Management Accounting Innovation

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Introduction

Management accounting entails preparing management account with the sole purpose of coming up with accurate timely financial statistical information that the accounting management agent requires. The prepared reports point out the available cash, unpaid debts, raw materials and underway inventory. Management account differs from one firm to another according to what policies and structures dictate (Seal, Garrison and Noreen, 2009, p. 782-785).

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As per Chadwick, management accounting utilises accounting, management plus finance with key edge skill to push for successful businesses. It as well plays a key role in informing managers on financial consequences of various projects started. In addition, management accounting presents opportunities to undertake internal audits and explain the strong effect of competitive concerns surrounding business enterprise (Chadwick, 2000, p. 36).

Innovation in management accounting has played a vital. It has improved the quality of information and management within institutions since mid 1980s. These resulted to the adoption and implementation of innovative management accounting tools, practices and concepts. Key innovations discovered include activity-based cost (ABC) management, the balanced scorecard, business process reengineering (BPR), strategic cost management and its components including value-chain analysis and organisational-based cost driver analysis, and target costing.

This essay supports the argument “Management Accounting Innovation has been one of the core themes driving modern organisations”. The essay reviews areas of innovation and growth, changes in organisations and adoption of innovation strategies, and sustainability of management accounting innovation in both administrative and technical departments to support the above statement. This field has evolved from traditional approaches to management accounting to provide solutions to dynamic challenges facing modern organisations.

Management accounting Innovation and growth

Most scholars have noted that management accounting innovation has been driving the growth of organisations for the last 15 years. Management accounting innovation has some approaches that modern organisations have used. These include the balanced scorecard, activity-based costing (ABC), target costing, and strategic cost management among others.

Most scholars concur that the use of management accounting innovation has been responsible for driving organisational growth in modern organisations. However, not much research exists to support such claims. All the same, most organisations have adopted the use of innovation in management to run most of their core functions due to the resultant benefits of such innovations.

Activity-based costing (ABC) involves giving costs and organisational processes based on their needed requirements. In this case, activities refer to daily routines an organisation undertakes such as provision of services to customers. ABC approach to management accounting innovation takes into account cost-cutting strategies in acquiring raw materials and avoids wasteful tendencies in production processes. ABC attempts to emphasize production activities that can reduce costs.

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These include provisions of services and various processes of products production. The approach does not focus on direct labour as a means of reducing costs. Emsley notes that management control theory posits that management accounting acts as a management tool of control that guides an organisation in the right direction (Emsley, 2005, p. 158). This implies that management accounting innovation forms the central part of organisational operations in terms of defining its objectives, gauging achievements, and accounting for rewards and punishment in performances.

According to Chadwick, management accounting must have provisions for existing or emerging trends in the business environment (Chadwick, 2000, p. 39). This is because failure to take notice of such occurrences may affect the performance of an organisation negatively. However, reactions to such changes depend on the internal components of an organisation such as actions, executives’ perceptions, and course of actions to the organisational scenarios.

In this case, the organisational management teams must modify their management accounting information to consist of all elements in the production systems. These must include both positive and negative elements. The information contained in the management accounting system has the capability of transforming actions for the benefits of an organisation. Modern organisations tend to deviate from traditional approaches to management accounting that tended solely affect management decisions.

Scholars have observed that such traditional approaches to management accounting were not effective. This created the need for management accounting innovation. The traditional management accounting tended to focus on labour efficiency as the basis for determining production, timelines were short, methods of accounting for fluctuating costs were not clear, the approaches did not adequately account for linkages with other internal systems, and inventory tended to be the main point of focus at the expense of decision needs.

As these methods proved ineffective in the dynamic business environment, management discarded them for other effective approaches. The point was that these approaches could lead to deceptive representation of an organisation due to their relatively short period of assessment. Kaplan and Norton note that it is only logical and relevant to tie productive capacity with resources and costs invested in them as these are the main driving forces of measurements against measurable outputs (Kaplan and Norton, 2001, p. 89).

Kaplan further notes that during the 1980s innovations in the field of management accounting theory and practices happened due to scope, and rapid technological changes that took place in the same period. Many critics note that most management accounting innovations of the 1980s such as ABC came as a result of the criticism that the traditional approaches were not serving the industry effectively, and were insensitive to changes in the business environment. In addition, they could not cope with rapid changes that took place during the 1980s and 1990s (Eaton and Innes, 2005, p. 78).

Management Accounting Innovation

Organisational management accounting considers innovation as new ideas, approaches, practices or objects that an organisation adopt for the first time. This definition indicates that change is a necessary component of innovation. However, not all changes constitute innovation. Given this approach, we can define management accounting as the “practice of measuring and reporting financial and nonfinancial information needed by managers make decisions that are geared towards the achievement of organisational goal and objectives” (Vollmer, 2009, p. 141).

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Vollmer looks at management accounting as a social science and argues that management accounting has the characteristics of technological changes and innovations that form part of the modern organisation. In this case, we can argue from the point of view of systems theory approach with regard to the recent development in management, accounting innovations that have transpired in the recent past.

Systems theory approach posits “all parts of a system are related to each other, and any change in one part of a system, or an organisation may require appropriate changes in other parts of the system, or organisation; otherwise, the system may not work properly” (Vollmer, 2009, p. 142).

In consideration of Vollmer argument, we can conclude that recent changes and innovations in management accounting are consistent with the systems theory approach. Thus, if we look at recent technological innovations in organisational processes such as manufacturing, communication, and information systems, we may align them to management accounting strategies and practices together with costs.

Systems approach theory can also address the adequacy of changes and innovations that happen in the management accounting and costs. For instance, we can look at implemented changes in other sections of the organisation and relate them to the level of satisfaction that an organisation derives from such innovations in management accounting.

A number of studies indicate that most management accountants have not been fully able to drive innovation in organisations. Since 1980s, the industry experts have been developing strategies of transforming ineffective accounting practices. The experts propose dynamic and innovative systems to management accounting.

The main transformation in the field of management accounting innovation that differentiates traditional and modern approaches are visible in cost control approaches (Coombs, Hobbs and Jenkins, 2005, p. 6). The modern management accounting has adopted cost control as the basis for control whereas the traditional approaches relied on variance analysis as the main technique.

The traditional approach compared the actual costs against budgets in raw materials, and labour in production processes. Accountants have developed the traditional approach and merged it with modern aspects of technological innovations that work to fit certain functions in the modern business field. It blends well with life cycle cost analysis and activity-based costing.

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Drury notes in a life cycle costing, the management can “alter the cost of manufacturing of a product when it is still in the design stage” (Drury, 2008, p. 105). In modern manufacturing organisations, the levels of activities that occur in the productions processes determine manufacturing costs in organisational processes. Still, this can ensure efficiency through minimising breakdowns and issues of quality control.

Kaplan and Norton look at the role of innovation in creating a learning organisation through a balanced scorecard (Williams, 2004, p. 5). They observe that modern organisations have to strive continuously to succeed in the competitive global markets. They note “a company’s ability to innovate, improve, and learn ties directly to the company’s value” (Kaplan and Norton, 2001, p. 91).

This implies that modern organisations must create new products, increase customers’ experiences, and enhance efficiencies. This is the only way an organisation can capture new markets and create value for shareholders. The fundamental issue in this case scenario is a continuous improvement and value-creation. Thus, management should relate organisational objectives to innovation and learning. At the same time, they must relate such approaches to enhancing the company’s sales from new products.

Technical and Administrative Initiatives: Innovation sustainability

Innovation in an organisation can take both technical and administrative initiatives. Management accounting innovations tend to favour both sides. Innovations in organisations stretch both to technical and administrative elements in their implementation. This makes any evaluation process focus on both elements of administrative and technical initiatives. We also have to acknowledge that benefits an organisation derives from implementation of innovations are indirect noticeable in organisational behaviour change.

We can only notice the benefit of enhanced management accounting after its implementation. Today, innovation forms a crucial component of business strategy. Thus, managers must plan from innovation point of view as a competitive strategy. This implies that organisations must understand the core concepts of innovation.

However, the challenge is that most organisations do not have a clear definition of innovation. Chenhall provides some components of innovation common to all organisations in terms of mobilisation and generation of idea. These include “screening and advocacy, experimentation, commercialisation, diffusion and implementation” (Chenhall, 2005, p. 340). It is the willingness of the participants that determine the success of an innovation process.

This means that participants give their diverse outputs, concerns, and tensions common in every stage. These stages implement innovation in organisations a difficult task. Therefore, all participants in the innovation processes must work as a team in supporting innovation initiatives. Organisations must plan their innovations strategy to ensure that all members participate, and ensure adequate incentives in terms of rewards, goals, and achievements. This can help management and other staff members participate in processes of innovation.

Management accountants are vital in the corporate world today due to their numerous roles and responsibilities to organisations. They are responsible for giving financial and nonfinancial report as managers require them. Management accountants guide the business team and are keys in developing innovation process. Management accountants direct their energy towards achievement of organisational goals and objectives.

Other activities management accountants undertake include forecasting and planning, reviewing and monitoring costs core to the business. Such responsibilities enhance accountability to the finance and the business team together (Drury, 2008, 106). Therefore, accountability is key to the management team than it is to the corporate finance department as it is in charge of development of new products costing, sales management operations research, and analysis of the clients profit.

However, the financial department enjoys the privilege of developing financial reports. It assembles data to source systems and risks as well regulatory reports as it takes responsibility in putting together financial information from all segments of the organisation.

Management accountants utilise relevant information they access to guide them in decision making geared towards producing positive results in the organisation irrespective of the set standards. According to Abrahamson irrespective of the flexibility there are key concepts that widely affect the practice. He further states “financial institutions and production sectors use price transfer as an application in management accounting innovation” (Abrahamson, 1991, p. 596).

The bank uses this method in transferring prices through the rates of interest to borrowers. The bank’s corporate treasury department sets aside some “funding charges to the business unit for their usages of the bank’s resources, when they issue loans” (Abrahamson, 1991, p. 597). Such a concept serves as a rule for judging accounting in bearing identical applications in the business field. Adaptability in management accounting aid the management accountant in benefiting from the knowledge and experience from different areas. This includes marketing, efficiency auditing, valuation, marketing, valuation, pricing and logistics.

Seal et al state categorically that management accounting extends extensively throughout three key areas. First, it encompasses strategic management that includes developing the duty of the management accountant as an appropriate partner in the organisation. The second area entails performance management that focuses in developing the skill of decision making in business. Third is management and how it is a key in building underlying set of ideas and practices of recognising reporting, measuring and managing risk in achieving the organisation’s objectives (Hopper, Northcott and Scapens, 2007, p. 67).

Conclusion

Management accounting innovation success depends on the organisation’s management accountants who demonstrate high levels of innovativeness. Management accountants should be a part of decision-making to determine whether the innovation is suitable for the organisation and understand the value in it.

Some studies also reveal that most firms neither understand nor appreciate the role of accountants, innovation, and their contribution. This is because any criticism of a new project only goes to the project management team, and never to the financial team. However, we must note that management accountants make financial recommendations that ensure the success of innovation initiatives.

Given the above scenario, we must also understand why some organisations may be slow in adopting management accounting innovation. Some studies have indicated various factors such as unwillingness from the executives, organisational strategies, factors that influence diffusion of management accounting innovation such as communication channels structures, dependency on financial accounting, and lack of enough role models (Askarany, 2010, p. 2).

The current business environment is dynamic, competitive, and there are significant changes in terms of customer management, service delivery, and products innovation. Competition among companies has gone beyond quality and prices of products. It now includes customers’ satisfaction, reliability, customer retention, and service delivery among others. Still, nonfinancial activities and issues such as corporate social responsibilities have become essential elements for consumers in decision-making processes (Naranjo and Mass, 2007, p. 4).

Consumers tend to gauge organisations using such methods and measure quality expectations in their products. There is a shift from the product side to the customer as industry environments become competitive. These are mainly nonfinancial approaches. We can use management accounting innovation approaches such the balanced scorecard and strategic cost management to implement both financial and nonfinancial operations.

This enables the organisation achieve both short and long-term objectives in all areas most crucial to success such as internal business operations, innovation, customer, and learning. Such complex approaches needed the innovation in management accounting as traditional accounting could not offer efficiency in dynamic business environment. Its scope was narrow to support the long-term development initiatives of modern organisations. Therefore, it is the role of management accounting innovation to drive growth and business in modern firms (Brooks, 2000, p. 4).

References

Abrahamson, E. (1991). Managerial fads and fashions: the diffusion and rejection of innovations. Academy of Management Review, 16(3), 596-610.

Askarany, D. (2010). A comparative investigation into the diffusion of management accounting innovations in the UK, Australia and New Zealand. Research executive summaries series, 5(9), 1-11.

Brooks, A. (2000). Management Accounting Innovation and Organizational Learning. Management Accounting Innovation Review, 1(1), 4-45.

Chadwick, L. (2000). Essential Management Accounting. New York: Prentice Hall.

Chenhall, R. (2005). Integrative strategic performance measurement systems,strategic alignment of manufacturing, learning and strategic outcomes: an exploratory study. Accounting, Organizations and Society, 30(5), 395-415.

Coombs, H., Hobbs, D. and Jenkins, E. (2005). Management accounting: Principles and applications. Thousand Oaks: Sage Publications.

Drury, C. (2008). Management and Cost Accounting. London: Thompson Business Press.

Eaton, Graham and Innes, John. (2005). The Handbook of Management Accounting (3rd ed.). London: CIMA Publishing.

Emsley, D. (2005). Restructuring the management accounting function: a note on the effect of role involvement on innovativeness. Management Accounting Research, 16(2), 158-170.

Hopper, T., Northcott, D. and Scapens, R. (2007). Issues In Management Accounting (3rd ed.). New York: Prentice Hall.

Kaplan, R and Norton, P. (2001). Transforming the Balanced Scorecard from Performance Measurement to Strategic Management: Part I. Accounting Horizons,15(1), 89-101.

Naranjo, David and Mass, Victor. (2007). How CFO’s determine management accounting innovation: An examination of direct and indirect effects. Management Accounting, 1(1), 4-20.

Seal, W., Garrison, R. and Noreen, W. (2009). Management Accounting. New York: McGraw-Hill.

Vollmer, H. (2009). Management accounting as normal social science. Accounting, Organizations and Society, 34, 141-150.

Williams, K. (2004). What Constitutes a Successful Balanced Scorecard? Strategic Finance, 86(5), 4-7.

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