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1990's: Value Based Focus shifted to include the creation of customer value, strategy, balanced scorecards, EVA, and other related concepts. 1980's: Lcan Enterprise CA M-I Management Focus shifted to the reduction of waste, JTT, teamwork, ABC, target costing, quality, investment & product life cycle management.

1951 - 1980's: Managerial Focus shifted to providinginformation for management & .

1920 - 1950: Matching concept developed. Focus on cost determination and financial control.

1812 - 1920: Accountingfor Processes Prior to the matching concept. Focus on operating cost and efficiency of processes.

Shah Kamal Historical Evolution of Assistant Relationship Manager Bank Alfalah [email protected]

Abstract

The obsolescence of most companies' cost accounting and management control is particularly unfortunate for the global competition of the 1980s (Johnson & Kaplan, 1987). During the past two decades, conventional cost and management accounting practices have been under extensive criticism for their malfunction to instigate change and their inability to support management accounting in coping with the requirements of a changing environment. The academic literature has been crucial of conventional management accounting systems particularly for their lack of efficiency and capability to present comprehensive and the latest information and to assure decision makers and potential users of such information. Focusing on this debate, current study reviews the evolution of cost and management accounting innovations over the past century around the world and to examine whether there has been a significant impact of management accounting in the . The analyses suggest that management accounting is changing. However, these changes do not have much bearing upon the type of management accounting techniques. Rather they focus on the manner through which management accounting is being used.

Keywords : Obsolescence, global competition, management accounting, evolution, conventional management accounting

THE COST AND MANAGEMENT 12 ISSN 1817-5090, VOLUME-43, NUMBER-4, JULY-AUGUST 2015 1. Introduction dealing with the requirements of a changing environment relate to the collapse of such practices There has been an extensive debate in recent to provide comprehensive information on activities years over the extent to which management necessary for Lawrence & Ratcliffe, accounting is changing. Johnson and Kaplan (1987) 1990 uphold this argument by providing survey argued that management accounting had not evidence of levels of dissatisfaction among both changed since the early part of the twentieth management and managers with the century and had lost its relevance for the purpose cost and management accounting techniques of informing managers' decisions. Since then, and afterward being used in . (Bork &Morgan, possibly in response to these criticisms, a number 1993) reiterate this observation signifying that of innovative management accounting techniques conventional cost and management accounting have been developed across a range of industries. systems have failed to keep up with the increasing The most prominent contributions are activity demands imposed on them by technological change based techniques1, in environments. Noticeably, for that accounting and the balanced scorecard. These reason, the management accounting literature has techniques have been designed to prop up modern witnessed a growing attention into the study of the and management processes, such as flow of cost and management accounting innovations total (TQM) and just-in-time (JIT) systems, and the search for a Research on management accounting change competitive advantage to meet up the challenge of mostly relates to practices in developed countries. global competition. These recent techniques, it has Literature has cautioned against the been argued that2, have affected the entire process transportability of these practices across nations of management accounting and have shifted its (Kaplan, 1983; Johnson and Kaplan, 1987; Bromwich spotlight from a simple role of cost determination and Bhimani, 1989; Wallace, 1990; Atkinson et al., and financial control to a sophisticated role of 1997). (Bromwich and Bhimani, 1989) argue that creating value through improved exploitation of only shifting new management accounting systems . It has also been argued that the developed in foreign surroundings for coping with environment in which management accounting is a changing environment is not absolutely practiced has changed significantly - with advances reasonable because of the divergent conditions in information , markets that are more under which different companies operate. They competitive, different organizational structures and further argue that consideration should always be new management practices. made of the political, economic, social and cultural environments that surround the firm. In the This paper attempts to think about the challenges viewpoint of developing countries insights of the that an organization faces and what factors it "imported" systems may be gained by commencing critically needs for developing much-needed studies of the manner in which foreign companies management accounting practices. In addition, the establishing operations in developing countries evolution of management accounting practices adjust their management accounting systems to around the world with their idiosyncratic features the context of the developing world (Wallace, has also been checked in order to provide a 1990; Peasnell, 1993; Chow et al., 1994, 1999). better understanding of their development. In this connection, following questions have been delved: G What are the management accounting 3. Methodology systems in use in the organizations? A significant body of research has been published in G Have management accounting systems in the the field of management accounting practices. For organizations changed significantly during example, (Askarany, 2004; Burns and Scapens, 2000; the last decade? Carvalho, Conde and Nunes, 2003; Waweru, Hoque and Uliana, 2004) etc. These studies report on the 2. Literature Review use of diverse management accounting techniques in different countries. The study builds on and is During the last two decades, the criticism of informed by the tradition and accumulated findings conventional cost and management accounting of such research, and that is why, it is based on only practices for their lack of efficiency and capability in secondary data collection method.

1 Including activity based costing, activity based budgeting and activity based management 2 See, for example, Ittner and Larcker, 2001; Kaplan and Atkinson, 1998; Otley, 1995; Fullerton and McWatters, 2002; Hoque and Mia, 2001; and Haldma and Laats, 2002

THE COST AND MANAGEMENT 13 ISSN 1817-5090, VOLUME-43, NUMBER-4, JULY-AUGUST 2015 4. Historical Overview of standards to monitor labor and material efficiencies and . This was the time of the Introduction of of that AccountingInnovations concentrated on gathering accurate information vis-à-vis the efficiency of workers affianced in 4.1. Introduction of Management specified tasks. Moreover, the use of variance Accounting Techniques Before 1950s analysis of actual costs and standard costs for the purpose of controlling operations was also The (International Federation of Accountants, developed. 1998) describes management accounting before 1950 as a technical activity required for the Scientific management experts, during the pursuit of organizational objectives. It was nineteenth century, also developed new cost predominantly oriented towards the accounting procedures to evaluate and control determination of product cost. Production physical and financial efficiency of tasks and technology was comparatively simple, with processes in complex machine-making firms and products going through a series of dissimilar to assess the overall profitability of the enterprise processes. Labor and material costs were simply (Johnson & Kaplan, 1987). More or less the 1900s identifiable and the manufacturing processes were managers started paying attention to the mainly governed by the alacrity of manual productivity and performance of capital. The operations. Therefore, direct labor provided a design of Du Pont management accounting natural basis for assigning overheads to individual procedures during that period facilitated the products. The spotlight on product costs was of the performance of capital; these supplemented by and the financial control gave momentous attention to the application of of production processes. return on investment. Such information helped managers in the allocation of new investments According to (Chandler, 1977), management among contending economic activities and the accounting systems (MAS) first appeared in the financing of new capital requirements (Chandler United States during the nineteenth century. These &Salsbury, 1971). Before World War I, according to MAS employed both simple and complicated (Johnson and Kaplan, 1987), the Du Pont Company accounting methods. Cost accounts were used to was using nearly all of the management accounting determine the direct labor and costs of procedures for planning and controlling purposes, converting raw materials into goods. The use of known until the 1980s. As they reported, most of sophisticated accounting procedures also dates the cost and management accounting procedures back to the nineteenth century. As early as the were developed during the nineteenth and first first quarter of the nineteenth century, according quarter of the twentieth century. They further to (Porter, 1980), some companies in the USA stated that some organizations were trying to used sophisticated sets of cost accounts. New develop and use accurate cost accounting systems accounting systems were intended to control and to trace costs exactly to dissimilar lines of record the disbursements of during this products before World War I. This evidence period, which provided management with timely supports that even the thought and logic behind and accurate reports on expenditures. activity based costing for designing an accurate Cost accounting became more than just a utensil costing method is not new (Askarany, 2004). for evaluating internal conversion processes during The application of non-accounting information the nineteenth century, according to (Johnson and (financial and non-financial) in management Kaplan, 1987). It was also used as a means to accounting is not new either, which has attracted evaluate the performance of subordinate considerable attention in the last two decades. managers. Besides, internal accounting systems for According to (Johnson, 1992), as far back as the evaluating costs, throughput, and first half of nineteen century, owners were developed during the nineteenth century. and managers were using the non-financial New cost techniques for analyzing information to control organizational operations. productivity and relating profits to products were The idea of paying more attention to the working developed during the late nineteenth and early people and customers of organizations as a long- twentieth century (Askarany, 2004). On twentieth- term source of also dates back to before century accounting practices, these techniques had the 1950s. However, the demand for management a significant impact. Some of these techniques accounting information for the purpose of provided the foundation for the development of planning and control decisions is a much more

THE COST AND MANAGEMENT 14 ISSN 1817-5090, VOLUME-43, NUMBER-4, JULY-AUGUST 2015 recent phenomenon although it might be argued Just-in-time scheduling, Strategic business units, that the logic behind most of the management Experience curves, portfolio management, accounting techniques dates back to the first half Materials planning, Diversification, of nineteenth century (Cooper & Kleinchmidt, Matrix organization and Product 1990; Johnson, 1992; Johnson & Kaplan, 1987; and repositioning. Kaplan, 1984). Moreover, a comparison between today's management accounting procedures and 4.2.2. Introduction of Management Accounting those used before the 1950s would show a Techniques during 1980 to 1989s substantial number of innovations in this field The increased global competition in the early (Askarany, 2004). 1980s and the world recession in the 1970s following the oil price shock threatened the 4.2 Introduction of Management Western established markets. Increased Accounting Techniques from 1950s competition was accompanied and underpinned by rapid technological development which influenced 4.2.1. Introduction of Management Accounting many aspects of the industrial sector (Kader and Techniques during 1950 to 1979s Luther, 2004). For example, the use of robotics and The focus of management accounting shifted to computer-controlled processes improved quality the of information for planning and and reduced costs in many cases. In addition, control purposes in the 1950s and 1960s. In this developments in computers, especially the phase, management accounting is seen by emergence of personal computers, obviously (International Federation of Accountants, 1998) as changed the nature and amount of data which a management activity, but in a role. It could be accessed by managers. Hence, the design, involved staff (management) support to line maintenance and interpretation of through the use of such technologies systems became of considerable importance in as and responsibility accounting. effective management (Ashton et al., 1995). Rather than strategic and environmental The challenge of meeting global competition was considerations, management controls were met by introducing new management and oriented towards manufacturing and internal production techniques, and at the same time administration (Kader and Luthar, 2004). controlling costs, often through reduction of waste Management accounting tended to be reactive, in resources used in business processes identifying problems and actions as part of a (International Federation of Accountants, 1998). In management control only when deviations many cases, this was supported by employee from the business took place (Ashton et al., . In this environment, there is a 1995). Since the 1950s, more than 30 popular cost need for management information, and decision- and management accounting techniques have been making, to be diffused throughout the introduced. The majority of these innovations have organization. The challenge for management been introduced during the last two decades. accountants, as the primary providers of this According to (Hagerty, 1997) and (Smith, 1999), information, is to ensure through the use of the major developments in management process analysis and cost management accounting since 1950s can be explained as technologies that appropriate information is follows: available to support managers and employees at all G Cost and management accounting levels (Kader and Luther, 2004). In brief, cost and innovations in 1950s can be identified as management accounting innovations in 1980s can Discount cash flows, Total quality be identified as: Activity based costing, Target management, Cusum charts and Optimum costing, Value-added management, Theory of transfer . constraints, , Private labels and G Cost and management accounting Benchmarking (Hagerty, 1997) and (Smith, 1999). innovations in1960s can be identified asComputer technology, Opportunity cost 4.2.3. Introduction of Management Accounting budgeting, Zero-base budgeting, Decision Techniques from 1990s tree, Critical path scheduling, and In the 1990s, worldwide industry continued to . face considerable uncertainty and unprecedented G Cost and management accounting advances in manufacturing and information- innovations in 1970s can be identified as- processing technologies (Ashton et al., 1995). For Information and agency theory,

THE COST AND MANAGEMENT 15 ISSN 1817-5090, VOLUME-43, NUMBER-4, JULY-AUGUST 2015 example, the expansion of the worldwide web and According to (Hagerty, 1997) and (Smith, 1999), allied technologies led to the appearance of E- cost and management accounting innovations in that further increased and emphasized 1990s can be identified as: the challenge of global competition. The focus of reengineering, Quality functional deployment, management accountants shifted to the generation Outsourcing, Gain sharing, Core competencies, or creation of value through the effective use of Time-based competition and Learning resources. This was to be achieved through the use organization. Reviewing cost and management of technologies which checkup the drivers of accounting innovations of the last two decades, customer value, value, and (Björnenak & Olson, 1999, p.327) identify the organizational (International Federation major recently developed cost and management of Accountants, 1998). The characteristics of accounting techniques in the literature as- activity management accounting practices in four stages of based costing (ABC); activity management (AM) evolution are shown in Appendix Table 1. and activity based management (ABM); local information system (LS); balanced scorecard (BS); The four stages of the evolution of management life cycle costing (LCC) and target costing (TC); accounting described by the (International strategic management accounting (SMA). The Federation of Accountants, 1998) statement are evolution of management accounting practice is illustrated in Figure 1. A significant difference summarized as follows (see Figure 2): between Stage 2 and Stages 3 and 4 is the transform in focus away from information The Evolution of Management Accounting Practice provision and towards , in the form of waste reduction (Stage 3) and value Accounting 1812 - 1920: Prior to the matching concept. creation (Stage 4). However, the focus on for Processes Focus on operating cost and efficiency of processes. information provision in Stage 2 is not missing but is refigured in Stages 3 and 4. Information becomes Cost 1920 - 1950: Matching concept developed. a resource, along with other organizational Accounting Focus on cost determination and financial resources; there is a clearer focus on reducing control. waste and on leveraging resources for value creation. Consequently, management accounting is Managerial 19511 - 1980's: Focus shifted to seen in Stages 3 and 4 as an essential part of the Accounting providinginformation for management management process, as real-time information planning & control. becomes accessible to management directly and as the distinction between staff and Lcan Enterprise 1980's: Focus shifted to the reduction of waste, becomes indistinct. The use of resources to create CAM-I Cost JTT, teamwork, ABC, target costing, quality, Management investment & product life cycle management. value is a vital part of the management process in contemporary organizations (Kader and Luther, Value Based 1990's: Focus shifted to include the creation 2004). Management of customer value, strategy, balanced scorecards, EVA, and other related concepts.

Figure 2: The Evolution of Management Accounting Practice Source: (Martin, 2006) Stage

4 5. Factors Determining Ongoing Transformation 3 Transformation Management Accounting Change 2 Transformation Different people mentioned various factors 1 Transformation determining management accounting change, but perhaps the most frequently quoted were the competitive economic situation of the 1990s and

Cost Information Reduction of Creation of Value Focus particularly global competition. The degree to Determination for Waste of through Effective and Resources in Resourec Use which the claims of increased competition are Control Planning and Business metaphorical does not in fact matter rather than Control Processes actual economic effects. It is the perception of managers and accountants that is important, and Figure 1: Evolution of Management Accounting how they perceive the economic climate in which Source: (International Federation of Accountants, 1998) they operate. If there is a perception of greater

THE COST AND MANAGEMENT 16 ISSN 1817-5090, VOLUME-43, NUMBER-4, JULY-AUGUST 2015 competition, then an increased focus is likely to be Spain. In Finland, the requires a given to markets and the customer. An added to be on a variable costing basis. This has elementary change is the advance in information been significant in promoting variable costing in technology that has taken place in recent years. the management accounts. The momentum of technological change over the In a survey of Spanish manufacturing companies, last 30 years or so has had a profound effect on (Carmona and Alvarez, 1994) report that 63 organizational life. Predominantly significant over percent reported major changes in their the last 5-10 years has been the extent of the management accounting systems in response to dispersion of computers and computing capacity the new business environment. around the organization. The increased use of the computer has had major effects on the nature of Being the Chartered Institute of Management , especially clerical work, and on information Accountants (CIMA), only the United Kingdom flows around the organization (Burns and Scapens, has a professional body dedicated to management 2000). accounting... Besides, there have been other significant changes in - although again 6.2 Management Accounting Change whether they are generated by metaphorical or in China real economic factors is not apparent. Whereas in the UK in the 1970s, for example, there was a The transform in management accounting wave of acquisitions and mergers, with the practices in China dates back to the late 1970s creation of conglomerates, by the 1990s when the Chinese government undertook its organizations were moving in the reverse economic reform program. The expansion and direction. The trend was then for de-mergers, with change of decision-making authority and level from companies focusing on core competencies, and the government to the enterprise has been the outsourcing non-core activities (Burns and most crucial factor that has created the demand Scapens, 2000). These various changes - in for practicing management accountants in China competition, technology, and organizational (Waweru, Hoque and Uliana, 2004). Progressively, structure - all have important connotations for the the way was given to the use of benchmarking nature of management accounting - particularly when Chinese enterprises started defining and the way in which conventional accounting referring cost elements to the best performance techniques are now being used. of the market. (Jones and Xiao, 1999) revealed that Zhoulu Fertilizer Ltd. in China has successfully implemented a 'responsibility cost management 6. Management Accounting system.' The costs are fixed according to market Around the World competition and duties of various responsibility centers are then defined. (Adhikari and Wang, 6.1. Management Accounting in Some 1995) documented that of all the western European & Latin American management accounting techniques, the (CM) and the cost-volume- Countries profit (CVP) analyses have been the most popular (Birkett, 1998) observes that the very thought of techniques with Chinese enterprises. Both what constitutes "management accounting'' varied techniques have provided Chinese managers with between European countries. The scope of the use simple but powerful tools to analyze the effect of Activity Based Costing (ABC), which seems to that different operational decisions will have on be referred to as an indicator of the pursuit of and costs. The use of CVP analysis and the modern techniques, seems predominantly strong CM approach such as planning and control tools in in the UK and Belgium and weak in Denmark and Chinese enterprises is continuing to increase. Germany. In UK, the cost reduction and cost control attractions of ABC have proved to be 6.3 Management Accounting Change particularly popular. In Belgium, only 17 percent of in Australia the companies reported that they had a cost reduction motive. In France, ABC is not so much a A widespread literature review and a three-year costing tool. A strong majority support full costing survey of professional and practitioner journals, in Sweden, France, Germany, and Greece. Variable conferences and workshops exposed the most costing is the common practice in Denmark and popular recently developed cost and management Finland and has a strong presence in Italy and accounting innovations in Australia consistent with

THE COST AND MANAGEMENT 17 ISSN 1817-5090, VOLUME-43, NUMBER-4, JULY-AUGUST 2015 (Barbera, Baxter, &Birkett, 1999; Björnenak 7. Conclusion &Olson, 1999; Chenhall & Langfield-Smith, 1998; Lukka &Shields, 1999), to be: Management accounting is in its infancy. performance measurement and balanced Historically, it has played a secondary role to scorecard techniques, activity based costing, , and in many organizations, it valued added concepts, total quality still is little more than a by-product of the financial management, strategic management, risk reporting process. However, events of the last two management, benchmarking, re-, decades have spurred the development of economic value added and target costing. managerial accounting, and it is becoming widely Most of the recently developed cost and recognized as a field of expertise separate from management accounting practices have been financial accounting (Ray, 1982). The number of introduced among Australian practitioners cost and management accounting innovations through professional journals, workshops during the last two decades is higher than those of and conferences (Askarany, 2004). two earlier decades (1960s and 1970s). This notifies that the lack of cost and management Nevertheless, despite witnessing frequent accounting innovations during the last two seminars, workshops, conferences and decades does not materialize to be an issue. articles for introducing recently developed Supporting this view, (Kaplan, 1994) emphasizes cost and management accounting techniques that the 1980s and 1990s have seen a revolution in Australia, the commence of these concerning the innovation in management management accounting innovations is accounting theory and procedures. (Björnenak & surprisingly low and the level of adoption of Olson, 1999, p.325) also echo this observation by most of these new techniques lags relatively suggesting that over the last two decades there behind those of conventional ones has been a rich supply of management accounting (Askarany, 2004). For example, the ranking in innovations in the literature. terms of adoption of some of these new techniques in Australian firms are: activity Over the last 50 years, there is actually been based costing ranked (24), activity based nothing much new in management accounting. management (21), product life cycle analysis Looking at the changes over the past 50 years, (20), target costing (27). (Chenhall and some of the functions have remained unchanged, Langfield-Smith, 1998) compare this ranking but now they are professed as having moved from with some of conventional cost and a functional responsibility to a professional one. management accounting techniques such as The evolution really is about the analysis for budgeting for planning financial professionalization of the management accounting position (1), (2), function. In the last part of the 20th century, performance evaluation using return on management styles changed significantly. What investment (3). In a comparative analysis, have changed are the issues, such as the they conclude that the rates of adoption of environment or the speed of technology. The recently-developed techniques in other knack to make decisions promptly and be an countries such as U.S.A., U.K., and mainland effective partner also has changed radically. Europe are even lower than those applied in Management used to be a command and control Australia. (Askarany and Smith, 2003), structure where almost every decision was made supporting this view, find that only 19 at the top. More decentralized reporting and percent of organizations registered with decision structure is developed. Organizations CPA in Australia have implemented and today face multitude options and challenges. They accepted ABC by the end of year 2002. Prior need management accountants to step in and to this study (Chenhall and Langfield-Smith, work at any level as part of a . 1998) found that the adoption rate for ABC was generally below 14%. Other studies on the adoption of ABC also indicate that the "There is no poor country in adoption of ABC is following same pattern the world but there are poorly overseas. For example, (Innes and Mitchell, managed countries." 1995) in the UK find that the adoption rate - for ABC is generally below 14%.

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Appendix Table 1: Characteristics of Management Accounting Practices in Four Stages of Evolution

Stage 1: Cost Stage 2: Provision of Stage 3: Reduction of Stage 4: Creation of Value Determination and Information for Waste in Business Through Effective Financial Control Management Planning & Resources Resources Use Control Representative Prior to 1950 1950 - 1964 1965 - 1984 1985 to date period:

Where Similar to company secretarial. A 'staff' management Management accounting an integral part of management 'owned' positioned in activity by all managers as the distinction between 'staff' and 'line' organization: management becomes blurred.

Role: A necessary technical activity Providing info to support 'line' Managing resources (including Directly enhance outputs and in 'running' an organization. management's operations. information) to 'directly' add value through the strategy enhance profits by bearing of 'leveraging' resources down on inputs. (especially information).

Main Focus: Cost determination & Information for management Reduction of waste/loss in Creation of value through controlling expenditure. planning, control and decision- business resources through using resources effectively to making. Including basic model process analysis and cost drive customer value, building. management technologies. shareholder value, and innovation.

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