Management accounting is
concerned with collecting, classifying, analysing, and communicating
financial and non-financial information to assist managers. (Garrison
et al., 2008). It is widely appreciated that the service industry has
greatly developed in recent decades, thus, traditional management accounting
has become obsolete for the contemporary business. This essay will discuss
how the development of the service sector has raised challenges for
management accounting whose principles and practices largely refer to
the paradigm of manufacturing. The key issues discussed will
be the development of technology and globalization, cost accounting
issues and the growing influence of customer satisfaction


The development of technology and
globalization has expanded the service industry, causing challenges for
management accounting. Johnson and Kaplan (1987) claimed that Management
Accounting was not keeping up with the growth in technology.
Recent decades show an increasing percentage of the service industry on
GDP in most countries which leads us to question whether management
accounting has been too slow to change despite the rapid growth of technology.
Following research from Bank of England (2017), growth in the service sector
has doubled than that of manufacturing and services now account
for two-thirds of UK GDP. This implies a decline of the manufacturing
sector as it would not be able to keep up with the latest
advancements and current trends, therefore, as (Talha et al, 2010)
describes, Management accounting should adapt to the advancement
of technology. This puts into question whether
management accounting is needed as it is reliant on practices
from the manufacturing sector which is declining. Accounting methods have to be
flexible in order to keep up with services whereas, in the manufacturing
sector, the same policy can be used for years without change.


One of the main issues arising from the
service industry that has challenged management accounting is
cost accounting (Kerr 2008). With increased competition and
technological advancement, it is crucial that managers have correct and
relevant cost information in order to facilitate long-term strategic decisions
as well as day-to-day operating decisions and resource allocation decisions. Modell (1996) states
this has become problematic in the service industry due to the
simultaneity of production and consumption along with the absence
of inventories due to services being intangible. Within the service
sector, many cost objects can be identified which can
be very challenging for cost allocation purposes and can potentially give
misleading information.


The service sector has had problems coming up
with cost accounting methods because they have been developed from
systems found in the manufacturing industry. The main problem is that
manufacturing companies place emphasis on valuing inventory, which service
firms do not have (Cinquini 2016). Services cannot be stored in inventory,
therefore managers in service industries are less interested in product cost,
but rather, which customers are profitable and which are not. Product
costs can be identified within the manufacturing sector using
standard cost techniques. However, Dearden (1978) states that in
the service industry, product costs are not major cost categories as it is
difficult to calculate. Nonetheless, this means that costs in the
service sector needs to be forward-looking and they need to know
right costs for product profitability analysis. Activity Based Costing is a
tool developed as a response used for such analysis and there are several
service industries where it has started to emerge and will continue to prove


As the service sector continues to rise, the
role of customer satisfaction becomes crucial towards the company’s financial
performance and the way an organization carries out its services. Customer
satisfaction is linked with higher and more stable revenues
(Cinquini 2016). ”value is created when the customer uses goods
or services” (Cinquini, L, and Tenucci, 2016, pg
52). Cinquini (2016) states in the service industry, customers as
co-producers will make operations more difficult. This is because customer
needs are continuously changing and their contribution as co-producers will
create uncertainty. Additionally, Cugini (2007) states that
understanding the relationship between customer satisfaction levels and the
costs the company incurs when delivering customer services is vital to
profitability. However, this raises a challenge for management accounting
because there is little guidance in this area. Measuring customer satisfaction
is difficult as the inputs and outputs are not readily defined or quantifiable.
In contrast to the manufacturing sector, services are intangible and are
characterized by the variability of production and delivery costs
according to individual’s consumption behaviours. Furthermore, in service
companies, financial statements do not accurately show the important
contribution of customer satisfaction.


Overall, this essay has discussed issues
which challenge management accounting such as the development of technology and
globalization, cost accounting implications, and customers as co-producers.
To conclude, management accounting still needs further development in
order to maintain an informative role in
the decision-making process. As the service sector becomes a larger
part of the overall economy, many service companies need to invest in
management accounting systems that meet their needs.