The Development of Management Accounting

In 1998 the International Federation of Accountants (IFAC) issued a statement describing the development of management accounting through four sequential stages.

Stage 1 - cost determination and financial control (pre 1950)

IFAC describes management accounting before 1950 as a technical activity necessary for the pursuit of organisational objectives. It was mainly oriented towards the determination of product cost. Production technology was relatively simple, with products going through a series of distinct processes. Labour and material costs were easily identifiable and the manufacturing processes were mainly governed by the speed of manual operations. Hence, direct labourprovided a natural basis for assigning overheads to individual products. The focus on product costs was supplemented by budgets and the financial control of production processes. The strong position held by Western countries in international markets made their products highly regarded. They could be sold relatively easily, and competition on the basis of either price or quality was relatively low. There was little innovation in products or production processes as existing products sold well and the production processes were well understood. Accordingly, management was concerned primarily with internal matters, especially production capacity. The use of budgeting and cost accounting technologies was prevalent in this period. However, the dissemination of cost information tended to be slight, and its use for management decision-making poorly exploited (Ashton et al., 1995).

Stage 2 - information for management planning and control (by 1965)

In the 1950s and 1960s the focus of management accounting shifted to the provision of information for planning and control purposes. In Stage 2 management accounting is seen by IFAC as a management activity, but in a staff role. It involved staff (management) support to line management through the use of such technologies as decision analysis and responsibility accounting. Management controls were oriented towards manufacturing and internal administration rather than strategic and environmental considerations. Management accounting, as part of a management control system, tended to be reactive, identifying problems and actions only when deviations from the business plan took place (Ashton et al., 1995).

Stage 3- reduction of resource waste in business processes (by 1985)

The world recession in the 1970s following the oil price shock and the increased global competition in the early 1980s threatened the Western established markets. Increased competition was accompanied and underpinned by rapid technological development which affected many aspects of the industrial sector. The use, for example, of robotics and computer-controlled processes improved quality and, in many cases, reduced costs. Also developments in computers, especially the emergence of personal computers, markedly changed the nature and amount of data which could be accessed by managers. Thus the design, maintenance and interpretation of  information systems became of considerable importance in effective management (Ashton et al., 1995). The challenge of meeting global competition was met by introducing new management and production techniques, and at the same time controlling costs, often through reduction of waste in resources used in business processes (IFAC, 1998). In many instances this was supported by employee empowerment. In this environment there is a need for management information, and decision making, to be diffused throughout the organisation. The challenge for management accountants, as the primary providers of this information, is to ensure through the use of process analysis and cost management technologies that appropriate information is available to support managers and employees at all levels.

Stage 4- creation of value through effective resources use (by 1995)

In the 1990s world-wide industry continued to face considerable uncertainty and unprecedented advances in manufacturing and information-processing technologies (Ashton et al., 1995). For example the development of the world-wide web and associated technologies led to the appearance of E-commerce. This further increased and emphasized the challenge of global competition. The focus of management accountants shifted to the generation or creation of value through the effective use of resources. This was to be achieved through the use of technologies which examine the drivers of customer value, shareholder value, and organisational innovation (IFAC, 1998).