Question

Explain why the traditional management accounting systems are considered to be inadequate in today’s business world?

Answer 1

Traditional management accounting evolved from cost accounting and hence has its origins in manufacturing, where for most of the twentieth century, the supplier was of highest significance, competition was primarily localised, and the rate of technical and social progress was slower than now. Because of the simplicity of the operational environment, managers might quickly forecast occurrences and prepare with more accuracy utilising less external information than is now feasible.. (3 marks)

Nowadays, customers come first and competition is intense that the PLC is constantly threatened. To compete effectively, org must be flexible to respond speedily to customer needs. Such a focus on customers and competition, requires a more forward-looking approach, which must be substantially outward-looking and focus on external information as opposed to the backward & inwards looking approach of traditional MAS

The primary focus nowadays is on customers, and organizations strive to improve the customer satisfaction. In addition to this  competition has become more fierce. To compete effectively, the organisation must be adaptable and responsive to client requirements as quickly as possible. Such an emphasis on consumers and competitors necessitates a more forward-thinking strategy, which must be significantly outward-looking and focused on external information, as compared to the old MAS's backward and inward-looking approach.

Traditional management accounting was designed largely to help production management, hence its emphasis on accounting was on labour, material expenses, and production overheads. Changes in the current organization's cost structure and cost nature have impacted the relevancy of such emphasis and resulted in the risk of providing deceptive cost statistics, particularly on overhead absorption.

Internal information utilised by management accounting was often acquired from accounting systems designed for financial reporting, However this transaction was classified to aid in financial reporting purpose and its not always relevant to be used for decision making