Analysis of Management Accounting Innovations in Organizations

Introduction

Management accounting can be defined as the process of preparing management accounts that are aimed at providing accurate and timely financial as well as statistical information needed by accounting management agents within a company such as; department managers and the chief executive officer for important decision making. The financial reports indicate the amount of cash available, accounts receivable, outstanding debts, raw material and in-process inventory. Management accounting however may vary from firm to firm as provided for by policy and structure in the company (Seal, Garrison & Noreen 2009, p. 675-680).

Management accounting innovation in organizations

According to Emsley (2005, pp. 14–16) several management accounting innovations have in the last fifteen years been developed for use by most organizations, top on the list being Activity-Based Costing (ABC) and the Balanced Scorecard (BSC). Researchers in this field have attested to the fact that the adoption of ABC and BSC coupled with other innovations has been beneficial for most firms. On the contrary, the lack of hard evidence to support this fact has caused the skeptics to term innovations anecdotal and non-systematic. Internationally, nonetheless organizations have either adopted the innovations; are in the process of adopting the innovations; or are determining the net benefits resulting from the adoption of the innovations. A common characteristic in all three cases is that most of the organizations are relatively larger. Activity-based costing acknowledges that successful modern factories must not only reduce the raw material cost and expenses but must also avoid activities that disrupt and cause delays in the production process. In activity-based costing, less emphasis is placed on direct labor as a cost driver. However, the method is more concerned with the production processes as well as the cost of service providers. Given the management control theory, management accounting is understood as a mechanism for management control that provides surveillance within an organization (Emsley 2006).

Role of Management Accountants’ in driving innovation

Innovations in management accounting are considered as an idea, practice or object that is recognized as new by the organization that is adopting it. The perception as new denotes that all innovations involve change, although not all changes involve innovations.

Management accounting is defined as the practice of measuring and reporting financial and non-financial information needed by managers to make decisions that are geared towards the achievement of organizations’ goals and objectives. However, the role of Management accountants has not been adequate in driving innovation in organizations according to the results of a number of studies conducted in the field. A study to determine the role of the CFO in the adoption and implementation of new management accounting systems reveals a number of conflicting explanations. Firstly, individual differences between CFOs dictate the organization’s use of innovation in management accounting. Consequently, the individual characteristics of CFOs check the level to which environmental contingencies are rationally adopted b organizations. Secondly, a study on the dissemination of management accounting practices in the public sector explores the manner and methods of diffusion and drawbacks to the adoption of the innovations. The results of the survey conducted on public sector managers indicated that the adoption of management accounting innovations in the public sector organizations is to a greater extend influenced by the government (Abrahamson 1991, pp. 586-592).

Role involvement and appropriateness of innovations

Perera, McKinnon & Harrison (2002. p. 140-145) point out that effective innovation requires that management accountants have a considerable amount of information coupled with the fact that they comprehend its appropriateness to the needs of a unit business manager. The appropriateness of innovation will largely depend on whether or not a management accountant has a business unit orientation under which they work or report to. Therefore, in the process of operating within close proximity with the unit managers, the management accountants are better placed to get wind of the information that is of vital value towards the unit’s decision making proves. Consequently, they are more likely to match the kind of information produced with the appropriate innovations. Although constraints from functional accounting might seem to affect management accountants with a business orientation, the need by the innovations to portray the changing business needs presents the innovations as relative to existing practice. On the contrary, however, functionally-oriented management accountants working under the organization’s accounting function will be less familiar with both the decisions made within the business unit and the appropriateness of the information necessary for the decision-making process. As a result, the lack of adequate information will affect their ability to design and implement the right innovations that would have otherwise provided business unit managers with the relevant information (Foster & Swenson 1997, p. 109-113).

Innovations can either be characterized as administrative or/or technical; management accounting innovations are purely radical and administrative. However, most innovations involve new technical and administrative elements and the implementation of some particular innovations necessitates the adoption of other technical and administrative innovations. Therefore, the evaluation of implementation impact is often viewed as a global package of a number of components (both administrative and technical innovations). Additionally, the implementation of management accounting innovation less often results in benefits directly, but rather indirectly through the organization’s behavioral change. The impact of improved management accounting information results in the long run after it has been put into use (Burns & Scapens, 2000p. 3-14).

Role involvement and acceptance of the innovations

Because innovation is a crucial component of an organization’s business strategy, Banker, Chang & Pizzini (2004, p. 1-5) highlight that a successful organizational plan around innovation requires a firm grasp of the innovation process. With little transparency associated with the innovation process in most organizations, Chenhall (2005, p. 395-403) quickly points out that the innovation process involves idea generation and mobilization; screening and advocacy, testing, diffusion and implementation. Most importantly, the success of the innovation process will be determined by the willingness of the participants to work out the different outputs, tensions, and concerns that are associated with each stage.

Incentives to innovate

Although its implementation and subsequent management have proved demanding for most organizations, the concept of innovation and its processes is a crucial component of most business strategies. As such, the complicated processes necessitating the participation of all members in an organization would prove generally demanding and taxing. Therefore, the success of a planned process will cause the management to adopt attractive strategies for the members to fully participate. Incentives in form of rewards, goals achievements and retraining courses would easily tempt an employee into participating in the ‘otherwise difficult’ process of change. On the contrary, the cooperation between different members in the different stages of the process is vital for the smooth running of the activity. In this context, the retraining courses ought to be conducted in unison for the uniformity and transferability of skills to encourage unity, and thus success.

Management Accountants and innovation acceleration

In the process of measuring and reporting financial and non-financial information needed by managers to make decisions, management accountants play a much greater role in the acceleration of the innovation process. The accountants’ effort should be linked with the ultimate activity aimed towards the achievement of organizations’ goals and objectives. In this context, the responsibility rested on their positions would finally contribute towards the speedy achievement of organization’s goals.

The roles and actions of management accountants are sensitive in today’s corporations because they have multiple relationships with the organization. Firstly, they act as strategic partners and providers of decision-based financial as well as operation information. Secondly, they are tasked with overseeing the business team in addition to reporting relationships and responsibilities to the corporation’s finance organization. Therefore, management accountants are involved in planning, forecasting and monitoring business costs as well as computing the cost variances. These functions are the ones that present dual accountability to the finance as well as the business team. Business management accountants should possess higher levels of transparency and accountability as compared to their counterparts in the department of finance because they play key roles in costing products and other activities in the entity. Therefore, they determine the profitability of a business entity at all levels.

Management accountants use the available information to make decisions geared at delivering positive results within the organization irrespective of the set standards because the application of the discipline varies from one organization to another. Abrahamson (1991, 600-612) proposes that despite the flexibility there are fundamental concepts that cut across the practice. For example, transfer pricing is applied to other sectors in the economy apart from the manufacturing sector. It is also applicable to the banking industry to assign the interest rate risk used to lend money to the various business entities. It is through the transfer pricing method, that the corporate treasury department of the bank can apportion the funding charges to the loans that are disbursed to the clients. Through this process, the convention of management having related applications is judged.

The flexibility in management accounting enables the management accountants gain knowledge and experience from various fields as well as functions within an organization like; information management, efficiency auditing, marketing, valuation, pricing and logistics. According to Seal, Garrison & Noreen (2009, p. 780-788) management accounting stretches across three basic areas. Firstly is strategic management which entails advancing the role of the management accountant as a strategic partner in the organization. The second is performance management, which is aimed at developing the practice of business decision making, and managing the performance of the organization; thirdly, risk management, which contributes to frameworks and practices of identifying, measuring, managing, and reporting risks to the achievement of the organization’s objectives (Hopper, Northcott & Scapens 2007).

Conclusion

The first part of this paper examines the definition of management accounting and presents management accounting innovation in organizations. Secondly, the paper describes the practices of various participants in the organization and their contribution to the innovation process. Thus, the roles of management accountants, appropriateness of innovation, acceptance of innovations, the role of incentives, and acceleration of innovation by accountants are analyzed.

References

Abrahamson, E 1991, Managerial fads and fashions: the diffusion and rejection of innovations, Academy of Management Review, vol 16, no. 3 , pp. 586-612.

Banker, R D., Chang, H & Pizzini, M. J 2004, The balanced scorecard: judgmental effects of performance measures linked to strategy, The Accounting Review, Vol 79 no. 1 , pp. 1-23.

Burns, J & Scapens, R.W 2000, Conceptualizing management accounting change: an institutional framework, Manage. Acc. Res. 11 (1), Pp. 3–25.

Chenhall, R. H 2005, Integrative strategic performance measurement systems, strategic alignment of manufacturing, learning and strategic outcomes: an exploratory study. Accounting, Organizations and Society, vol 30, no. 5 , pp. 395-422.

Emsley, D 2005, Restructuring the management accounting function: a note on the effect of role involvement on innovativeness. Management Accounting Research 16:2 , pp. 157-178.

Emsley, D 2006, Discipline of Accounting and Business Law, School of Business, University of Sydney, NSW, Australia

Foster, G & Swenson, D.W 1997, Measuring the success of activity-based cost management and its determinants, J. Manage. Acc. Res. 9, Pp. 109–141.

Hopper, T., Northcott, D & Scapens, R 2007, Issues In Management Accounting, 3^rd Edition, Financial Times Prentice Hall.

Perera, S., McKinnon, J.L & Harrison, G.L 2002, Diffusion of transfer pricing innovation in a public sector organization: a longitudinal case study, Manage. Acc. Res. 14, Pp. 140–164.

Seal, W., Garrison, R. H., & Noreen, E.W 2009, Management Accounting, McGraw-Hill, Pp. 675-788.