The role of inventory management accounting with corporate governance in digital age

36 International Conference on Finance, Accounting and Auditing (ICFAA 2018) November 23rd, 2018 Hanoi City, Vietnam The Role of Inventory Management Accounting with Corporate Governance in Digital Age Phan Huong Thao a aThuong Mai University Submission day: 30/10/2018 Review day: 10/11/2018 Acceptance day: 15/11/2018 Abstract For all businesses, inventory plays a very important role in the process of production and business. Consequently, inventory control is essential to make sure that it is enough. If the inventory level is too high, the price will increase, which makes it difficult to compete with our competitors in the market. Conversely, if the inventory level is low, it will reduce sales, causing stagnation in production. In order to manage inventory well, there must be an effective combination between the functional sections in the enterprise, in which general accounting and accounting management in particular are efficient management tools for the managers. By using qualitative research methodology and making a survey in 2017, the article reflects the role of inventory management accounting with administrative functions and positions in enterprises. Keywords: Corporate governance, Inventory, Inventory accounting management. 1. Introduction Inventory Management Accounting (IMA) is a part of management accounting, providing necessary, specific, timely information, suitable for inventory management accounting activities in the enterprise. Inventory Management Accounting not only provides historical information, but also provides directional information to help managers easily analyze, evaluate and make appropriate decisions Inventory Management Accounting always exists in every organization, but the effect of providing information to different audiences will vary, depending on the construction and operation of the accounting system. Businesses in developed countries around the world have 37 developed a modern inventory management accounting system that provides useful information to internal managers to assist them in planning, implementation of the plan and the inspection and assessment of the performance of inventory plans. In order to bring out the best business plan, firstly, enterprises need to know the rules of the market, in addition, they also need to know how to promote and make the most of their available resources in order to find out some logical management solutions that fit their organizational structure. Therefore, the organization of inventory management accounting has always been the top concern of many corporates and is applied to their management activities, because management accounting plays an important role in providing useful, flexible, fast and effective information to serve the management process. However, until now, in Vietnam, accounting system including management accounting, there are still many shortcomings in comparison with many countries. The author makes a quick survey about the application of inventory management accounting in some manufacturing companies in Vietnam in 2017 such as: paper, beverage, pottery enterprises According to the preliminary survey of the author, managers in these enterprises all understand and apply inventory management accounting at a simple level of about 23%; up to 61% of enterprises surveyed said they knew but did not apply, the rest did not know. Fig 1: The percentage of applying inventory management accounting in VietNamese manufacturing enterprises Source: Author’s survey Based on author’s survey, the perception and process of organizing management accounting in the conditions and environment of Vietnamese enterprises, especially in inventory management accounting, still have many difficulties and unavoidable limitations due to some main reasons such as: The enterprises have applied management accounting but the model applied is not scientific and reasonable, the administrators have not paid much attention to the application of management acccounting in business, employees' qualification does not meet the requirement from the manager, the demand of the market, the size of business The factors that affect IMA can be exposed as follows: 23% 61% 16% Inventory Management Accounting Application Simple Application No application No understanding 38 Fig 2: Factors affect inventory management accounting application in enterprise Source: Zwelihle Wiseman Nzuza (2016) 2. Literature review In the present days, as Vietnam has increasingly integrated into international and regional economies, accounting in general and management accounting in particular is a very important factor to create strength for businesses. The role of inventory management accounting for enterprises is expressed in different aspects, specifically: 2.1. IN TERMS OF ADMINISTRATIVE FUNCTION - For planning function: Planning is the important task of corporate governance, it involves building a path to common goals and specific goals of the company. Businesses often formulate strategic plans and operational plans. Inventory Management Accounting plays an important role in preparation of these two types of plans. Strategic plans often have a long-term vision and set long-term financial goals. IMA provides current and predictable financial information with high accuracy whereas the operational plan is usually related to daily tasks. IMA information on each type of goods, department, each type of product at specific times will be very useful for this planning. Through information provided by IMA, managers will have the idea for allocating appropriate budgets for production, preserving, sales, and investment activities to ensure safety and delivery of the whole organization. In order to achieve those goals, the accoungting management system will review the historical data for future inventory cost forecasts. IMA can anticipate some possible challenges to the operations of the business, helping the manager to get prepared and get ready for dealing with potential inventory-related risks. - For organizing function: Administrators should always base on the proposed plan. At the same time, to give direction, business managements also need to have updated information about all activities of the unit on the aspects, locations and objects involved. In the process of implementation, accounting management is always monitored and managed in terms of quantity and value to provide timely information to managers to manage inventory, contribute to avoid losses, minimize costs and capture the market chances to plan Size of business Employee’s qualification Inventory Management Accounting Application Awareness of the administrator Demand of market 39 for possible inventory devaluation, reflect the true value of each commodity. In addition, the presentation of information in the inventory reports covers the financial and non-financial aspects of the company at different times as required by the management, making the the implementation of the plan become easier for directors. - For control and evaluation function: Control is the identification and rewarding activities that brings about targeted results as well as the detection and correction of errors. When controlling and evaluating, enterprises need to define measurement conditions and criteria. Measurement helps to compare plans with results. Inventory Management Accounting plays an important role in measuring and evaluating the results of the unit. Measurement tools related to inventory such as inventory revenue, inventory ratio, etc. can help to provide information on financial capacity, financial responsiveness and opportunity cost, retained earnings and costs related to increasing external financial sources. IMA will indicate which department, when, which issues have delayed or breach the plan so that the executives will take appropriate action. At the same time, from the use of financial and non- financial measures, IMA will help managers identify and evaluate the performance of their work, other current issues that are critical to the planning for the next period. - For decision-making functions: IMA information is a key factor in making corporate governance decisions related to the inventory of executives. The decision- making process of the manager is the selection from a variety of business plans, each of which is considered to include a lot of accounting information. To obtain information for decision making, IMA uses appropriate analytical methods, selects the necessary information and synthesizes them, presents them in a straightforward sequence. This information can be expressed in various forms such as mathematical models, graphs, comparison tables.... so that the administrator can handle quickly and timely. Through inventory reports such as optimal order quantity report, inventory status report according to production schedule ... they will help to provide, analyze and prove the decisions of the administrator. Fig 3: The role of inventory management accounting for decision –making in business Source: Mayanja MK and Vander Poll HM (2011) Inventory Management Accounting Physical information about inventory Moneytary information about cost, revenue of inventory Management and decision – making process Related parties (customers, creditor, government agency) 40 2.2. IN TERMS OF ADMINISTRATIVE POSITIONS - For senior executives (CEOs, boards of directors): These people need accounting information to assess the business situation, set goals and plans to achieve the proposed target. They need to work closely with the accounting department to obtain appropriate and comprehensive reports for specific areas that need to be consulted. Mayanja MK and Vander Poll HM (2011) argued that Management Accounting staff should report to the board about in-depth analysis of key issues in the internal and external business environment based on deep knowledge of asset management activities. In order to help businesses research and implement large financial policies, IMA will synthesize, analyze information on each type of inventory, identify financing sources that can be mobilized at maximum level, cost to pay such as ordering costs, storage costs, storage costs.... Through this, the Board of Directors and CEOs will make appropriate decisions and directions to increase the value of the company's assets. - For middle-level managers, management of functional departments: Due to their assigned positions, these people need detailed, timely and regular information to assess their business situation and implement strategic plans. On the other hand, daily information is also essential to make daily decisions that achieve the company's overall and specific goals. Managers of different levels, with different functions and tasks, will need different information at different times. The information provided by the IMA meets all that necessary requirements. However, businesses in general and business managers in particular, need to determine the true capacity of their IMA staff to make specific requirements. Ehrhardt and Brigham (2009) argued that management accounting contributes to preserving the ethics of business as well as corporate executives. Management accounting in general and IMA in particular, through their work can detect fraud related to enterprises' inventory and report the actual value, from which to effect to the tasks of executives but also ensure transparency and otherwise create reliability for investors. 3. Results and discussion Based on the author’s survey, most of Vietnamese enterprises are small and medium size. They are limited scale and weak financial potential. Therefore, they have not paid much attention for information technology and invested in management accounting. In addition, IMA in Vietnamese enterprises are not really popular, creating a major obstacle to promote the development of management accounting in the area. Many enterprises have not created the link about inventory management accounting between departments, so the efficiency of providing information to managers is very low. Therefore, in order to put IMA into operation, it is popularly applied in state management agencies and the majority of enterprises in VietNam, we need to develop a plan to accelerate the development of IMA in the coming years. Some specific solutions are: - Ministry of Finance should coordinate with specialized agencies to promote propaganda, dissemination and public awareness about the benefits of management 41 accounting, intensifying training and developing management accounting human resources for state employees, enterprises, start-up youth and students. - Vietnamese enterprises need to develop their IMA implementation in line with the requirements and actual conditions of financial resources, human resources as well as their business goals in the future. IMA application requires careful and appropriate effort for this. Specifically: + Enterprises must determine that IMA development strategy is aimed to long term investment rather than short-term investment. Therefore, based on the characteristics of the business activities, managers need to determine the purpose and target participating in IMA. For example: increase the understanding of market and activities of enterprises, promote the brand, reduce costs, increase revenue + Enterprises need assess the impact as well as determine factors that influence the application of IMA such as competitors, customers, demand of market. In addition, management accounting is different from financial accounting, before conducting IMA application, enterprises need to review the internal and external relationships that affect IMA plans to identify bad situations that may occur during the business process. - In the enterprise, the human factor always plays the leading role and is the successful factor of enterprises. Therefore, to keep up with the continuous development of commune progress. Assembly, especially the progress of science and technology, businesses need to strengthen the work training and fostering to raise the professional level for organizations and individuals who participate in network management activities as well as fully exploit the applicants of management accounting. Therefore, it is necessary to train computer experts and to disseminate knowledge about IMA for the management department. Besides, those enterprises need to send staff to attend training courses on advanced management accounting, administration network 4. Conclusion Management Accounting is an area of economic science, creating a useful channel for information management, which plays an important role in supporting corporate governance. The information provided by IMA is a reliable, transparent and timely information system about the responsibility of the executives in administrating and managing the assets of the business. On the other hand, inventory management accounting information facilitates better management functions and aligns business activities with the external environment. It is through the exchange of information that the business, especially the new manager, understands the needs of customers, suppliers' capabilities and other issues that arise in the organization. Therefore, businesses in general and Vietnamese enterprises in particular should consider this type of accounting and therefore have specific measures to develop, organize and maintain an effective inventory management accounting system. 42 5. References: Alan Robert, (1997), ‘Charts of Accounts in Europe: An Overview’, Management Accounting, 75(6), 39-40. Ehrhardt and Brigham, (2009), Financial Management: theory and practice, 13th Edition, South Western Centage learning Garrison, (1998), Managerial Accounting: Concepts for Planning, Control, Decision Making, Irwin, Boston. Mayanja MK and Vander Poll HM, (2011), Management accounting: An instrument for implementing effective corporate governance. Nguyen Thi Thu, (2009), Accounting – Basic for management decisions, Statistical Publish House. Zwelihle Wiseman Nzuza, (2013), ‘Factors affecting the success of inventory control in the Stores Division of the eThekwini Municipality, Durban: a case study’, Durban University of Technology, South Africa