is to provide managers with sufficient information that can be used to achieve set goals and objectives as well as improve effectiveness and efficiency (Aranda and Arellano 2010). The techniques that are used to conduct management accounting activities include total quality management systems where the organization produces high quality products and services, target costing which involves determining the ability of customers to pay for certain products, business process-re-engineering where the efficiency of the organization is increased by changing production processes, just-in-time production which involves the production of goods based on customer’s orders, the balanced score card method where the objectives of the business are measured in financial and non-financial terms and throughput accounting practices which concentrates on reducing the costs and expenses of running a business (Scapens and Bromwich 2010).

The role of management accounting in all organizations is to create and develop information systems that can be used by managers to make informed decisions. The nature of information that is included in management accounting reports is usually subjective and verifiable in nature as it is mostly used by managers and supply chain managers. Management accounting is meant to provide decision makers within an organization with the appropriate tools that can be used in the identification, measurement and communication of financial information that will be improve business operations. It also provides managers with cost production information that is vital in the valuation of inventory and raw materials and it also drives the need to provide performance measures based on the changing needs of customers (Needles et al 2008).

The role of management accounting in KBOs involves designing and operationalizing the knowledge management systems that exist in organizations to ensure that there is a strategic utilization of organizational resources. Knowledge based organizations face a myriad of risks as their operations are mostly based on knowledge systems and the generation of knowledge products which require the proper control of information to reduce the occurrence of risks. Some of the risks faced by knowledge based organizations include inappropriate corporate policies, poor information transfer, high employee turnover rates, poor shelf life of knowledge products and the vulnerability of intellectual property (Lee and Epstein 2006).

The role of a management accountant’s in a knowledge based organization involves designing knowledge management systems that will facilitate the strategic management of the organization’s knowledge resources. Management accounting is used within these organizations to add value to the operations of the company through the strategic utilization and development of knowledge systems. It is also used in the proper leveraging of collective organizational resources to increase the responsiveness of the company’s managers with regards to decision making activities. Knowledge management therefore becomes an important aspect in the activities of the management accountant within a knowledge based organization (Barker 2010).

Knowledge management that is focused on management accounting involves the application of structured managerial processes that are used to assess the knowledge assets of a firm. Knowledge management systems that are well designed and developed enable an organization’s managers to effectively identify the knowledge assets in existence within the company and how these knowledge assets can be used to achieve an optimum result in information processing and content management activities. To determine these knowledge assets, the management accountant needs to identify what knowledge assets exist in an organization, how many people are aware of these assets and what knowledge the employees of the organization need to know (Lee and Epstein 2006).

Apart from managing the knowledge assets of an organization, the management accountant has the role of developing enterprise knowledge policies that will give the organization a competitive advantage. Developing knowledge policies is an important activity for the management accountant as it ensures that the knowledge assets of a product’s lifecycle are managed to achieve success in the operations of the business. Strong knowledge policies ensure that common strategies and goals are developed to maintain the organization’s standards of operations (Birnberg 2009).

The role of a management accountant in a knowledge based organization also involves the collaboration and documentation of knowledge management systems to ensure that the company has a competitive advantage over its competitors. Collaboration and documentation of knowledge involves coordinating the knowledge assets that are used by the functional units of an organization. The proper coordination of knowledge assets ensures that documentation of the knowledge product is done in a successful way through the optimization of the organization’s knowledge resources. Documentation in management accounting ensures that the organization is able to actively solicit for feedback and also retain its employees thereby lowering its employee turnover rates (Alnoor 2003).

Management accounting ensures that collaboration within the organization is managed through the use of knowledge management systems that reduce the risks of uncertainty that are present in knowledge assets. It also ensures that managers have the ability to review the resources that they need to manage the feedback aspects of an organization and to also ensure that the organization has an opportunity to improve its knowledge products (Carlucci and Schiuma 2004). Another role of a management accountant within a knowledge based organization is to develop the knowledge security aspects of knowledge management systems. These security systems are important in ensuring that the underlying knowledge assets of the organization are protected from any theft or misuse by the organization’s employees or its competitors. The accountant develops auditing systems, back-log files, sensitive networks and databases that will be used by the organization’s employees to access important knowledge information when needed (Alnoor 2003).

Independent Research

Difference between Knowledge Based and Traditional Organizations

Knowledge based organizations are different from conventional or traditional organizations because they are focused more on the use of knowledge to produce goods and services within the company rather than on the management of business operations that will ensure the production of the company’s products. There are various characteristics that can be used to differentiate between a conventional organization and a knowledge based organization and these include process, purpose and perspective (Zack 2003). Procedure refers to the various activities conducted inside a knowledge based association which are openly involved in the making of a product or service.

These activities usually form the majority of business operations conducted within the organization. Another characteristic that is used to identify a knowledge based organization is purpose which refers to the objectives and strategies that an organization has to achieve profitability from the sale of its products and services to customers. The characteristic of perspective ensures that the influences of the external environment do not affect the operations of the knowledge based organization as it strives to achieve profitability in an uncertain environment (Kazemi and Allahyari 2010)

The difference in the processes of a knowledge based company and a traditional company is that traditional organizations incorporate processes that are meant to produce commodities and services through the selection of various techniques that can be used to combine resources necessary for the production of goods. In the knowledge based organization, the process of producing goods is focused on the use of knowledge to configure and integrate resources that are important in the production of goods and services (Huotari and Iivonen 2004). With regards to purpose, all organizations have a purpose that will be used to achieve the goals and objectives set out by managers and executive officers. For the knowledge based organization, the purpose of the organization is usually focused on the strategic management of knowledge assets within the organization. Knowledge is usually the main technique that is used to achieve the goals, strategies and objectives of the company. The purpose of the company therefore revolves around the use of knowledge to develop products and services within the company (Chaston 2004).

The perspectives that are used by conventional or traditional organizations are usually based on the cultural, social, political, technological and economic influences and constrains that affect the decision making activities of an organization. These aspects are important as they ensure that managers base their decisions on the views of the external environment. With regards to a knowledge based organizations, perspective is focused on the point-of-view that the company’s employees and managers have on knowledge. Knowledge is used to provide a point of view in every aspect of the organizations processes. Perspective in knowledge based organizations evaluates strategy in the form of knowledge which is also used to evaluate how the organization organizes itself in its business activities (Zack 2003). Figure one demonstrates the various elements that make up a knowledge based organization.

Assumptions of Knowledge as a Competitive Resource

Knowledge has continued to gain importance in many organizations as an important source of competitive advantage as it has led to the development of knowledge based technologies that are used to enhance the efficiency and effectiveness of a company’s operations. Organizations that are able to acquire new knowledge in an effective way are able to sustain a certain level competitive advantage in the now dynamic market economy. Aspects such as the financial resources of a company, the ability of the company to access raw materials and labour are no longer being considered as important sources of competitive advantage. Knowledge in many 21st century companies has become the primary resource of competitive advantage that allows an organization to achieve some uniqueness in its industry (McFayden and Canella 2004).

Assumption of Competitive Resource

The competitive resource view of both knowledge based organizations and conventional organizations is based on the assumption that firms are heterogeneous in nature and they possess different resources and capabilities to produce goods at different levels of organizational efficiency. The competitive resource assumption is based on the view that supplying customers with products and services that offer different levels of satisfaction will ensure the organization’s profitability within its industry. The assumption also holds that firms within a particular industry are meant to be distributed along a continuum that provides superior firms with certain extremes of profitability and inferior organizations with other extremes of profitability. With regards to knowledge as a competitive resource, the basic assumption is that there is the existence of imperfect knowledge within an organization that is used to distribute certain levels of information within a particular industry (Royer 2005).

By assuming that there is no perfect knowledge, organizations can be able to predict the certain and uncertain events that might affect the business operations used to produce goods and services. The assumption of imperfect knowledge ensures that a company within a particular industry is able to produce new products and services while maintaining a competitive edge over its rivals. Imperfect knowledge ensures that an organization is able to achieve superior profits within the industry by providing it with a cost advantage that will be used in market or industry entry. The cost advantage is usually derived from the kind of importance that an organization places on a particular resource or source of raw material that has not yet been identified by other firms within the same industry (Yue et al 2010).

Assumption of New Knowledge

Another assumption of knowledge as a competitive resource is that in a situation of imperfect knowledge, companies will be unable to achieve previous profitability levels and market performance that were based on the ability of the company to reproduce its goods and services based on its resources and capabilities. The assumption of knowledge under this line of thought holds that competitors within a particular industry will be unable to imitate or substitute the resources used by a company in the production of its goods and services. New knowledge according Sheikh (2008) is the only form of competitive resource that can be used by an organization to achieve a competitive advantage over its rivals. This means that for organizations to remain competitive, they have to create and use new knowledge to ensure that their products are more superior than those of their competitors in the same industry (Sheikh 2008).

According to literature, new knowledge within an organization is usually gained from the use of well-defined intelligence gathering techniques employed by a company’s managers to achieve a competitive advantage in their particular industry. The new knowledge is usually used to manage the competitive nature of the business by positioning it in a different way from that of other organizations within the same industry. “By incorporating the use of Michael Porters generic competitive strategies such as cost leadership, product differentiation and focus strategies, knowledge can be able to implement various strategies that will be used to provide a competitive advantage” (Sheikh 2008). Figure 2 depicts the structure of new knowledge in a knowledge based organization.

Assumption of Knowledge Derived from Human Experiences

There are various theories that support the assumption that knowledge can only be derived from the experiences and skills of individuals. According to Sveiby (1997), human beings have the ability to create new knowledge as a result of the life and work experiences and also their skills, capabilities and knowledge levels. Knowledge as a competitive resource within an organization is becoming important as more and more organizations place a lot of emphasis on the acquisitions of new knowledge. This is mostly attributed to the fact that knowledge is an inexhaustible aspect that can be renewed and shared unlike financial and human resources (Demski et al 2008).

Economical Characteristics of Knowledge

Returns to Scale and Non-Scarcity

Returns to scale as a characteristic of knowledge refers to the aspects that describe what happens when production increases within an organization in the long term. It involves viewing knowledge as a normal production function in the creation of goods within a knowledge based organization. New knowledge as a return to scale is deemed to be an important aspect of improved production functions within an organization where managers use knowledge to increase the efficiency levels of a company’s business processes thereby increasing the returns to scale of the organization. Returns to scale as a characteristic of knowledge are the cumulative marginal returns that accrue in knowledge based organizations providing them with a competitive advantage (Cooke 2002).

The characteristic of non-scarcity in knowledge based organizations is where one company’s use of a product doesn’t lessen the use of another company with the same good. Knowledge processes that are used to develop various technological innovations can be applied in various organizations and in various organizational contexts to achieve optimum results in business operations. For example a computer chip can be used to operate various types of machinery in different factories operating in different industries. Non scarcity ensures that an organization is able to achieve optimal outcomes through the proper utilisation of resources that have been allocated to production activities (Cooke 2002).

Externalities and Indirect Costs

Externalities as a characteristic of knowledge involves the consumption, production and investment problems that affect people not directly involved in the business transaction. Externalities do not influence the price of a good rather they affect the making activities that are used to produce the good or service. Externalities can be either positive or negative in nature where the negative externalities involves managers basing their decisions on the direct rather than the indirect costs of production as well as the profit opportunities that will arise from the production activities.

The indirect costs which are not borne by the manufacturer include the expenses of spoilt goods, high employee health care costs and unused raw materials. Positive externalities are those that affect the direct costs of production in a positive way like for example research and development activities which are generally geared towards producing better product innovations. Externalities add on to the knowledge processes that exist within organization as they ensure that ensure that managers are able to determine which production functions are important for the business (Helbling 2010).

High Development Uncertainties and Nature of E-Commerce

High development uncertainties refer to the unpredictable nature of knowledge especially if its dependent on the experience and skills of an organization’s employees. High development uncertainties arise when the production activities of an organization are geared towards developing new products and services. The uncertain nature of the economic market makes it difficult for managers within organizations to collect information that will be used in the knowledge processes of an organization. Uncertainty refers to whether the production systems within an organization might fail during the organization’s operations. Uncertainty in high developments therefore involves not being able to access the necessary knowledge to deal with these unknown situations (Gururajan and Fink 2010).

The nature and development of e-commerce as a characteristic of knowledge mostly relies on the changing technological environment that continues to see more internet based products being used to market the operations of a company. Knowledge plays an important role in the development of e-commerce as new ideologies need to be used to develop information that will enhance the productivity and performance of a company. Knowledge in e-commerce ensures that information generated from intelligence gathering activities is inexhaustible and indefinite in nature. The nature of e-commerce ensures that company operations are more flexible and highly reliant on effective communication between the various actors of an organization (Yin et al 2010).

Role of Management Accounting (Research Findings)

The findings of the report have revealed that the role of management accounting systems in knowledge based organizations is mostly involved with designing and implementing knowledge management systems within organizations to ensure there is a strategic utilization of organizational resources. Another finding based on the role of management accounting in a knowledge based organization is that it adds value to the various operations of an organization. It ensures there is the proper leveraging of organizational resources to increase the competitive advantage of the organization. These systems according to Lee and Epstein (2006) increase the responsiveness of the organization to external factors and environments. Management accounting also ensures that there is the collaboration of knowledge assets within the organization to reduce the risk of uncertainty (Barker 2010).

With regards to the importance of knowledge in knowledge based organizations, findings of the research have noted that knowledge is the primary resource of knowledge based organizations. According to McFayden and Canella (2004) knowledge acts as a competitive resource in KBOs as it is the instrumental force used in ensuring that the organization has a competitive advantage. Royer (2005) notes that the existence of imperfect knowledge within KBOs is used to distribute certain levels of information within a particular industry. Imperfect knowledge within these organizations enables them to produce new products and services that will give them a competitive advantage in their industry (Sheikh 2008).

Knowledge Management in Literature

As mentioned earlier in the report, knowledge management activities are focused on the use of a wide range of strategies to identify and create important information. The history of this scientific field is based on case studies, apprenticeship and discussions which would be used to support any information identification and distribution processes. The concept has however evolved in recent years to incorporate more technological aspects such as knowledge repositories, decision support systems and computer supported knowledge systems. The use of academic literature to explain the concept of knowledge mostly focused on the objectives of knowledge management systems and the various concepts that are used to manage and maximize the intangible assets that exist in knowledge based organizations (McInerney 2002).

The earlier forms of academic literature focused on the objectives of the knowledge management systems within the organization. The recent forms of academic literature have however focused on the theoretical aspects of knowledge management as well as the importance of intellectual capital in managing KBOs. There has been a notable decrease in the number of knowledge management publications produced by researchers in the field. There has also been a notable change of the role of knowledge management practitioners and other professionals involved in knowledge management activities within an organization as the concept becomes more dynamic (McInerney 2002).

The schools of thought that govern the use of knowledge in academic literature include community of practice where knowledge is incorporates people, processes, technology and organizational structures. The social network analysis school of thought on knowledge deals with the social relationships that are used to explain knowledge management within organizations through network theories while information theory quantifies information in either a mathematical or statistical format. Other schools of thought that are used to explain knowledge in academic literature include intellectual capital which are the knowledge resources used to determine the value and competitiveness of an organization and constructivism which refers to the philosophical view of knowledge in knowledge based organizations (Nanjappa and Grant 2003).

Focused Critical Review of Management Accounting in KBOs

Management accounting involves creating financial information that will be used by managers to make important decisions on the direction of the company. Management accounting in knowledge based organizations provides managers with important tools that can be used manage the knowledge assets of such organizations. The report has dealt with an extensive analysis of knowledge and the competitive resources of knowledge which allow KBO to be more responsiveness to forces from the external environment.

The role of management accounting to a knowledge based organization becomes vital when structured knowledge systems that will be used by managers are needed within the organization to manage the knowledge assets. Well designed systems enable managers to identify the existence of these assets and also determine how they can be able to use them to enrich the organization. Management accounting has to take into consideration knowledge based characteristics such as process, purpose and perspective to ensure the knowledge management systems designed address the various needs of the organization. Management accounting also ensures that the KBO is able to document and collaborate its systems to ensure that the functional units of the organization are working properly.

Proper documentation of knowledge assets ensures that products and services produced by the company are optimized and utilised according to organizational needs. Documentation ensures that such organizations are able to retain the client base as well as the employee base to ensure that there is a continuing flow of output and input. While developing the knowledge management systems, management accountants also develop security features that will be used to ensure the knowledge assets of a company have been protected from any copyrights or intellectual theft from competitors or employees of the company. Security systems such as sensitive networks and back-log files ensure that the knowledge assets are inaccessible to everyone.

While this discussion has identified various roles of management accounting in knowledge based organizations, there has been insufficient research conducted on the topic as most researchers have focused on management accounting in organizations that use raw materials instead of knowledge to create products and services. The insufficient amount of research conducted on management accounting and knowledge based organizations has made it difficult to critically evaluate the application of this concept. The information garnered from this report will therefore be important in developing recommendations and conclusions that can be used in determining the importance of management accounting in knowledge based organizations.

Conclusions

This report has dealt with the role of management accounting in knowledge based organizations which are mostly focused on the intensive production of goods and services. The report has uncovered the various findings and discussions that contain information on management accounting as well as knowledge based organizations which mostly direct their efforts on the intensive production of goods and services. The report has also assessed the differences that exist between knowledge based organizations and traditional organizations where the processes involved in knowledge based organizations involve the use of knowledge while those used in traditional organizations involve the use of specific techniques to conduct business operations. Knowledge has continued to play an important part in the operations of a company as it provides vital information that can be used in the production of goods and services.

Recommendations

The role of a management accountant in knowledge based organizations has not evolved as would have been anticipated yet management accountants play an important role in the creation and maintenance of knowledge based systems and processes that are vital in the operations of knowledge based organizations. More research needs to be conducted on the importance of management accounting practices within knowledge based organizations apart from managing the knowledge management processes and assets of the organization. For a knowledge based company to survive in the conventional or traditional corporate world, it has to improve its data collection systems as well as its knowledge synthesis activities.

Many traditional organizations have the ability to process and disseminate information on a more complex and higher level that knowledge based organizations. For KBOs to be effective, they need to incorporate better dissemination systems to improve intelligence gathering activities. This will ensure that there is the proper management of knowledge assets and products within the company. The organization should also incorporate knowledge leveraging and sharing activities which will enhance its competitive advantage in its particular industry. Knowledge sharing and leveraging will allow the employees of an organization to have access to better knowledge that will be used to help them innovate and adopt suitable production practices.

References

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Anthony, R.N., (2003) Management accounting: a personal history. Journal of Management Accounting Research, Vol.15, pp 249-253

Aranda, C., and Arellano, J., (2010) Consensus and link structure in strategic performance measurement systems. Journal of Management Accounting Research, Vol.22, pp 271-299

Barker, R., (2010) The operating-financing distinction in financial reporting. Accounting and Business Research, Vol. 40, No.2 , pp 1-22

Birnberg, J.G., (2009) The case for post-modern management accounting. Journal of Management Accounting Research, Vol.21, pp 3-18

Carlucci, D., and Schiuma, G., (2004) Managing knowledge assets for business performance improvement. Professional Paper presented at 5th European Conference, Innsbruck, Austria

Chaston, I., (2004) Knowledge based marketing. London: Sage Publications

Cooke, P., (2002) Knowledge economies: clusters, learning and cooperative advantage. London: Routledge

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Appendices

Appendix A: Diagrams

  • Example of a Management Accounting Report
Management Accounting Report
Memorandum
When: Today’s Date
Who: To: A. Wang, Good Foods Store
From: Sal Chavez, Accountant
Why: Re: International distributors ordering and shipping costs
What: As you requested, I have analysed the ordering and shipping costs incurred when
buying from international distributors. I found that during the past year, these costs
were 9 percent of sales which amounted to $36,000. On average the company is
placing about two orders in a week where each order requires two and a half hours of
an employee’s time. The international distributors charge a service fee for every
order and shippers charge high rates for small orders such as ours.
My recommendations are to 1) reduce the number of orders to four per month 2)
Begin placing orders through international distributor websites as they do not charge
any service fees for online orders. If we follow these recommendations, the costs of
receiving products will be reduced to 4 percent of sales which amounts to $16,000
saving the company $20,000

(Source: Needle et al 2008)

  • Knowledge Management Business Strategies
(Source: Lee and Epstein 2006)
(Source: Lee and Epstein 2006)
  • Collaborative Workflow to Exploit the External Knowledge Sources
(Source: Lee and Epstein 2006)
(Source: Lee and Epstein 2006)

Appendix B: Glossary

Accounting Systems

An organized set of manual and computerised accounting techniques, methods and procedures that are used to interpret and present accurate financial information and data.

American Institute of Certified Public Accountants (AICPA)

A national and professional organization of Certified Public Accountants (CPAs) based in the United States

Balanced Scorecard Method (BSC)

A management practice that measures the past performance of a company with the current and future performance

Business process-re-engineering

An analysis and design of the various workflows and processes that exist within an organization.

Chartered Institute of Management Accountants (CIMA)

A professional body based in the United Kingdom that offers training and qualifications in management accounting and related financial subjects.

Financial Accounting

A field of accounting concerned with the preparation of financial statement for important decision makers such as suppliers, stockholders, government agencies and banks.

Intellectual Property

The documented and undocumented knowledge, creative ideas or expressions used in developing commercial products or monetary gain

Just-in-time Production (JIT)

A type of inventory system where inventory and raw materials are delivered on a need basis so as to eliminate product inventories

Performance Management

A field of management that ensures all organizational goals are consistently being met in an efficient and effective manner.

Risk Management

A field of management that deals with the identification, assessment and prioritization of risks as stipulated by ISO 31000 and the application of coordinated resources to minimize the risks.

Strategic Management

A field of management that deals with the evaluation and control of businesses by providing managers with emerging initiatives to utilize organizational resources.

Target Costing

A type of product costing method where the final cost of a product is determined after conducting a market analysis after which the product is designed to meet the market analysis

Appendix C: List of Figures

Figure One: An Overview of Knowledge Management Elements

(Source: DeLong 1997)
(Source: DeLong 1997)

Figure Two: New Knowledge in a Knowledge Based Organization

(Source: DeLong 1997)
(Source: DeLong 1997)