External Influences On Management Accounting: Unit 1 Section

EXTERNAL INFLUENCES ON MANAGEMENT
COST AND MANAGEMENT

UNIT 1 SECTION
ACCOUNTING 3
Unit 1, section 3: External influences on management accounting
ACCOUNTING
Dear student, you are warmly welcome to the third Section of Unit 1 of this
Course. This Section focuses on the external influences on management
accounting. Examples of such contemporary external influences on
management accounting have also been discussed.
We welcome you to a fruitful study of Section 3 of Unit 1.
By the end of this Section, you should be able to:

 outline the external influences on management accounting;
 give examples of such external influences on management accounting.
Now, read on…
Section Overview
Traditional management accounting systems focused mainly on reporting
financial measures. These systems were designed for use in an environment
that was very different from the environment we have today. In other words,
the environment, situations and challenges faced by the traditional
management accountant have evolved significantly over the period,
presenting the contemporary management accountant with almost entirely
different environment, situations and challenges. These external changes
such as rapid technological advancements have influenced management
accounting greatly; consequently management accounting systems have
undergone modifications to meet the requirements of today’s manufacturing
and global competitive environment.
External Influences on Management Accounting

Drury, Collin outlines the following as the external factors that have
influenced management accounting: global competition; growth in the
service industry; changing product life circles; advances in manufacturing
technologies; impact of information technology; environmental issues; and
customer orientation
 Global competition.
In the 1980s many organisations operated in a protected competitive
environment. Barriers of communication and geographical distance, and
sometimes protected markets limited the ability of overseas companies to
compete in domestic markets. There was little incentive for firms to
maximise efficiency and improve management practices, or to minimise
costs as increases could often be passed on to customers. During the 1990s,
however, organisations began to encounter severe competition from
overseas competitors that offered high quality products at low prices as a
result of globalisation and increasing removal of trade barriers. These
changes have enabled competitors to gain access to domestic markets
throughout the world. Nowadays, organisations have to compete against the
best companies in the world. This new competitive environment has
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Unit 1, section 3: External influences on management accounting ACCOUNTING
increased the demand for cost information relating to cost management and
profitability analysis by product lines and geographical locations.
 Growth in the service industry

Before the 1990s many service organisations, such as those operating in the
airlines, utilities and financial service industries, were either government-
owned monopolies or operated in a highly regulated, protected and non-
competitive environment. These organisations were not subject to any great
pressure to improve the quality and efficiency of their operations or to
improve profitability by eliminating services or products that were making
losses. Prices were set to cover operating costs and provide a predetermined
return on capital. Hence cost increases could often be absorbed by
increasing the prices of the services. Little attention was therefore given to
developing cost systems that accurately measured the costs and profitability
of individual services.
However, during the last decade, privatization of government –controlled

companies and deregulation has completely changed the competitive
environment in which these service companies operate. Pricing and
competitive restrictions have been virtually eliminated. This has created the
need for service organisations to focus on cost management and develop
management accounting information systems that enable them to understand
their cost base and determine the sources of profitability for their markets.
 Changing product life circles

A product’s life circle is the period of time from introduction of the product
onto the market to the time at which it is withdrawn from the market.
Intensive global competition and technological innovation, combined with
increasingly discriminating and sophisticated customer demands, have
resulted in a dramatic decline in product life circles.
Normally, large fraction of a product’s life circle costs are determine by

decisions made early in its life cycle. This has created a need for
management accounting to place a greater emphasis on providing
information at the design stage because many of the costs are committed or
locked in at this time. Therefore, to compete successfully, companies must
be able to manage their costs effectively at the design stage, have the
capability to adapt to new, different and changing customer requirements
and reduce the time to market of new and modified products.
 Advances in manufacturing technologies

Excellence in manufacturing can provide a competitive weapon to compete
in sophisticated worldwide markets. In order to compete effectively,
companies must be capable of manufacturing innovative products of high
quality at a low cost, and also provide a first- class customer service. At the
same time, they must have the flexibility to cope with short product life
circles, demands for greater product variety from more discriminating
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COST AND MANAGEMENT
ACCOUNTING Unit 1, section 3: External influences on management accounting
customers and increasing international competition. World- class

manufacturing companies have responded to these competitive demands by
replacing traditional production systems with lean manufacturing systems
that seek to reduce waste by implementing just-in-time (JIT) production
systems, focusing on quality, simplifying processes and investing in
advanced manufacturing technologies (ATMs).
 The impact of information technology

During the past two decades, the impact of information technology (IT) to
support business activities has increased dramatically and the development
of electronic business communication technologies known as e- business, e-
commerce or internet commerce have had a major impact. Information
about every activity can now be accessed everywhere, thanks to the internet!
This has substantially reduced routine information gathering and the
processing of information. Instead of managers asking management
accountants for information, they can access the internet to derive the
information they require directly and do their own analysis. This has freed
management accountants to adopt the role of advisers and internal
consultants to the business.
 Environmental issues
Customers are no longer satisfied if companies simply comply with the legal
requirements of undertaking their activities. They expect company managers
to be more proactive in terms of their social responsibility, safety and
environmental issues. Environmental management accounting is becoming
increasingly important in many organisations. Companies are finding that
becoming a good social citizen and being environmentally responsible
improves their image and enhances their ability to sell their products and
services.
These developments have created the need for companies to develop

systems of measuring and reporting environmental costs, the consumption
of scarce environmental resources and details of hazardous materials used or
pollutants emitted to the environment. Knowledge of environmental costs,
and their causes, provides the information that managers need to redesign
processes to minimize the usage of scare environmental resources and the
emission of pollutants and to also make more sensitive environmental
decisions.
 Customer Orientation
In order to survive in today’s competitive environment, companies have had
to become more customer-driven and to recognise that customers are crucial
to their future success.
This has resulted in companies making customer satisfaction an overriding

priority and to focus on identifying and achieving the key success factors
that are necessary to be successful in today’s competitive environment.
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Unit 1, section 3: External influences on management accounting ACCOUNTING
Bravo! You have successfully completed the second Section of Unit 1

In this Section, the external factors that have influenced the development of
management accounting systems have been explained to you. Examples of
such factors have also been vividly explained to you. the external factors
that have influenced management accounting: global competition; growth in
the service industry; changing product life circles; advances in
manufacturing technologies; impact of information technology;
environmental issues; and customer orientation.
Now get prepared for the next section (section 3) of Unit 1. We hope you
will enjoy that too.
Exercises
 Outline four external factors that have influenced management
accounting.
 Explain how technology has influenced management accounting.
UEW/IEDE 27

External Influences On Management Accounting: Unit 1 Section

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EXTERNAL INFLUENCES ON MANAGEMENT

COST AND MANAGEMENT

We welcome you to a fruitful study of Section 3 of Unit 1.

By the end of this Section, you should be able to:

Now, read on…

External Influences on Management Accounting

 Growth in the service industry

However, during the last decade, privatization of government –controlled

 Changing product life circles

Normally, large fraction of a product’s life circle costs are determine by

 Advances in manufacturing technologies

customers and increasing international competition. World- class

 The impact of information technology

These developments have created the need for companies to develop

This has resulted in companies making customer satisfaction an overriding

Bravo! You have successfully completed the second Section of Unit 1

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