wild managerial accounting

wild managerial accounting

The Wild Frontier of Managerial Accounting: Navigating Complexity in Modern Business Environments

1. Introduction to Managerial Accounting in the Digital Age

While the debate about machine learning in the jobs of the 21st century is a constructive exercise, its underlying assumption is that a robot controller is really the most that digital technology can contribute to a manager’s work. That is, our vision of a manager in the digital age is one who directs the work of others in routine, or even non-routine but relatively simple and well-defined tasks. Focusing on this set of tasks does have its virtues – it certainly has implications for the issue of wage distribution. But a broader, more inclusive vision that incorporates all the potential of digital technology is missing from the discussion, one that details the share of work a digital assistant might legitimately take on from managerial decision making and that does not stop at the barista’s counter. Such omissions do an injustice to the capabilities of digital technology to deal with unprecedented levels of economic activity, but they also raise doubts about the economic research that dismisses automation as a driver of wage stagnation that implies and reinforces an effective limitation of digital’s capabilities to help organizations fundamentally improve business management.

The digital age is changing the daily life of a manager in significant ways. While their traditional roles in information gathering, decision making, and communication are enhanced by new digital tools and channels, those changes are still largely adaptations within the manager’s familiar realm of decision support. More importantly, today’s computing power and algorithms can also automate non-routine knowledge work – the kind of tasks that only human beings were previously believed capable of performing. Faced with this new frontier of automation, it is not surprising that many managers’ first question is “What will my job look like in 10-20 years, and how much of it will I still be doing?” As recent editorials and books generally agree, top management consultants, and academic experts offer wildly divergent, even contradictory answers to that question.

2. Advanced Techniques and Tools for Analyzing and Interpreting Financial Data

Consider the initially simple example of trying to compare two financial statements prepared by different firms. Two firms’ income statements report $4,950 and $4,750 in operating profits, but they face markedly different financial circumstances. Further investigation reveals that the firm with the $4,950 in operating profits has first-lien debt, paid interest of $80, and paid three $1.30 dividends on 15.32 million shares. The other firm has second-lien debt, paid interest of $90, and paid dividends of $2.40 on 6.25 million shares. The estimated cost of goods sold for the firms is $2,542 (before accounting for interest payments). The firm with the first-lien debt reports weighted-average shares outstanding of 11.25 million shares, as well as selling, general, and administrative expenses (SG&A) of $273. The other firm has higher SG&A spending: $301. Would these data lead the analyst to view the firms’ situations as similar? What other questions would an analyst hold in abeyance?

3. Innovative Approaches to Cost Management and Decision Making

The types of costs as well as cost behavior might significantly differ across different types of companies (for example, manufacturing, transportation), different business models (either public or private, 3rd party service provider or in-house service provider), in-house service provider organization models, and different industrial areas or different segments within specialized areas. Indeed, collaboration-based managerial cost accounting offers completely different ways of tying costs to logistics activity. By incorporating ink-jet and media costs for two engine/aircraft types, the total cost for testing ink-jet costs was reduced by 62%, and the total cost for the media compared with conventional brakes was reduced by 34%. Grob Corporation and the Boston University School of Management Center have been working to develop and pilot-test the feasibility of measuring and analyzing relevant performance measures for the implementation and cost analysis of a twin-service supply chain. These are the most fundamental changes in calculating cost and cost behavior, and in determining the logistics cost as a part of the total costs.

The traditional managerial cost accounting systems that were developed in the latter part of the first half of the 20th century have two underlying cost assumptions – the unit variable cost assumption and the near-time assumption. The first of these cost principles suggests that “a cost will change or vary in direct proportion to activity,” while the near-time assumption implies that cost behavior within individual cost categories will occur generally within charging intervals (for example, on a monthly basis). Because traditional cost systems are automatically produced by impacts on cost within the individual traditional cost centers, managers have generally built cost accounting systems that link costs directly to demand. It stands to reason, of course, that a multi-functional logistics enterprise would require a modified managerial cost accounting system in which operating costs are pooled and allocated based on the resource capabilities involved in the carrying out of service functions.

4. The Role of Managerial Accounting in Strategic Planning and Performance Evaluation

Strategic planning was once fairly simple and straightforward. A firm would set long-term objectives and goals and then develop a “business plan” to meet these goals. Pricing, product mix, total costs, level of sales, personnel deployment, manufacturing requirements, financing requirements—all of these were important elements of the business plan. Preparing the budget for this simple, stable environment might take three to six months of hard work. Variance analysis was relatively simple, and the consequences of a poorly prepared budget could generally be identified fairly quickly. In the complex environments faced by most firms nowadays, however, the future picture is less stable. Good management accountants are using forecasting techniques to develop useful long-range plans. They are looking outward and thinking about the way technological changes will affect the computer and information support systems their firms use. They are looking at demographic changes to plan for the implications of a slower growth economy. They are asking questions about other variables as well. How will shifts in savings patterns change the financing terms under which the firm invests? How might changes in consumer preferences affect pricing strategies or product development investments?

Although management accounting focuses on providing information to help managers make better planning and control decisions, one of the most important aspects of the management accountant’s role is to support other managerial functions, including strategic planning and performance evaluation. In the past, when business environments were generally less complex, these planning and evaluation functions themselves were relatively straightforward and did not require a great deal of management accounting support. In today’s complex environment, where competitive advantage depends on making both good strategic planning decisions and effective evaluation and feedback decisions, the professional advice and reporting capabilities of management accountants are increasingly in demand.

5. Ethical Considerations in Managerial Accounting Practices

If the principles of intellectual resource stewardship are not considered, a number of pitfalls can destroy value rather than create it. Further, the absence of basic stewardship accountability will lead to ultimate credibility problems for the corporation, which then will spread to broader problems of honesty, transparency, and economic prosperity. Ethical behavior involves respect for the company and the customers, the obligation to maintain skills and knowledge, and the use of that knowledge for organizational and customer benefits. Further, the integrity of providing unbiased reporting of performance is also an important ethical issue, but when linked to financial rewards, pressure is created which has the potential to lead to excesses. Managers must set an appropriate decision climate, ensuring that the ethics and culture of the organization, bolstered, when necessary, by procedure and governance structures, render the enterprise and all of its members capable of employing knowledge to mutual good effect.

The wild frontier metaphor suggests that managerial accounting is a robust, pioneering field that does not fear the opening up of new territory or the willingness to face danger. This thought can, however, lead to some major ethical frontiers that must be faced. In some sense, this challenge is unique to managerial accounting when compared to financial reporting. In the area of financial accounting, the primary ethical issue is determining what the correct reporting should be for a given business transaction. The concern is primarily about the numbers. For managerial accounting, the numbers are estimated and planning-oriented, becoming meaningful only after context has been given. The ethical question therefore becomes more about how the numbers were created, whether they have been manipulated, and whose interests are being served by their creation? If managerial accounting is, as I have argued, in the knowledge business, the broader questions of ethical, intellectual, and human capital stewardship come into play.