There is Still Time to Take Another Management Accounting Path
I am a fan of the music from Led Zeppelin, especially their song Stairway to Heaven. In their song are these lyrics:
“Yes, there are two paths you can go by, but in the long run there’s still time to change the road you’re on. And it makes me wonder.”
Here is a link to the song where you can hear those lyrics in the second stanza:
Stairway To Heaven - Led Zeppelin
What does this have to do with management accounting?
The problem begins with the imbalance of emphasis of external statutory and compliance financial reporting for government regulatory agencies (e.g., the USA’s SEC) dominating over internal management accounting. The purpose of the former is for “valuation” (e.g., inventories, cost of goods sold) whereas the latter’s purpose is for “creating financial value” for shareholders and owners by providing insights for better decisions.
The problem is most CFOs and accountants place their emphasis on the former rather than the latter.
The good news is there is still time for CFOs and accountants to shift to the latter – to apply progressive management accounting methods including activity-based costing (ABC).
Progressive Management Accounting
My message here is that an organizations executives and line managers (e.g., sales, marketing, operations, supply chain) deserve much better financial information from their accountants. The accountants typically provide flawed and misleading management accounting information. The accountants are underserving their managers. It is borderline irresponsible.
For example, many CFOs and accountants take the convenient route when allocating indirect expenses (commonly called “overhead”) to calculate product or standard service-lines costs. They allocate expenses (e.g., salaries, purchases) into costs like “spreading butter across bread”. They use broadly averaged cost allocation factors that violate costing’s universal causality principle. Examples of these cost allocation factors are sales volume, number of employees, square feet, or number of direct labor input hours. There is no cause-and-effect relationship! The result is their calculated costs are substantially inaccurate compared to reality. Yes, they reconcile exactly for the external financial accounting, but they are wrong with the parts. (Activity-based costing [ABC] resolves this problem.) Management accounting does not require 100% accuracy the way that external statutory financial compliance reporting does.
Barriers and Obstacles
So, what are those barriers and obstacles? A major one is human behavior’s natural resistance to change. Most people like the status quo – the current state. Another barrier is the belief that the benefits from applying progressive management accounting will not exceed the extra administrative effort to calculate the costs. That is, it is just not worth the trouble. Sadly, this barrier is due to the misunderstanding and misperception by accountants that applying progressive management accounting methods is too complex and complicated. It is not. (To learn why is not, search for the term “rapid prototyping implementation”.)
Always remember this. In the land of the blind, the one-eyed man is king. This means those organizations who have implemented ABC will make better decisions from its superior information compared to organizations continuing to use flawed and misleading information from traditional management accounting.
CFOs and accountants deserve a second chance. There are always second chances. Examples are a failed marriage or lack of success the first time with a college education. Even the television game show Jeopardy has a special edition of contestants who lost in their first round to a player with a higher score and are invited back to play with two others with same experience.
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