Management Accounting Innovation - Essay Example

Running Head: MANAGEMENT ACCOUNTING INNOVATIONS Management accounting innovation Name Course Lecturer Date Total words [2026] Introduction In today’s volatile business environment, innovation is the cornerstone to successful survival of organizations. Accounting management in this innovation is to ensure that managers are adequately informed about the changing business circumstances. However, accounting managers have been criticized over the years for their lack to innovate. This perception continues to persist in the light of relatively slow implementation rates of management accounting innovations such as balanced scorecards (BSC) and Activity based costing (ABC). Askarany and Yazdifar (2007) nevertheless underscore the importance of management accounting innovations terming it as the driving force to effective managerial practices. Management accounting innovation is a process which enables preparation of management accounts that are aimed at providing timely and accurate statistical and financial information needed by accounting management agents within an organization such as chief executive officers and department managers for purposes of decision making. It is a tool used to explain to managers about the financial implications of various projects being run within the company as well as the consequences of critical decisions. Management accounting provides a platform for conducting internal checks and audits. In a growing competitive landscape, organizations need to stir up management accounting techniques in order to remain on a competitive edge (Balakrishnane et al, 2009). The purpose of this paper is to discuss the contribution of management accounting innovations towards the success of organizations. It begins by examining the role and importance of management accounting innovations in modern organizations. The second part evaluates the role of management accountants in driving the innovation. The third part will discuss how management accountants ensure sustainability of innovations. Role of management accounting innovations in modern organizations Management accounting techniques have been developed and adopted by many organizations over the past few decades. Topping the list are the Activity Based Costing (ABC), Balanced Scorecards (BSC) and tagged costing. Research indicates that the use of these innovations coupled with a wide range of other management accounting innovations has proved to be a crucial tool in gaining a competitive advantage. Nevertheless, there is a gap in research regarding this argument which formed the focal point for debates concerning the appropriateness of management accounting innovations. Opponents argue that innovations are quite unreliable due to the constantly changing technological atmosphere thus places an organization on a risky position. Nonetheless, organizations across the globe have embraced the concept and have actually integrated them into their systems. Epstein and Lee (2010) observe that management accounting innovations have gained a breakthrough in relatively large organizations; those with the financial ability to install these rather expensive innovations. Activity based costing is one of the most important and apparently most common innovation in the field of management accounting. ABC, was in the pasts, predominantly use in the manufacturing context but is now applied in the service sector. This innovation traces overheads in two basic stages. In the first stage, significant activities in the company are identified after which overheads are allocated depending on the proportion of resources used. In the second stage, the activity cost poll is allocates to each product or service depending on the proportion of the cost driver absorbed by product or service. Numerous studies reveal that information accrued from ABC systems serve as platforms for making critical decisions in many areas within the organization such as activity budgeting, pricing, product and service development cost modeling and customer profitability analysis. However, ABC has one notable limitation in that it technically complex and requires considerable amount of money, time and skilled personnel. Hansen and Mowen (2006) note that even with the rich information about the advantages of management accounting innovations such as ABC there is an incredible lack of interest and low adaptation rates by many organizations. One important explanation for low adaptation is what economics term as ‘accounting lag’. This refers to the period between the emergence of theoretical idea to the time they are practically implemented. Accounting lag on the other hand is caused b a number of factors: emphasis on financial accounting, widespread use of computer-based accounting and lack of interest by top management to improve management accounting functions and systems. Hillton (2005) suggests that another possible for slow rate of diffusion of management accounting innovations into organizations is the perceived shortcomings of new technologies. In line with this, Hughes (2005) states that the results of an innovation will be determined by the terms used in the project as well as the well as the levels of innovations applied. Management accounting innovation has reached fever pitch as every organization strives to incorporate it into their system. However, management accounting innovations are only applicable where the information generated from these systems will be relevant in making critical decisions. For instance, even though ABC reduces cost distortion substantially, it implementation would remain pending until the company uses the better cots in its decision making. The benefits of management accounting innovations are highly uncertain and their outcomes are difficult to observe during the initial stages. Unfortunately, many managers spend more time evaluating effectiveness of the innovations which ultimately lead to accounting lag. Resistance to management accounting innovations is partly contributed to presence of an internal labor market for managerial talent which occurs in hierarchical organizations. Research indicates that managers of older well established organizations are more likely to resist management accounting innovations than those of younger organizations. This is termed as ‘perpetual management accounting innovation lag’. Management accountant’s role in driving innovations The issue of changing roles of accountants particularly management accountants has polarized professional and academic debates in recent years. The propagated role change essentially means a transition of their role from the traditional number crunching orientation to a business oriented role whereby they are now part and parcel of the organization’s decision making function. Management accountants do play a fundamental role in the design of accounting innovations such as the ABC systems. Based on their expertise in terms of skills and training they can identify areas that need innovations such as the processes, products or customers and even make predictions of the probable causes of cost deficiencies within the organization. Besides that, based on their wealth of information pertaining to the company’s costing information systems, management accountants are uniquely qualified to make judgments concerning the type and the level of aggregation of accounting systems most appropriate to the organization (Hughes and Gjerde, 2003). According to Model (2009) management accountants are equipped with the understanding of costing methods that can be used to recommend relevant methodologies for the assignments of costs to cost objects and activities. Generally speaking, management accountants use their understanding about cost and information relationships to support accounting innovation systems once they are implemented. As with other management tools and techniques, management accounting innovations require an effective change management process. The main objective of the process is to ensure that it is supported and implemented at all levels of the organization. This calls for the championing of the initiative by top management as well as its acceptance by lower-level managers and other employees. As such management accountants have the central role in educating these involved parties about the systems, particularly its advantages towards attainment of organizational goals. This will also involve effective communication at all levels of the organization. The management accountant will first need to communicate the deficiencies of the current accounting system, the negative effect of this towards managerial decision making and how the new accounting innovation will be able to supply information that is more relevant to managerial decision making process. Communication nonetheless ought to be a multi-way process whereby other employees, other than the accountants can make their suggestions towards the venture. Conclusively, management accountant’s function has been transformed from one of a watchdog and a scorekeeper to one of an active management advisor on areas that require innovation in order to drive the success of the organization. Suitability of innovation incentives and role involvement Unlike other innovations which are contained both managerial and technical functions, management accounting innovations are exclusively managerial. Parker (2001) however notes that most innovations are technical thus most management accounting innovations are usually coupled with technical aspects during implementation stages. Being more of administrative than technical, management accounting innovations do not produce direct quantifiable results rather produces results long after implementation via organizational behavior. Indeed, successful implementation of management accounting innovations is not an easy undertaking hence require formulation of a concrete plan that takes into account all the aspects of the innovation. Basically, an innovation plan contains six basic steps: creation and collection of ideas, advocacy and screening of the ideas, experimentation, commercialization, diffusion and implementation. According to Sisaye (2006), each stage should be well articulated with clear goals and objectives and relevant resources in terms of manpower and finances. Concerns and tensions should be addressed at each stage. As a way of involving all members of the organizations, management accountants ought to establish strategic approaches such as rewards to participants. Training and developing employee in the field is also essential in ensuring effectiveness of the innovations. Sustainability is considered as an economic imperative and a primary moral as well as an important source of business opportunities and risks. Hillton (2005) maintains that incremental changes towards sustainable accounting innovations is not sufficient as a fundamental shift is needed in the way that directors and companies respond towards management accounting innovations. In addition, the role of management accountants needs to be reviewed as they play a significant role in the sustainability of such systems. Hansen and Mowen (2006) assert that management accounting is a core function of managerial decision making hence can prove detrimental if not well handled. It is recommendable for the management to appoint a committee in charge of ensuring sustainability of the systems. The team will be responsible for taking track of the new developments in the market as well as capturing and applying new knowledge into the system. Conclusion Management accounting innovation has been portrayed as a central function in management of modern organizations. It is considered as a crucial tool for gaining a competitive advantage as it serves as a platform upon which management make sound and informed decisions. The central role of management accountants in driving innovations is to apply their skills and expertise to identify areas within the organization that require innovations. Besides that, they have a clear understanding of costing methods thus can make sound judgments on what needs to be changed. Effective implementation of management accounting innovations is purely administrative although it requires technical applications during its implementation. In order to ensure successful implementation, the process requires adequate planning and controls. Sustainability is determined on the knowledge of the innovation by all members of the organization. Mishandling of management accounting innovations would potentially cause management to make wrong decisions. Proper management of the innovations through a selected team is therefore quite imperative. References Askarany, D. and Yazdifar, H. (2007). Why ABC is not widely implemented? International Journal of Business Research, Vol. 7, No.1, pp. 93-98. Balakrishnan, R., Sivaramakrishnan, K., and Sprinkle, G. (2009). Managerial accounting. Hoboken, NJ : John Wiley & Sons. Epstein, M. and Lee, J. (2010). Advances in Management Accounting. Bingley : Emerald Group Publishing Limited. Hansen, D. and Mowen, M. (2006). Management accounting: The cornerstone for business decision . South Western, Mason: Thomson. Hillton, R. (2005). Management accounting : Creating value in a dynamic business environment. NewYork: Mc Graw Hill Jrwin Companies, Inc. Hughes, A. (2005). ABC/ABM – Activity-based costing and activity based management. A profitability model for SME’s manufacturing clothing and textiles in the UK,. Journal of Fashion Marketing and management, Vol. 9, No. 1, pp. 8-19. Hughes, S. and Gjerde, K.(2003). Do Different Cost Systems Make a Difference? Management Accounting Quarterly, Vol. 5, No. 1. Model, S. (2009). Bundling management control innovations: A field study of organizational experimenting with total quality management and the balanced scorecard. Accounting, Auditing & Accountability Journal. Volume 22, issue 1, p.59-81. Parker, L. (2001). Back to the Future: The Broadening Accounting Trajectory. British Accounting Review, December, Vol.33 No.4. Sisaye, S. (2006). The ecology of management accounting and control systems : implications for managing teams and work groups in complex organizations. Westport, CT : Praeger Publishers. Read More