Evolution of Performance Measurement Models in Management Accounting

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Evolution of Performance Measurement Models in Management Accounting


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2nd October 2010

Changes in management accounting have gone by unnoticed in the recent years. This article tries to explain by how much management accounting has altered through the years, since the 1950s to date, and the reasons that led to the changes. This work also focuses on various performance evaluation models, their applications and their effectiveness.

There was little advancement in accounting in the 1950s, as much of the effort was made towards finance and stock valuation. However, there have been material changes in the business environment over the past six decades, coupled with advancements in information technology that have warranted the transformation of management accounting. Although management control measures have altered significantly, there have been little changes in design and actions in most procedures. Literature review

Scholars and business people alike have contributed to the advancement of management accounting. Bhattacharya (2009, 11) says that except for those who work in research, many people do not realize the role in management accounting changed from cost collection and analysis to a proactive part in development and implementation of strategy. Bhattacharya gives two reasons for this; first being that there is no culture to capture the evolution of accounting and a lack of innovativeness on the part of accounting bodies. Secondly, most businesses do not fully utilize management accounting systems, implying that the average accountant would not experience the whole scope of his or her profession.

The Institute of Management Accountants (IMA) of the USA captures the evolution of management accounting by giving it a new definition: “Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy” (Berliner and Larcker 1988, 19). This portrays the role that management accounting is expected to play by boosting competitiveness of companies in the future. In the 1950s, management accounting was preserved for lower level management, but presently, IMA says the same position is reserved for top management for the same company.

Horngren (1989, 52) observes that cost accounting classes in the 1950s laid emphasis on inventory valuation and income determination models. He goes on to say that focus in the discipline has shifted over the last sixty years. Horngren (1989, 112) notes “between 1960 and 1970, 46 percent of the material in textbooks covered inventory valuation while 33 percent focused on management accounting, compared with 73 percent and 6 percent respectively in the 1950. Interest in management accounting has been increasing over the decades mainly due to the changing dynamics in the business environment. ” In the period between 1950s and 1960s, accounts were handled by a single person and focused on a single period, which all changed in the 1970s as accounts came to be handled by multiple people and focused on multiple periods. There was easy access to information in 1950 to 1960, relative certainty and hence zero cost of information. On the contrary, uncertainty and asymmetric information across individuals led to costly information in the 1970s and 80s.

Company objectives also contributed to the shape up of management accounting, as Horngren (1989, 107) puts it. Profit maximization was the major goal for companies in the 1950s, leading to practices such as variable costing. However, the objectives changed in 1980s as companies sought to utilize their resources, while considering important areas such as marketing, training, motivation, innovation and quality. Managers nowadays choose methods that will provide...
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