Jeff Walters, President
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By Raef Lawson, Ph.D., CMA, CSCA, CPA, CFP, CFA, and Larry R. White, CMA, CSCA, CFM, CPA, CGFM
The accounting profession, like many others, faces challenges as disruptive technologies change its practices at an ever increasing rate. Technologies such as machine learning and robotic process automation are already eliminating the need for many entry-level positions, while these and other digital tools promise to soon make many higher-level positions redundant.
This calls into question the future role of the management accountant. A common line of thought is that by acquiring competencies in areas such as predictive analytics and by exploiting Big Data, management accountants can achieve the role of “business partner,” assisting in and supporting senior management in strategy formulation, validation, and implementation. Yet others—including those in operations, HR, and marketing—can make similar claims about the ability to offer strategic insights by exploiting the new sources of data available. So what added value do we as management accountants bring to the table? It’s that only management accountants can combine a holistic view of operations, mastery of quantitative and technological skills, and a unique understanding of costs—their behavior, their relevance, and their use in decision making.
But how well are we management accountants currently serving this role? Unfortunately, not well at all. An IMA® (Institute of Management Accountants) study of senior finance professionals found that while 80% believed that the Finance function adds a great deal of value to their organization, only 22% believed that those outside of Finance saw its role as adding a great deal of value (see http://bit.ly/2pd8S8i).
This lack of perceived value in the information provided by Finance isn’t unfounded. An ongoing survey by IMA’s Managerial Costing Task Force of operations and supply chain professionals found that slightly more than half of the respondents believe that their organizations’ cost information system fails to provide an accurate assessment of costs for internal decision making. Forty-four percent agree with the statement that “Our cost information is not helpful to me in my work.” And 83% believe that the benefits of improving their costing systems outweigh the cost of doing so. (See “IMA’s Managerial Costing Task Force” for more about the task force itself.)
Why is there a disconnect between the value we believe we provide to others and the value they perceive we provide? In large measure, it’s due to the information we provide. While the Finance function in many companies focuses on preparing costing information and financial reports according to Generally Accepted Accounting Principles (GAAP) or similar standards, other functional areas understand that managing operations based on such information is inadequate for decision support, planning, and control—and are finding alternate sources of information for making decisions.
FIX THE PROFESSION, FIX COST MODELING
The management accounting profession is in need of a framework to support the development of costing information that reflects economic reality and enhances internal decision support. IMA’s Conceptual Framework for Managerial Costing (CFMC) is such a framework (http://bit.ly/2IQ2eO8). It identifies the principles, concepts, and constraints that need to be addressed and considered when creating a costing approach for an organization’s decision support. It isn’t a method—it’s a framework to assess an organization’s costing needs and to evaluate methods and systems against an organization’s alternative solutions.
The CFMC replaces advertising hype with clear principles and concepts. For example, activity-based costing (ABC) can be implemented with an immense range of modeling techniques. At the simplistic end, an ABC solution may create as many distortions (for example, allocations of fixed costs) as insights. As an organization incorporates more CFMC concepts into its ABC solution, however, models generate greater insights and less distortion (but also require a higher level of modeling knowledge and systems support).
The CFMC focuses on two principles (see Figure 1). The first is causality (or cause and effect), the foundational principle for creating better models that support internal decision making. Managerial costing models need to reflect the reality of resources and processes in the organization. The second principle is analogy, the logical use of information for decisions. The CFMC moves costing out a method-centric environment—where methodologies like ABC, Theory of Constraints (TOC), lean accounting, total cost of ownership, standard costing, and others compete for customers, consultants, software vendors, and managers—to a knowledge base grounded in principles and concepts.
Most cost models that accountants use are simply financial models that seek to generally reflect operations and resources. Models based on the CFMC focus first on building an operational model, then costing it in a manner that reflects causal relationships, and then applying resource costs without clear causal relationships to outputs in a manner that’s appropriate for decision making. In other words, the CFMC requires that a cost model be an overlay of an operational model of an organization’s resources and processes.
An example of an incorrectly applied noncausal cost is excess capacity in a work group or resource, such as a resource capacity for which there is no demand for creating additional output. The job of a good operations manager is to become more efficient and effective, which means he or she will create excess capacity. This should be recognized positively, but how often is it? Typically, a manager is penalized for not keeping the work unit busy, or the costs of idle capacity are applied to the work unit’s output, thereby negating the efficiency improvement. Preferably, excess capacity costs should be applied to the business or, in the case of salable products or services, perhaps applied to the sales and marketing area since it failed to generate sufficient demand.
Increasingly, relevance for management accountants means focusing more on forward-looking information. Creating such information puts a premium on understanding causal operational resources, processes, market relationships, and more. The models needed to support projections must incorporate and reflect an organization’s operating model before determining the monetary impact of a given decision, trend, scenario, or projection. IMA’s CFMC is the only framework for creating decision-supportive models with principles, concepts, and constraints that apply equally to financial and nonfinancial modeling.
This is an abstract. For the full article, click here: http://sfmagazine.com/post-entry/april-2018-maintaining-relevance-in-the-digital-age/
You will earn CMA and CPE credits when you attend any live webinar. Replay webinars are available in the archive but do not earn credits. Advance registration is recommended—IMA webinars are popular and fill up quickly.
The CMA Exam: Test-Taking Tips and Strategies
New Lease Accounting: Business Impacts You May Not Be Thinking Of
Beyond the Budget: How to Make the Move to Rolling Forecasts
The Case for Continuous Accounting
Join Us at IMA Technical Sessions
2017-2018 tech sessions will be held at Kozmo's Grille with the exceptions noted below. There are two hour-long sessions beginning at 5:00 and 6:30 and dinner in between.
Cost for dinner is $30 regardless of the location. Please look for invite emails with registration information prior to each meeting.
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