Management Accounting Innovation - Essay Example

RUNNING HEAD: MANAGEMENT ACCOUNTING INNOVATIONS Management Accounting Innovation Name Institution Date Introduction Contemporary organizations are in critical need of innovation and effective decision making essentially due to the changing business environment. It is against this backdrop that management accounting innovation has become one of the core themes driving modern organizations. According to Foster and Young (1997, p63) management accounting innovation is a newly perceived idea that can be adopted by an organization in order to act as a fundamental design standard for non financial and financial information systems that assist managers in making decisions to attain the objectives of the organization. Modern organizations have therefore in recent years adopted a variety of management accounting innovations, some of the major strategies being the; Balanced scorecard (BSC), the Activity –Based costing (ABC) and the Resource Consumption Accounting (RCA).This particular paper therefore seeks to analyze the notion that management accounting innovation has been one of the core themes driving modern organizations. The scope of the analysis is grounded on evaluating the practical benefits of management accounting innovation systems in contemporary organizations. Management accounting innovations are in most cases assumed to be administrative and radical. However according to Daly (2010, p5) most innovations entail new technical and administrative elements. Proponents of management accounting innovation argue that the application of the approach is potentially beneficial for every modern organization. Activity-based costing (ABC) has in the recent years drawn increased attention in the field of management accounting. Some of the potential functional benefits that can be derived from activity-based costing include: improved quality, cost reduction and reduced manufacturing cyclic time. Benjamin etal (2002, p56 ) highlight that in terms of cost reduction, the ABC approach provides a mechanism for measuring the cost of products or services by initially allocating resource costs to the tasks undertaken by the organization. After the allocation of costs the next step entails the use of causal cost drivers to allocate activity costs to services, products or consumers that gain from or develop demand for these activities. Carolfi (1996, p13) further reveals that the ABC system gives useful information concerning value-added and non-value-added tasks performed by firm. This information assists managers in cost reduction by designing processes and products that utilize less activity resources, therefore raising the efficiency of the existing activities, while at the same time eliminating non value adding activities to consumers. A study conducted by Adams etal (2003, p17) on manufacturing business units situated in the United States indicated that the application of the ABC approach within the manufacturing business has been a valuable tool for cost reduction and the improvement of business processes. From the responses attained from the random sample questioners, managers acknowledged the fact that use of this particular approach in modern organizations has captured the economics of the process of production more closely as opposed to the traditional system of unit cost. ABC basically reduces the variation that exists between the information available to the organization and the information needed for decision making as a result it is possible for organizations to achieve higher profitability and better decisions can also be made. Apart from cost reduction the ABC approach has been potentially beneficial in preventing the disruption of business processes. As it is evident, the modern day business environment is basically unpredictable and unstable as witnessed by the recent global recession which saw the collapse of many business operations globally. Emsley, (2006, p158) acknowledges the fact that modern organizations have to develop effective systems of preventing disruption of business processes such as production, which is as essential as the aspect of cost reduction. Activity based costing has therefore become useful in the sense that it reduces emphasis on direct labour as the main cost driver. On the other hand it emphasizes on activities that drive costs like the creation of product components and service provision. In general it is vital for management accounting to effectively respond to changing business environment and the already existing business conditions (Emsley 2006, p158). As a result through the utilization of activity based costing strategy modern firms are able to emphasize on activities that drive cost such as development of new products and service provision, which can be useful to the organization even within the changing business environment. Activity based costing has also been a useful to in modern organization essentially in terms of enhancing competitive advantage. The contemporary business environment is characterized by increased competition among firms. This is due to increased innovation which has resulted to more substitutes and compliments of services and products within the market. As a result many firms have the basic objective of developing competitive advantage. Empirical studies confirm that competitive advantage can mainly be attained from a firm’s assets or resources. Activity based costing has therefore come in handy for modern organization. Daly (2009, 10) highlights that Activity based costing when applied to a firms pricing strategy is evidently a powerful tool of enhancing the organizations competitive advantage. Daly (2009, 1) also refers to the approach as Activity Based Pricing (ABP). ABC approach seeks to discover the causes of cost, which are referred to as cost drivers. On the other hand the traditional cost accounting approach treats each cost that occurs every time a unit of output is produced. The central model of ABC is that there is existence of a hierarchy of activities. Under this particular assumption, costs are acquired at different periods over the products life. Daly (2009, 3) further reveals that activity-based costing utilizes a common sense procedures to trace the behaviour of cost as a result organizations can undertake proper pricing for the their products. Companies that adopt activity based pricing find that they have developed a competitive advantage essentially in circumstances where their competitors are still using traditional techniques. This is because firms that still use the traditional methods tend to overprice quotes at high values; on the other hand companies using pricing techniques that are activity based attain the benefit of experiencing an increase in the volumes of their average products over time, which also enhances the competitive advantage of the firm (Daly 2009, 4). The Balance Scorecard is another management accounting innovations approach that has been implemented by many modern organizations. The approach is more administrative as opposed to being technical. Adams etal (2003, p 1) highlights that proponents of the BSC system argue that the approach gives a powerful means in which an organization can transform their strategies and visions into tools that successfully motivate performance and communicate strategic plans against the set strategic goals of the organization. Adams etal (2003, p 1) asserts that the value of the BSC approach is that it facilitates the development of consensus across the organizations strategy and vision, therefore enabling managers to communicate the organizations strategies in the entire organization and also focus on the most essential measures. This kind of communication ascertains that employees are aware of the long-term strategy, the relationships between a variety of strategic objectives and the connection between the selected strategic goals and employees actions. An empirical support for this particular claim is from a 1996 survey of the implementation of the Balance scorecard approach by consultation firms. The findings highlighted that 64% of the responds reported a sense of value or satisfaction attained from the utilization of the Balance scorecard approach. The percentage was extensively higher than that attained from other forms of performance measurement methods. The concept of balance scorecard approach has also been successfully utilized by modern firms in the recent years to facilitate better measure of their financial performance or results. According to a study performed in the year 2000 40% of 500 Fortune companies were utilizing this particular approach to assess their performance at the end of the financial year. In essence, the development of the balance scorecard approach in these organizations proved that the traditional financial measures used to evaluate performance were not giving organizations the opportunity to relate measures of financial performance to the organizations long term-objectives. For instance, traditional financial evaluation fails to put into consideration key variables such as levels of customer service, market share within a segment and employee morale. In addition the traditional approach of financial analysis focuses on measuring the past performance of the organization and fails to integrate the drivers of future organizational performance. The balance scorecard system of financial measurement on the other hand has emphasized on how an organization can unite the traditional financial measure to the strategic objectives of the organization, which in most cases entails measures such as being more customer focused, creation of the best service record within the industry and being a leader in the innovation of new services and products. Corrigan, (2010, p1) highlights that these factors are important in the sense that they influence the companies ultimate success. The balance scorecard approach has also provided a benchmark for modern organizations to create a balance between financial performance and strategic management of the organization. Foster and Young (1997, p63) argue that for a long time organizations determined their success through accounting and financial measures, however these methods do not provide the full picture of successful financial performance .The balance scorecard was therefore devised on grounds of helping organizations evaluate their strategies and performance away from the traditional systems which focused on measurement of financial assets. One of the issues in contemporary management accounting concerns the aspect of development of innovation Corrigan etal (2010, p1).This particular issue has therefore resulted to the adoption of longitudinal and cross-sectional research approaches in order to develop effective innovation within the management accounting field (Corrigan etal, 2010, p1).The balance scorecard approach can therefore be described as a tool that offers all the activities within the organization a strategic framework and enhances consistency and clarity in financial reporting. The balance scorecard has also become useful in modern organization essentially in the aspect of resource allocation. The approach has assisted firms to set priorities and also allocate resources based on the long-term strategies of the organization. Webber and Clinton (2004,14) highlight that many managers have utilized the balance scorecards approach in the budgeting process .This entails the alignment of physical and financial resources of the organization. The link between the using the balance scorecard in budgeting entails the calculation of monetary investment and non monitory investment that are necessary for launching new business initiatives. As a result budgets are devised on the basis of effective implementation of the initiatives. The balance scorecard approach in budgeting also entails ensuring that all the initiatives are in line with the performance targets of the organization. Kaplan and Norton, (2001) further argue that organizations that have utilized this approach have attained successful outcomes in their outlined performance targets. The Resource Consumption Accounting is another management accounting innovation approach that has emerged in modern organizations. The approach integrates the German cost management system (GPK) and Activity Based costing discussed in order to formulate a comprehensive system of management accounting , that can finally assist non – accounts with information for making decisions. The RCA approach is grounded on three basic principles. The first principle entails focusing on resources and their consumption in order to understand your resources effectively, their consumption and cost. The second principle entails development of quality structures that facilitate effective resource consumption. Under these particular principle operations are the main drivers of cost, the operations are then modeled, resources used and then cost is applied. This initiative enables the effective management of resource capacity. The third principle entails recognizing the changing nature and the inherent nature of costs. Under this particular assumption, pooling resources begins with inherent cost structures. As the use of resources continues, the cost nature changes, costs that were originally proportional in terms of nature are changed from proportion to fixed costs on the basis of consumption patterns (Keys and Anton 2002, p22). The Resource Consumption Accounting approach has been integrated in modern organizations as a cost management system that can assist managers to make better decisions. This can be attained through the separation of cost behaviours, whereby the RCA approach reduces distortion of fixed cost and idle capacity. These two significant features are essential in resolving the pandemic of insufficient management accounting systems. Keys and Anton(2002,p23) highlights that the RCA approach makes it more easier for managers to comprehend and also reduces the unplanned efforts that managers have to go through in order to in order to acquire the information they require in order to make decisions . RCA tries to break down reporting costs at the lowest level which can further be aggregated in any particular level. For instance, research conducted on American companies highlighted that the RCA approach has the capability improving the trust that managers possess in the organizations cost data, therefore making it easier to make decisions. The RCA approach basically integrates management and measurement of businesses into a system of accounting that reflects openly how the organization operates. Another achievement attained from the Resource Consumption Accounting approach in modern organizations is that it facilitates better control of costs. By treating variable and fixed cost separately, the RCA approach eliminates distortions of fixed costs that exist in many other systems of costing Keys and Anton (2002, 24). This fundamental relationship also gives easier and more predictive forecasting and budgeting. Keys and Anton (2002, 25) further highlight that RCA has also assisted organizations to deliver a sustainable solution for long-term cost management. For instance, the application of RCA in manufacturing industries has over the recent years provided two objectives to the management of funds within the industry; one is the aspect of financial reporting and the other aspect is that it enhances manufacturing cost accounting. Due to the application of the two systems within the manufacturing industry, companies have been able to utilize disciplined methodologies to management the organization and in the control and measurement of systems. After the implementation of these strategies through the RCA approach companies in the manufacturing industry have able develop long-term solutions to Cost management. The application of the resource consumption accounting approach in modern organizations however has limitation such as the system is expensive to implement .In addition extensive planning is required as well a system of integrated EPR. This requirements have proven to be quite difficult for many organizations to fulfill due to the fact that the RCA system is very new and also very few software’s do exist for companies to implement the method . Keys and Anton (2002, 22) however highlights that for the few companies that have adopted the RCA approach, benefits such as improved decision making and better control of costs has been attained. Conclusion From the above analysis what is evident is that management accounting innovation has been beneficial to modern organizations. The aspect of measuring the net benefits of the management accounting innovation approaches such as; the balance score cared, activity based costing and the resource consumption accounting is currently viewed to be one of the major issues in management accounting. It is therefore essential that the field of management accounting should implement more research concerning how organizations can fully take advantage of various innovation approaches. References Adam, S and Fred, A. (2003). Balanced Scorecard, Activity-Based Costing and Company Performance: An Empirical Analysis. Journal of Managerial Issues, Vol. 15,p 17-22. Benjamin P, Foster, K, and Terry J. Ward.(2002). Theory of perpetual management accounting innovation . Accounting, Organizations and Society. Eastern Kentucky University, 4(5). p54-58. References and further reading may be available for this article. To view references and further reading you must purchase this article. Corrigan, P, Thomas D and Lyons, B. (2010). Capital Budgeting in the Context of the Balanced Score Card. Sacred Heart University.p1. Retrived Carolfi, I. A. (1996). “ABM Can Improve Quality and Control Costs,” Cost & Management. P12–16. Daly, L. (2010). Pricing for Profitability: Activity-Based Pricing for Competitive Advantage.p1-10 Retrived From Read More