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).
Chadwick (2000, p. 676) highlights that management accounting uses accounting, finance and management together with the leading edge techniques required to drive successful businesses. It is a useful tool in advising managers about the financial implications of various projects initiated; it can be used to explain the financial consequences of business decisions made within a company. As an instrumental tool in formulating business strategies aimed at enhancing desirable performance, management accounting offers a platform for conducting internal audits and checks besides being a parameter used to explain the impact of the competitive landscape surrounding a business enterprise.
Management accounting innovation in modern 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 recognizes that in a modern factory avoiding production disruptive events is of more essence than just reducing the costs of raw materials. Although ABC does not consider direct cost as a cost driver, it highly emphasizes activities that determine costs mostly those affecting production of components or service provision. In view of the management control theory, management accounting is understood as a mechanism for management control that provides surveillance within an organization (Emsley, 2006, pp. 42–56).
Management accounting is central to the management and control processes that define the objectives, measures progress and reward or punish performance in organizations. Chadwick (2000, p. 78) argues that management accounting ought to respond to existing or upcoming changes in the business industry because failure will negatively impact the performance of the firm concerned. This is basically due to the discipline limiting management perceptions, actions, and reactions to organizational events. The modification of management accounting information to include both productive and unproductive elements of a system is capable of changing management actions in a manner that could create a positive or a negative decision depending on the information contained in the statistics. Chadwick (2000, p. 123) further states that the focus has greatly shifted away from traditional management accounting practices that were understood to solely influence management decisions. The features of traditional management accounting measurements and managerial implications entailed are:
- Focused on efficiency of labor as the basic determinant of productivity and capacity utilization
- The measurements were tied to the monthly financial cycle raising questions on the relevance and timeliness of standard cost based information
- The variations from standard was used as single information point, it was then added to inventory and cost of goods to return accounts to result in average actual cost values
- The inadequate treatment of indirect costs based on variation caused differences in products or services.
- There was minimum linkage to the other forms of internal performance measurement
- Emphasis was on inventory valuation to the exclusion of management decision needs
- The emphasis on the productive time and effort of the organization
These practices were ineffective since the key features of the organization were ignored; the trends in performance were not trended to provide a long-term monitoring system, rather they were discarded therefore giving a deceptive image of the organization based on a short period of assessment. It is logical for any organization to emphasize the productive capacity of resources invested since the business world is focused on assigning all costs of resources consumed to actual measurable output (Kaplan & Norton, 2001, pp. 87-104).
Role of Management Accountants in driving innovation
Innovations in management accounting are considered as ideas, practices or objects that are recognized as new by the organization adopting the innovations. The fundamental perception as new denotes that all innovations involve change, although not all changes involve innovations. Therefore, 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 was concluded with a number of conflicting explanations. Firstly, individual differences between CFOs dictate the organization’s use of innovation in management accounting. Secondly, a study on the dissemination of management accounting practices in the public sector explored 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).
Since the late 80s accounting experts have been engaged in trying to change the redundant accounting practices, they have advocated for a more dynamic and innovative approach to management accounting. The difference between traditional and innovative management accounting practices can be pointed to by the invention of cost control techniques. In the modern management accounting practice cost accounting is used as the central method while traditional management accountants had variance analysis as their principal technique. The latter was used to systematically compare actual and budgeted costs of raw materials as well as labor used during a production period. The approach is still being used in some companies but it is blended with innovative techniques such as life cycle cost analysis and activity-based costing which is designed to suit specific aspects of the modern business environment. Durry (2008, p. 136) states that the life cycle costing recognizes that the manager has the ability to change the cost of manufacturing a product when it is still at the design stage. This is actually because in most modern factories manufacturing costs are largely determined by the level of activities that run in the factory the key to ensuring effectiveness therefore would be to optimize the efficiency of such activities by minimizing machine breakdowns and quality control failures (Hopper, Northcott & Scapens, 2007).
Role involvement and suitability of innovations incentives
Although innovations can either be characterized as administrative or/or technical initiatives; 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. Evidently, the impact of improved management accounting information results in the long run after it has been put into use (Kaplan & Norton, 2001, pp. 97-99).
Because innovation is a crucial component of an organization’s business strategy, Banker, Chang & Pizzini (2004, p. 1-5) note that a successful organizational plan around innovation requires a firm grasp of the innovation process. Although many organizations have not transparently defined the innovation process, Chenhall (2005, p. 395-403) outlines the innovation process as composed of generation and mobilization of an idea; screening and advocacy; experimentation; commercialization; 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.
Although the innovation process is a crucial component of most business strategies, its implementation and management have proved difficult to most organizations. As such, the complicated process 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 in order 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.
In order for managers to successfully conduct an overall review of the organization’s internal structure, it is paramount to have a closer look into the information available in management accounting. This analysis of the firm’s internal structure allows for the management of the organization’s control functions. Management accounting is responsible for providing a scorecard by which an organization’s overall performance is rated by outsiders. The managers use the same information to prepare various reports including; reports based on how well managers or business units have performed assessed against actual plans and benchmarks, reports geared at providing timely and frequent updates on the key indicators like; orders received, order backlog, capacity utilization as well as sales (Chadwick 2000, pp. 129-138).
In order for effectiveness within the organization, investigations on impending problems on profitability are done using analytical reports. There are other reports which are used by managers to analyze a developing business situation or opportunity such that the decisions made can be geared towards improving the current situation. Management accounting is a vital component in any company’s management system, a better understanding of the same or failure is likely to affect the operation as well as the efficiency within the company (Abrahamson, 1991, pp.526-545).
Management accounting information is the core of any management system if not well handled and analyzed it may lead to making wrong decisions which may affect the company’s operation. It is therefore important that before engaging in any management accounting planning or control the accountants should understand that, accounting information is affected by the modern business environments which are typically dynamic, turbulent as well as complex so accounting systems must be designed in a way that will enable them to withstand such environmental conditions (Coombs, Hobbs & Jenkins 2005, p 25).
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 the organization’s goals.
According to Emsley (2006), 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 charged with the responsibility of managing the business team besides having to report relationships and responsibilities to the corporation’s finance organization. Thus, the activities undertaken by management accountants include; forecasting and planning, variance analysis and reviewing and monitoring costs inherent in the business. These functions are the ones that present dual accountability to the finance as well as the business team. In that case, accountability is more relevant to the business management team as opposed to the corporate finance department because it is responsible for the development of new product costing, operations research, sales management score carding and client profitability analysis (Durry, 2008, p. 124). Because it is tasked with compiling financial data throughout the organization, the finance department will benefit from the presentation of financial reports, regulatory reporting and reconciling of data to source systems as well as risk. It is therefore widely believed that financial accounting is a springboard to management accounting since most corporations are moving from emphasizing financial accounting which is skewed towards compliance to embracing management accounting which is more concerned with value creation and driving success in the business.
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. Transfer pricing, for instance, is a concept widely used in the manufacturing sector as well as the banking industry. This is where a bank assigns the basis interest rate risk across the various lending products as well as sources of funds. Primarily, the corporate treasury department will impose funding costs (in form of interest rates) to the business unit in the process of extending lending products to their clients. At this point, management accounting explicitly elaborates on the presence of similar applications in business.
The flexibility in management accounting enables the management accountants to 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, it covers 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).
The paper examines the definition of management accounting and presents management accounting innovation in modern 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. Therefore, management accounting innovations have contributed a great deal to the success of modern organizations.
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