Management Accounting Innovation - Example

Running Head: MANAGEMENT ACCOUNTING INNOVATION Name Course Tutor’s Name Date Word count (references included): 1,993 Management Accounting Innovation Is One of the Core Themes Driving Modern Organizations The Balanced Scorecard (BSC) and Activity-Based Costing (ABC) techniques are among the innovations that are increasingly being used in modern organizations. Others include strategic cost management, competitor accounting, life cycle costing, customer profitability analysis, economic value added measurement, Japanese target costing and strategic management accounting. But are such innovations really effective in organizations? Can they even be considered core themes that drive modern organizations? This essay will analyze the statement that “management accounting innovation has been one of the core themes driving modern organizations”, and will specifically seek to highlight the contribution made by such innovations to organizations. The essay is segmented into different parts, which include the introduction, the analysis section, and a conclusion where the findings in the analysis are recapped. Management Accounting and Managing Accounting Innovations Management accounting is a mechanism used by managers to control and provide surveillance in an organization (Emsley, 2006). By definition, it is a practice through which the management measures and reports financial and non-financial information that is critical to decision-making in an organization and the attainment of goals and objectives therein (Emsley, 2006). It enables managers to define organizational objectives, determine if progress is being made, and motivate good performance through rewards or punishment (Emsley, 2006). It is also the mandate of management accounting to respond to organizational changes in order to avoid such changes having negative consequences on organizational performance (Chadwick, 2000). In order to be relevant (and drive modern organizations) managing accounting innovations arguably need to assist management accountants in their roles. According to Emsley (2006), management accountants are commonly charged with being decision-making facilitators and bookkeepers. The decision-making facilitator role is responsible for providing mid-level managers with information necessary for self-control and business decision-making. The bookkeeping role has the responsibility of ensuring that the financial data of an organization is based on internal control practices and company policies, and that it is accurate and fair. Drawing a link between management accounting and management accounting innovations requires an understanding of both. Having indicated what management accounting is above, it is important to understand what management accounting innovations are. According to Chenhall (2008), managing accounting innovation is a strategy in management accounting which seeks to connect the approaches to value chain and connect activities across the organization which that related to cost objects. Notably, modern organizations are increasingly seeking for ways through which they can connect their strategies to activities and value chains in a manner that reduces costs and enhances profitability (Chenhall, 2008). This arguably explains (albeit partially) why organizations are increasingly adopting and implementing management accounting innovations. Once the innovations are adopted, they have an effect on decision-making (considering that management accounts give mid-level managers information based on the results of the new management accounting innovations), and also on bookkeeping, since accounting is done based on the information sourced from the new innovations. It has been observed that since the late 1980s, major concerns have been raised regarding traditional managerial accounting methods’ ability to provide critical management accounting information in a detailed and critical manner and in such a way that such information would benefit the fast-paced business environment (Wnuk-Pel, 2010). It was further argued that traditional management accounting was too distorted and too aggregated and consequently, lacked relevance in managerial decision-making (Wnuk-Pel, 2010). New concepts (e.g. ABC and BSC) have thus been popularized in organizations worldwide, and have gained acceptance in a manner that can justify the proposal that management accounting innovations have been one of the core themes driving modern organizations. Although the implementation of the management accounting innovations often faces limitations, Wnuk-Pel (2010) indicates that numerous researches conducted worldwide show that information generated from management accounting innovations is used in various decision areas which include: cost modeling, customer profitability analysis, product and service development, activities budgeting and pricing among other areas. Ideally, every organization needs to obtain accurate information that it can use for managing its activities (Wnuk-Pel, 2012). Additionally, organizations need information that can help them improve performances and reduce costs (Wnuk-Pel, 2012). Moreover, the need to improve management control and the changing information has always pushed organizations to crave for better management accounting techniques (Wnuk-Pel, 2012). The promise that the foregoing factors can be realized with management accounting innovations has arguably led to their adoption and implementation, and as such, they have become the source of information that organizations use to make critical decisions regarding the strategies to take both in the short- and long-term. Arguably, it is not the information obtained from management accounting innovations alone that makes the new innovations to direct modern organizations; rather, the processes of weighing the options of which innovation to adopt and the processes of implementing the chosen option also have an impact on the direction that organizations take. According to Seal, Garrison and Noreen (2009), management accounting has a strategic function in an organization, and the management accountants must be perceived as strategic organization partners. This implies that before taking up an innovation, they need to be assured that it is going to enhance their contribution in the organization. Management accounting also touches on performance management, and as such, management accountants often choose to implement an innovation based on how well it can enhance performance management in an organization (Seal et al., 2009). Finally, management accounting stretches to risk management, and if a management accounting innovation is to be considered fit for adoption and implementation, the management accountants often seek assurances that it has the right frameworks for risk identification, measurement, management and reporting for purposes of achieving organizational objectives (Hopper, Northcott & Scappens, 2007). Effectively, what the foregoing means is that one other reason why management accounting innovations have been a core theme driving modern organizations is that in addition to the promise of enhancing the management accountant’s role as a strategic organizational partner, they also offer promises in potential enhancement of performance management and risk management. Arguably, a good strategy, good performance management and good risk management measures are three critical needs that any organization needs to succeed and perform better than its competition in the contemporary business environment. Implementing new management accounting innovations also drives modern organizations in that once the need to adopt an innovation is established, all concerned stakeholders start the implementation journey by understanding the innovation first (Banker, Chang & Pizzini, 2004). According to Chenhall (2005), the innovation adoption process has several stages which include mobilizing support for the idea; screening the idea for viability and advocating for it to be supported by relevant stakeholders; experimenting the idea to prove its suitability; commercializing the idea in order to prove that it does indeed make economic sense; diffusion of the idea to make it accessible and gauge how well its accepted; and implementing the idea based on its suitability and viability. The success of management accounting innovations in an organization setting depends on how well the different stakeholders are willing to negotiate the different concerns, tensions and outputs that arise at different stages of implementation. In a study conducted in Poland for example, Wnuk-Pel (2012) established that the implementation of ABS requires organizations to create sufficient knowledge among employees; dedicate enough financial and information technology resources to the implementation process; and be knowledgeable about model construction. Such processes require dedication from relevant stakeholders in the organization, and it is the promise that managers will have better information to assist them in decision-making that makes the new management accounting innovations worth the pursuit. Indeed, Yazdifar and Askatany (2010) note that the ability of an innovation to improve the quality of a job or service and its ability to enhance the effectiveness of the job or service are two important attributes that drive modern organizations to adopt new management accounting innovations. The need to continually improve existing management accounting innovations has also been underscored by Yazdifar and Askatany (2010), thus giving credence to the proposal that innovations require constant improvements. Such improvements are especially necessary for purposes of ensuring that the innovations meet the needs of organizations where they are implemented. In some of the firms reviewed by Yazdifar and Askatany (2010), it was established that the innovations that were adopted were not successful and as such, the organizations would need to implement fundamental changes, which would include identifying and implementing (hopefully) better innovations which would help the organizations meet their goals and objectives. The constant yearning to perfect the information obtained from management accounting innovations is therefore seemingly another reason why such innovations can be said to drive (or dictate the direction taken by) contemporary organizations. Overall, it is important to note that management accounting as a whole contributes to the competitive advantage of a firm by availing information that is relevant to the firm’s competition (Honrgren, Sundem, Schatzberg & Burgstahler, 2013). An organization that competes on low costs for example would want a management accounting system that focuses on production costs and how best to control them. Since firms are always looking for ways through which they can advance their relative competitive positions in the market, it is quite possible that part of the reason why management accounting innovations drive modern organizations is because firms are using them to advance their competitive advantage in their respective markets. Horngren et al. (2013) also note that some of the management accounting innovations focus on performance centered on sources of differentiation like quality, time, delivery, innovation and flexibility. Such sources of differentiation are things that each firm needs to know and have appraised constantly. If they are sourced from information derived from management accounting innovations, it could be that they too form a reason why such innovations are a core determinant of which direction the organization takes. Conclusion This essay has established that management accounting innovations are superior than tradition management techniques in the delivery of information critical to organizational decision-making. Decisions made by middle-level managers are critical to the direction that the organization takes, and since decisions are a continuous undertaking in most organizations, it would appear that management accounting innovations do indeed constitute a key driver of the direction that an organization takes. The analysis above has also indicated that the use of management accounting innovations has enabled organizations to access information, which they then use in various decision areas which include: cost modeling, customer profitability analysis, product and service development, activities budgeting and pricing among other areas. Such decision areas constitute the day-to-day running of organizations, thus providing further credence to the proposition that management accounting innovations are part of the core drivers of contemporary organizations. Overall, it would appear from the analysis above that information is critical in decision-making, and management accounting innovations are increasingly being adopted for their ability to provide more accurate and resourceful information to facilitate decision-making. This reinforces the proposition that management accounting innovation has been one of the core themes driving modern organizations. References Banker, R., Chang, H., & Pizzini, M. (2004). The balanced scorecard: Judgmental effects of performance measures linked to strategy. The Accounting Review, 79(1), 1-23. Chadwick, L. (2000). Essential management accounting. Upper Saddle River, NJ: FT Prentice Hall. Chenhall, R.H. (2008). Accounting for the horizontal organization: A review essay. Accounting Organizations and Society, 33, 517-550. Emsley, D. (2006). Discipline of accounting and business law. NSW: University of Sydney, Australia. Hopper, T., Northcott, D. & Scappens, R. (2007). Issues in management accounting. (3rd edition). Upper Saddle River, NJ: FT Prentice Hall. Horngren, C.T., Sunde, G.L., Schatzberg, J.O. & Burgstahler, D. (2013). Introduction to management accounting (16th edition).Upper Saddle River, NJ: Prentice Hall. Seal, W., Garrison, R., & Noreen, E. (2009). Management accounting. New York: McGraw-Hill. Wnuk-Pel, T. (2010). Diffusion of management accounting innovations in non-manufacturing firms – the case of ABC. Social Sciences, 1(67), 7-21. Yazdifar, H. & Askatany, 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), 2-11. Read More