Importance of Management Accounting in Manufacturing Firms

Introduction

The United Kingdom has a long history of manufacturing industry since the late 18th century. Having been at the forefront of the global industrial revolution process, the UK amassed lots of wealth through manufacturing practice which led to the early growth of Britain's economy. However, in the mid of the 20th century, the UK manufacturing industry began experiencing a steady decline in its operation (Baines et al., 2009: 549). The economy thus had to shift to the service sector majorly with manufacturing remaining relevant only because of the importance it has in overseas trade. This paper critically analyzes the challenges that have led to the decline in the U.Ks manufacturing sector and gives the most appropriate management accounting techniques that can be used to address the situation. It further gives a detailed recommendation on how management accounting can help in better decision making for both short and long term goals.

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UK Challenges in Manufacturing

UK Manufacturing and Economic Uncertainty

The manufacturing industry is an ever-changing sector, with new challenges occurring each year. The complexity of these manufacturing firms in the UK majorly arises from external rather than internal forces. One of the most eminent challenges facing the industry as per the 2016 survey is the economic uncertainty. With the recent Brexit vote, whereby the UK voted to leave the European Union, it remains very difficult to predict what will happen economy wise in the next coming months or years (Martinez et al., 2010: 450). Most manufacturers are concerned of the negative impacts that Brexit could cause especially to their businesses. Also, the post-referendum exchange rates volatility has greatly impacted on the UK manufacturing industry with its effect expected to continue over a prolonged and unknown period of time. The imported raw materials and components have become extremely expensive with exports becoming cheaper and more accessible to the potential buyers. Generally, this means there has been a rise in the pound sterling thus making it unpredictable on what the future holds for the manufacturing industry (Baines et al., 2009: 550).

Manufacturing Skills Gap

Another major threat to the manufacturing industry is the skills gap. Research surveys show that the U.K is not producing enough engineers. The baby boomer generation is almost reaching their retirement age, leaving a massive skills gap in the workforce. Despite the constant effort by the manufacturing industries to do as much as they can to inspire a new generation of manufacturing employees, there still remains a void in terms of skills and experience. It is important that the manufacturing industries reach out to local schools and universities to ensure that manufacturing based subjects are taught as a way to promote the industry (Martinez et al., 2010: 452). For example, the introduction of the apprenticeship levy will help create a smooth transition in the workplace with the aging workforce passing on relevant skills to the younger employees, who are the potential future workers in these organizations.

Cyber Security in Manufacturing Industry

With the recent advancements in the technology sector, the manufacturing industry has had to deal with numerous issues of cyber security and data protection. A recent report obtained by the U.K manufacturers association shows that the industry has been very reluctant when it comes to investing in cyber security planning (Martinez et al., 2010: 453). More precisely, the report points out that 56% of the manufacturers hardly pay attention to cyber security threats. Nonetheless, with the technological world fast changing and data remaining a key player in the progressivity of the industry, investing in cyber security is mandatory. If not, the businesses will find themselves more susceptible to cyber breaches , intellectual property crime, and infringement cases. As of April 2016, the U.K manufacturing industries were governed by the EU General Data Protection Regulation, but the recent Brexit, it yet remains unclear whether the U.K will continue to follow the E.U set rules and regulations or will have to establish their own to protect its companies from cyber attacks(Baines et al., 2009: 551). The manufacturers, therefore, have to get prepared as the data protection errors will now be more expensive than they ever were before.

Addressing the Challenges Through Management Accounting Techniques

Management accounting refers to a specialized field of accounting which provides very critical information to the people inside the organization. It is a process that creates and uses cost, quality and time-based information to help in the decision-making process of a company (Abdel & Luther, 2006: 339). The practice has been in existence since the early 19th century and continues to play an essential role in the running of the operations of any business especially in the manufacturing industry. The major techniques that can be used to help address the challenges facing the UK manufacturing sector include budgeting, break-even analysis, and variance analysis. They all play key roles in enabling the organization's plan, direct and control operating costs in order to achieve profitability. With the challenges the industry is facing with the present global recession, there is a need to integrate these management techniques as a way to strive for improved profitability (Ayvaz & Pehlivanli, 2011: 149).

Budgeting in Management Accounting

Budgeting is of critical importance in the manufacturing industry as it helps predict and control activities within an organization. In the UK manufacturing industries, budgeting can be used to help allocate relevant entity resources in accordance with the firm's goals and objectives (Scapens, 2006: 14). There are two major types of budgeting: Activity Based Budgeting and Activity Based Costing. Activity Based Cost is best suited for the improvement of any costing system based on the use of resources to produce the required product or service. It identifies the cost of a product or service in an activity. Moreover, it uses multiple overhead costs to show indirect costs by activities that consume those costs. On the other hand, Activity Based Budgeting refers to budgeting resources according to the target activities. It differs from the ABC in that it focuses more on the activities rather than the cost objects. For the manufacturing companies, ABB is the most preferred as it is more comprehensive and precise giving a full breakdown of the costs expected (Abdel & Luther, 2006: 342) . Use of budgeting strategy on a regular basis helps the companies develop a long-term planning and control of the business costs.

Performance Evaluation Techniques in Management Accounting

Performance evaluation is another key management accounting technique that helps manufacturing industries deal with a variety of challenges. The performance over the years has been measured based on financial measures e.g. standard costs, profits, and variance returns. Nonetheless, there is a need to use other performance measurements too such as benchmarks, Economic Value Added mechanism and nonfinancial measures directly associated with the customers, the innovations, and operations and the employees respectively (Dunbar, 2013: 54). The company's greatest resource are the employees, and they have to be carefully trained and motivated to attain satisfaction, hence increasing the overall output of the manufacturing enterprises of the country's economy.

The strategic analysis also helps when dealing with the effect of the competitors of the organization, especially in the making of decisions and cost structures for future operations (Alkaran & Northcott, 2006: 156). The information obtained from the various management accounting techniques is compiled to enable the organization to make decisions both internally and externally based on whether the goals are short term or long term. When making short-term decisions, the organization can use tools such as Cost Value Profit analysis which helps the manufacturer to know the amount units of product required for sale into the break even. Customer profitability tools can also be adopted to ensure the customers needs are met while gaining profitability (Williams et al., 2010: 34).

Conclusion and Recommendations

Despite the manufacturing industry being a key contributor in the UK economy, research shows a steady decline in its economic output in terms Gross Value Added for many decades. More specifically, the GAV has fallen from 30% in the early 1970s to less than 10% in 2014 (Dugdale & Green, 2006: 45). It is evident that the challenges affecting the UK manufacturing sector can be solved by the integration of various management accounting techniques such as budgeting, strategic planning, performance evaluation measures among many others. However, with emerging technological trends, there is a need to revise the already present management accounting techniques to come up with better and more efficient tools.

The most recent tools recommended to be used in the UK manufacturing sector include the balanced scorecards, which combines both nonfinancial and financial strategies to give a holistic measure of the company performance and also at an individual level. Another modern tool that could be recommended is real-time inventory management which uses radio frequency identification. These RFID tags are attached to the company products thus enabling the company to trace each inventory item. There are also a variety of other modern management accounting methods that can be used. Nevertheless, the UK manufacturing industry should strive to use these techniques to acquire more business profitability and revive the already declining economy.

Bibliography

Abdel-Kader, M. and Luther, R., 2006. Management accounting practices in the British food and drinks industry. British Food Journal, 108(5), pp.336-357.

Alkaraan, F. and Northcott, D., 2006. Strategic capital investment decision-making: A role for emergent analysis tools?: A study of practice in large UK manufacturing companies. The British Accounting Review, 38(2), pp.149-173.

Ayvaz, E., & Pehlivanli, D., 2011. The use of time driven activity based costing and analytic hierarchy process method in the balanced scorecard implementation. International Journal of Business and Management, 6(3): 146-158

Baines, T.S., Lightfoot, H.W., Benedettini, O. and Kay, J.M., 2009. The servitization of manufacturing: A review of literature and reflection on future challenges. Journal of Manufacturing Technology Management, 20(5), pp.547-567.

Dugdale, D., Jones, T., & Green, S., 2006. Contemporary Management Accounting Practices in UK Manufacturing. Oxford: CIMA Publishing

Dunbar, K., 2013. Economic Value Added (EVA TM): A Thematic-Bibliography. The Journal of New Business Ideas & Trends, 11(1), p.54.

Martinez, V., Bastl, M., Kingston, J. and Evans, S., 2010. Challenges in transforming manufacturing organizations into product-service providers. Journal of manufacturing technology management, 21(4), pp.449-469.

Scapens, R.W., 2006. Understanding management accounting practices: A personal journey. The British Accounting Review, 38(1), pp.1-30.

Williams, J., Haka, S., Bettner, M., & Carcello, J., 2010. Financial & managerial accounting: The basis for business decisions (15th ed). Boston: McGraw-Hill.