Potentials of the Application of IT in Management Accounting
Application of IT in
management accounting has created excellent potential to the accounting system
and now it is not possible or practical to perform accounting either financial
or managerial without the help of IT. The organizations have acknowledged the
potential of IT in management accounting and ready to explore the potentials to
benefit the organizations. What is IT potential? Well, it is actually
identifying the forceful reasons for adapting IT in management accounting. IT
made the future of any organization to compete in the global economy and IT
provides the competitive advantage to reach customers anywhere in the globe.
Every organization is either computerized fully or extensively.
Management accounting
also had to bow to the augment of technology and it is wise applying IT in
management accounting. Data mining and data warehousing (as a branch of IT) becomes
very valuable and drives application of IT in management accounting. Automation
is a potential IT technology, which can be used in management accounting to
automate the data retrieval, recommending decisions and preparing reports or
presentation papers.
This work is incomplete Here
The infrastructure of IT is
widely available today and it is in open system mode. Small companies have the
ability to compete with large organizations with the accessibility of internet
and e-business. The IT infrastructure has it foundation and most companies can
enjoy it with minimal cost. With the IT infrastructure well placed,
organizations can make available the management accounting information to the
internal and external parties via internet. Shareholders and investors are
insisted to view the information of the organization’s accounting results
before deciding further investment. Management accounting also has resorted to
IT infrastructure to gather information from various applications and database
to manipulate the data and to produce reports for decision-making.
Multi-national companies have optioned to IT to retrieve data from department
and regional offices located worldwide.
IT in management accounting has
its potentials in the future as current generations are exposed to IT and
nowadays computers have been introduced during school days. IT skills are being
possessed by younger generations and it will contribute and motivate the
implementation of IT in every aspect of business including management
accounting. CIMA, the management accounting body have initiated Business
Information Systems syllabus for the management accounting students. This is to
ensure that the future accountants not only able to use management accounting
technologies but also contribute to the growth of IT in management accounting.
Small organizations do not have to develop in-house management accounting
software as it may burden the organization’s budget. Small organizations can
take advantage of evolution of management accounting technology that is getting
off-the-shelf management accounting packages. As such, small companies would be
able to enjoy the management accounting technology with more affordable cost.
Benefits of the Application
of IT in Management Accounting
The application of IT in
management accounting brings benefits to the organization. There is evidence
that technology adapted in management accounting is able to revoke the
traditional management accounting limitations. IT and management accounting has
merged as a system to provide essential information to organization’s growth
and smart investment. The data and information provided by the management
accounting system is accurate and valid. The system is able to gather data and
information from various resources or departments using data mining technology.
The data mining technology uses single database repository that stores various
information needed by the accounting system. As such, the budget or cost
information provided to the management for decision making is deemed as
accurate and real time.
During traditional accounting,
the response for management accounting information may take weeks but with
application of IT, the information is ready immediately. The technology is
capable of processing large number of data and also to performs multi-tasking
to achieve the desired result. Current technologies also allow users to choose
the design of the reports wanted with a few mouse clicks. Management accounting
systems are also capable of producing 3D charts for presentations. Most of the
systems are user-friendly and easy to use. The management accounting system is
able to provide various solutions for decision makers. IT can be designed to
give recommendations and remedies to the management. The management accounting
system is capable of calculating the payback period, ROI or breakeven point
within split of seconds and advises the management on the decision to be taken.
The technology is very much useful to management when they are planning or
forecasting a long-term investment. The system is able to provide historical
data and the market trends to the management to assist to make the correct and
wise decisions.
It is rewarding to have technology in
place for management accounting, as it will ease the accountant’s
responsibilities. The accountants now can focus on other important tasks such
as financial analysis, decision making, consulting the management and design
business models. This is because application of IT in management accounting
releases accountants’ from day to day-monotonous tasks involving data
collection, calculation and reporting. The system can be designed to perform
the said tasks and allow management and financial accountants to concentrate on
more productive responsibilities. The main gain of application of IT in
management accounting is getting a competitive advantage.
The internet plays a vital role for
providing technology benefits to the organizations. Companies can use the
technology to draw customer’s attention which ultimately benefits the growth of
the company. IT in management accounting allows immediate updates of the
information in the Web site so that the customers, investors and creditors are
able to see a clear picture of the organization’s plans and goals. It is noted
that the application of IT in management accounting have clearly resulted in
benefits to the organization and more and more organizations are adapting IT in
management accounting.
Impact of Enterprise Resource Planning (ERP)
Systems as an Application of ITon Management Accounting
Information technology (IT) should be viewed as
more than just a vehicle that facilitates the automation of business processes.
IT can fundamentally change the way
business is done. Many organisations seek to improve their competitiveness
through adoption of advanced information technology, such as Enterprise
Resource Planning (ERP) systems. The level of success associated with these
implementations has varied widely. Traditional analysis and design projects had
minimal reengineering and the software was written to match current processes,
whereas ERP systems are implemented with minimal change to the software while
significant reengineering of business processes to match the ERP software
occurs.
One reason for many ERP implementations being less
than successful is that they adopted a traditional IT implementation
philosophy, rather than an ERP implementation philosophy. That is, they focused
on replacing the financial reporting systems and ignored the benefits that
could have been obtained through the design and implementation of a system that
integrated the operations of the entire organisation (i.e., including
accounting, manufacturing, supply chain management, etc.).
Research on the effects of ERP systems on
management accounting (Granlund and Malmi, 2002; Granlund and Mouritsen, 2003)
suggests that ERP systems have little impact on management accounting, but that
the management accountant is evolving into a business consultant.
Scapens and Jazayeri (2003) found that under ERP
there was no fundamental change in the nature of management accounting
information. However, there were changes in the role of management accountants
compared with those in traditional accounting environments:
·
ERP systems reduced the routine work undertaken by
accountants and led to the routinisation of accounting through evolutionary
change.
·
Management accountants and managers found new ways
of working with the ERP system, each performing different tasks than before,
e.g.
o operating
managers can access the information themselves from the ERP system rather than
waiting for the accounting report; and,
o management
accountants perform more analysis of results than before.
Both Fahy (2000) and Granlund and Malmi (2002)
suggest that further research is required to provide a richer understanding of
the use of ERP systems in management accounting, strategic management and
decision support. Further, an ERP system is seen as the basis for a successful
balanced scorecard approach (Edwards 2001). The balanced scorecard, with data
obtained from the ERP system provides management with visibility into the
business units and the ability to monitor progress against the overall
organisation plan.
Wallace and Kremzar (2001) suggest that the two
critically important objectives for ERP system implementations are fact
transfer and behaviour change. Examples given of fact transfer relevant to
management accounting include, "when the cost accounting manager learns
about ERP's extremely high requirements for inventory record accuracy"
(p.138). An example of behaviour change is "when the manager leads the
charge to eliminate the annual physical inventory, because he or she knows that
inventory records sufficiently accurate for successful ERP are more than
accurate for balance sheet valuation - and that physical inventory cost time and
money but often degrade inventory accuracy" (p.138). These examples
provide some insight into the impacts that ERP systems may have upon management
accountants.
A model of the impact of IT (ERP) systems on
management accounting and management accountants was developed by Granlund and
Malmi (2002) –see Fig. 2.1. They proposed that ERP systems have both a
direct and indirect effect on management accountants and management accounting
systems. Examples of direct effects are changes in report content, timing,
scheduling, etc. that are caused by the ERP system. Indirect effects result
from changed management practices, changes in business processes, etc. that are
initiated by the IT ERP implementation.
Fig. 2.1: Impact
of ERP Systems on Management Accountants and Management Accounting
Source: Grandlund
and Malmi (2002)
Implementation
Success
One element not identified in this model is the
success of the ERP implementation. If an ERP system implementation is
successful, the focus of the organisation changes from a functional orientation
to a process orientation (Davenport, 2000; Wallace and Kremzar, 2001). Doing so
requires a change in the management and accounts reporting structure; a change
in the generation of reports (since all data are now obtained from a
centralised database); and a requirement for communication across functional
areas. Since management accountants no longer need to generate the 'ordinary'
reports, they can provide value for the organisation through the generation of
forward-looking reports and improved analyses of business options. This is
similar to what Caglio (2003) referred to as the "hybridisation"
of management accountants.
A less successful ERP project might increase their
activity on some of their existing tasks, absorbing any time saved through
their being required to spend less time on other tasks, leaving no time for
them to develop into business consultants.It is inconceivable that the success
or failure of an ERP implementation has no impact on those involved, or upon
the tasks that individuals perform.Recognising the likely relevance of
implementation success, Grabski et al. (2009) used a case study approach to
examine the changes in management accounting and in the role of management
accountants resulting from the implementation of ERP packages in seven large
organisations based in the UK. In addition, they explored the effect that
implementation success or failure had on the changes that occurred. The study
found that in all seven case studies, the role of the management accountants
was affected and that the changes in the role were related to the success of
the system implementation:
·
the more successful implementations resulted in
dramatic changes to the nature of their role whereby the management accountant
became a business advisor who took proactive steps to aid the various
executives and decision makers;
·
in the less successful implementations there was a
dysfunctional impact upon the management accountants even where the tasks they
were expected to perform had not changed.
In the light of these findings, Grabski et al. (2009)
amended Granlund and Malmi's (2002) model to include the success of the ERP
implementation, as shown in fig. 2.2.
Fig. 2.2: Impact
of ERP Systems on Management Accountants and Management Accounting
Source: Grabski
et. al. (2009)
Challenges of the Application of IT in
Management Accounting
Application of IT in management
accounting has major challenges on the organization’s profits. It is wrong to
conclude that implementation of new technology in management accounting will
improve company’s profits. Implementation of new technologies may reduce
company’s income, as the implementation is costly depending on the technology
adopted. There is a risk to the companies that if inappropriate technology is
chosen, then the company is forced to incur unnecessary costs which lead to
waste of resources. However, if the management and the accountants study the
feasibility and the functionality of the systems before the implementation of
IT in management accounting, then the above risk can be avoided.
The skill and knowledge of accountants
should be repositioned to support the application of IT in management accounting.
The companies have to send their staff to IT related training to acquire and
update their IT skills to use the system efficiently. The users of the system
must be trained well in order to take advantage of the technology within the
system. Selecting user-friendly system is essential, as it require less IT
skilled personnel to handle the system. Most of the systems available now are
user-friendly and easy to use. Technology is changing fast and it is very
difficult to keep track with the technology changes. The company’s challenge is
to adopt a technology that can be used for a long period which may not be
achievable now. The new technology today will be obsolete within couple of
months and will be replaced by more sophisticated technology. So the company
has to select the technology that is upgradeable to meet the future technology
requirement.
Keeping
Step Information Technology
The
speed of technological change over the past years especially with the advent of
Personal computers had a profound effect on the organizational life.
Particularly significant over the past 5-10 years has been the extent of the
dispersion of computers and computing capacity around the organization. The
increased use of the computer has had major effects on the nature of work, especially
clerical work and on information flows around the organizations.
The
various changes in competition, technology and organizational structure all
have important implications for the nature of management accounting. One of the
most important, apart from the speed and capacity of modern systems, has been
the development of database technologies that provide the ability to store vast
amounts of information in easily accessible ways. These technologies permit
various users simultaneously to access the information stored on the database
and to use it in different ways.
With
modern databases, information can be analyzed in different ways. This makes it
possible to design an information system that meets the need of various users,
and in effect to have different purpose. Information which are needed from
different accounting systems can easily be available although there is one
database. These system are integrated
through the information systems as a whole. Another significant effect of IT
development is the way in which information is more widely dispersed around the
organization. Managers and many other people at all levels with the
organization have PC’s available on their desks which can be used to access the
information they need at any point of time. Compared to the traditional method,
managers would ask accountants for the information especially the financial
information they need. Some managers even maintain their own records, the
formal information was maintained in the accounting system. If they need to
access the information, they need to ask the accountants.
With
the advancement of information system has become more integrated and access to
them is dispersed around the organizations. Managers now have greater
responsibility for information concerning their areas of activity. They can
obtain the information directly from their PC at any time at their convenience.
Thus managers seeking information from accountants and the accountants use the
information stored in the information system to produce both financial and
management accounting report. This implies a change in the role of management
accountants, from one of information provider to the customer of broader
integrated information system.
Enterprise
resources planning (ERP) is an approach to consolidate all the company's
departments and functions into a single computer system that services each
department's specific needs. It is a convergence of people, hardware and
software into an efficient production, service and delivery system that creates
profit for the company.With ERP, all elements in the supply and production
chain can be easily accessed by all those who need the information. This
results to efficiency in customer management and perceived company
effectiveness in delivering on customer expectations.
Conclusion
Organization
in the new millennium will need to adopt a more realistic approach to
management. Managers require both traditional and non-traditional management
accounting methods to make better decisions. Key determinants such as size,
industry and strategic priorities have a differential impact on management
practices. Size is significant for emerging practices, while industry is
significant for traditional practices. Strategic priorities also affect the
benefits from traditional and emergent practices. Managers need to be mindful
of these organizational determinants and other such as the operating
environment. There are implications for the need of management accounting to
develop new approaches to address the new paradigm with the advancement of
information technology. Management accounting will evolve as a useful tool for
the managers to make decisions in the future.
It is acceptable to companies that
application of IT in management is inevitable and many companies already
looking towards implementation of IT based management accounting. Considering
the paper-less environment, companies are tempted to exploit technology to
reduce costs and overhead. However, the selection of appropriate system and
technology is essential and vital, so that waste of money and resource do not
arise. By adopting correct system and technology in management accounting, the
companies and the accountants are able to produce accurate reports to make
decisions and investments. The application of IT in management accounting is
becoming essential part of accounting to cater to the current needs of
immediate business analysis and performance measures. It is undeniable that
there are much potential for IT to be incorporated in management accounting. The
current world is living on technology and no doubt, management accounting needs
technology to improve and enhance its functionality. The managers are depending
on IT to deliver the requirement that traditional management failed to provide.
Technology is vast changing and keeping track with the changes is a challenge
to the company. The cost of implementation of the system is always a question
because it is a non-profit supportive investment. The benefits can’t be seen in
cash terms. However, the management can choose the system and technology
according to their budget. Overall, applying technology in management
accounting is in optimistic direction by the management in which they can
benefit in terms of advantages provided by the technology. The close involvement
by the management, accountant and users in implementing technology in the
company in management accounting is much needed. At the end, it is to benefit
everybody from shareholders, management and workers.
When an ERP implementation is successful, management
accountants have time for other, less mundane activities; and their role
becomes more enriching as a result. When
an ERP implementation is unsuccessful, the role of the management accountant
increases. Some of the ERP system deficiencies require increased activity on
the part of the management accountants without any noticeable reduction in the
tasks they traditionally perform. For example, they need to improve their
software and leadership skills in order to cope, but have no additional time in
which to do so. For ERP implementations
to be successful, management accountants should be involved from an early
stage. Also, it is to the benefit of management accountants to ensure that ERP
implementations are a success. If it is not, they are likely to find that their
workload increases without any alteration to the time in which they have to
perform their job. Whether it is a success or a failure, they also need to be
prepared for changes in their role which go well beyond simply doing more than
before.
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TOPIC:
THE APPLICATION OF INFORMATION TECHNOLOGY IN MANAGEMENT ACCOUNTING - ISSUES AND CHALLENGES