Service Industry Application of Managerial Accounting Concepts

Organizations have recently been exploring for strategies to maximize the benefits of managerial accounting. Obviously, one of the ways in which businesses can profit from managerial accounting is through the effective application of management accounting policies and their implementation in day-to-day operations. Management accounting should be embraced and accepted as a critical component of internal operations to guarantee the greatest possible output. According to the IMA (2008), management accounting is a field of accounting that assists businesses in making decisions, developing organizational strategies, implementing decisions, and reporting on performance. Management accounting is therefore critical to organizations growth and processes as it assist an organization to analyze its desired goal, set plans towards achieving that goal, implement the various strategies and measure performance. This is the main reason why management accounting has been adopted as one of the processes alongside financial accounting. In the past organizations relied on financial accounting to make decisions but due to its shortcomings the need for incorporation of management was felt. Incorporating both financial accounting and management in organizations is a key asset as they work well together.

One of the organizations which is a key beneficiary of management accounting is manufacturing industry. A manufacturing industry is involved in converting raw materials into finished products. According to Alleyne, P., and Weekes-Marshall, D. (2011), management accounting in firms in manufacturing industry plays a key role and is a key promoter towards its success. Through the various management accounting practices such as budgeting, planning, evaluation of performance and decision making, the manufacturing industry is able to grow and prosper easily. Management accounting also provides timely and crucial information which could be used for analysis by other organizational departments. It is therefore a crucial support system in a manufacturing industry.

Due to the change in organizations processes and systems, there has been a rise in the service industries. Management accounting can be applied in service industries too to ensure that the service industries are performing well. According to Stigler (1956), a service industry is an industry in which what they are offering to its customers is a personalized service. Unlike manufacturing industries which provide commodities, service industries provide a service which is not tangible but felt. Examples of service industries include insurance companies, hospitality, banking, travel companies and communication. According to Ramamoorthy (2000) a service industry is heavily dependent on the technical knowhow and mental abilities of the users or service as it is personalized.

Implementation of management accounting will differ on both manufacturing industries. This is because of the different features that the commodities and services have. According to Shostack (1977), there are four main features that differentiate commodities or goods and services. These features include tangibility, homogeneity, inseparability and perishability. In each of the four features the accounting treatment of each differs from each other.

Tangibility is the ability to touch an item. Commodities are tangible while services are intangible. For example in a manufacturing industry one can touch the products being manufactured while in service industry one is not able to touch the service provided. One can only be able to feel the experience. Homogeneity is the ability of two items being similar. In manufacturing industry two products going through one manufacturing process are similar unlike a service industry where services are not similar because of the human factors which are not constant due to circumstance service providers’ face which are beyond control. The third feature inseparability is the ability to separate the good or service from the service or goods provider. In the manufacturing industry it is possible to separate the goods from the industry while in service industry it is not possible to separate services from the provider. The customer has to be there so that he can enjoy the services. The forth feature perishability refers to the ability to store a product or service for future use. The manufacturing industry has the ability to store or keep in stock goods for future use and sale but in service industry it is not possible to store a service for future use.

These four main features are the main causes of differences in management accounts. This is because it mainly affects the valuation of stock, storage of stock and sales of stock. Based on the features the treatment of stock will differ due to the fact that in services it will be difficult to differentiate fixed costs and variable cost as both are provided concurrently, occurrence of production and consumption at the same instance because of inseparability feature of services, lack of accurate and consistent standardization ability of service due to the customer services factors involved which eliminates ability to initiate proper planning and lack of tangibility of services which eliminates the ability of measuring stock. According to Cinquini, L. and Tenucci, A. (2011), the unique features have led to development of a new methodology of measurement to aid in management accounting. The new methodology include utilization of activity based management, balanced scorecard and strategic accounting methods.

An example of a service industry is the hospitality industry. The hospitality industry has been the backbone of economic growth. It aims at providing customer service to its customer service. The hospitality industry lacks the ability to store its main asset, experiences. Since it aims creating good experiences to its customers through customer service one cannot be able to store the service. Therefore the concept of recording stock is not possible since the service may be sick or affected by weather which will affect how he provides the service. It is not possible to value the quantity and quality of service accurately and in a standardized manner since it is personalized and the experience differ from one person to another. Also it is difficult to sieve out fixed and variable cost of providing a service since customer services offered to client are offered as one package. Therefore separating cost is a challenge unlike in goods. Also it may be difficult to have the same or standardized customer service experience since one is unable to match two people offering the same service, one might be a learner and the other might be experienced.

It can be therefore be concluded that concepts applied in management accounting in manufacturing firms are different and cannot be applied in a similar manner. Each requires a different approach so as to be able to obtain accurate means of measurement of costs and be able to manage costs in the best way possible.

References

Alleyne, P., & Weekes-Marshall, D. (2011). An exploratory study of management accounting practices in manufacturing companies in Barbados. International Journal of Business and Social Science, 2(10).

Cinquini, L., & Tenucci, A. (2011). Management Accounting for Service: A Research Agenda. Capri, Istituto di Manag., Pisa.

Institute of Management Accountants. IMA. (2008). Definition of management accounting. United States of America: Institute of Management Accountants, IMA.

Ramamoorthy, C. V. (2000). A study of the service industry--Functions, features and control. IEICE Transactions on Communications, 83(5), 885-902.

Shostack, G. L. (1977). Breaking free from product marketing. Journal of marketing theory and Practice, 41 (2), pp. 73-80.

Stigler, G. J. (1956). The Classification and Characteristics of Service Industries. In Trends in Employment in the Service Industries (pp. 47-60). Princeton University Press.