Ifac's Evolution Model of Management Accounting

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Introduction

In 1989, the understanding of the scope and purposes of management accounting and the concepts which underpinned it was summarized by the International Federation of Accountants (IFAC) in a statement. Later on in 1998, the statement was revised and released as Management Accounting Concepts – Number 1 in the series of International Management Accounting Practice Statements.

The purpose of this article is to explain the IFAC’s perspective of the change in management accounting. This can be justified by the author when he surveyed the stages of evolution of the management accounting practices in the food and drinks companies in United Kingdom and used it to further develop and apply the IFAC-based model.

Since the 1980’s Kaplan review, there has been a lot of creative management accounting techniques that have been developed across a range of industries and from there, publicized internationally. These techniques have been designed to support the latest technologies and management processes. Besides that, there are companies which try to meet the challenge of global competition by searching for a competitive advantage. However, these new techniques have received a number of criticisms. One of those criticisms is that these new techniques have influenced the whole process of management accounting (planning, controlling, decision-making, and communication). It has also shifted its focus from a basic and easy role of determining cost and controlling the financial parts into something more sophisticated that creates value through upgraded deployment of resources.

Furthermore, it is still questionable whether the word ‘evolution’, with its implication of progress is an appropriate description for the word ‘change’. However, the purpose of this article is not to answer those questions but to acknowledge that IFAC has a strong claim to formally ‘speak for’ management accounting. Its framework is also useful for certain studies.

Even though the IFAC (1998) framework focuses on concepts instead of practices, there are still some parts which need further explanation. For example, the range, role, and organizational positioning of management accounting are different across organizations, cultures and countries. However, despite its weaknesses, the framework provides an interesting view of history and a reliable set of parameters.

Scopes, Uses, Merits and Demerits of IFAC’s Conception of the Evolution of Management Accounting

IFAC framework provides a remarkable outlook of history and a useful set of parameter. There are four stages of evolution of the management accounting recognized by IFAC which includes cost determination and financial control (stage 1), information for management planning and control (stage 2), reduction of resources waste in business processes (stage3), and creation of value through effective resource use (stage 4).

Stage 1 of the evolution of the management accounting recognized by IFAC explained that the focus was on cost determination and financial control, through the use of budgeting and cost accounting technologies prior to 1950. It also focuses on the product costs which are provided by the budgets and the financial control of the production processes. The use of cost accounting and budgeting technologies in determining the price of the products and for the decision-making gave a strong position to the companies which have adopted it because the budgeting and cost accounting technologies provide the information of deciding the selling price of products which make sure that the companies do not bear the losses, discloses the profitable products to be sold, control of materials and suppliers, information whether to manufacture or outsource and also control the manufacturing, selling and administrative costs.

The second stage of evolution of the management accounting identified by IFAC illustrated that the focus had shifted to the provision of information for management...
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