Management Accounting Innovation - Literature review Example

Running header: Small business Student’s name: Instructor’s name: Subject code: Date of submission: MANAGEMENT ACCOUNTING INNOVATION Management accounting is a branch of study that is concerned with providing and using accounting information to managers within organizations. It focuses on provision of knowledge and the basis to make proper well informed business decisions. This equips them with the knowhow to properly administer their control and managerial functions in an organization. Some of the managers include the departmental managers and financial managers among others. The management accounting features vary between different organizations based on their policies and structures of management. (John, Y. L. (2012).) According to (Epstein, M. J.,(2003)), management accounting uses finance, accounting and management together with techniques that currently top in the industry which are required to foster business success. It is an important management tool since it offers advice to the top managers and also offers results of the implementation of different projects. Similarly, it assists the management by outlining the financial consequences of the adoption of different decisions within an organization. This helps in indicating its essence in the formulation of business strategies which are directed on enterprise goal attainment. Management accounting also offers a platform for conducting internal audits within the firm and internal checks. It is also an important tool for explaining the impact of the competitive environment surrounding an organization. MANAGEMENT ACCOUNTING INNOVATIONS IN MODERN ORGANIZATIONS Northcott, D. (2007) states categorically that for the recent past, several management accounting innovations have been developed for use by many organizations. The major ones in the list are Activity Based Costing (ABC) and Balanced Scorecard (BSC). Many researchers in the field have confirmed to the fact that the application of ABC and BSC into the business arena has been very beneficial not only to the organizations but also to the related parties. However, there has been opposition from the skeptics who go ahead to claim that the innovations made are non systematic and undependable. Despite this, firms in the global arena have adopted the use of this innovations, some are in the process of adopting them while others are weighing the benefits of the adoption so that they can know whether to adopt them or not. The similarity between all these firms is that they are all large organizations. Activity based costing (ABC) entails that in a modern factory, the avoidance of disruptive events in the production process is as much as essence as reducing the cost of the raw materials. Activity based costing dwells much on the activities that drive the costs such as the production of a product component or the provision of services. It however discourages the use of direct labor as a cost driver. According to Emsley (2006) in the view of management control theory, management accounting can be understood as a mechanism for management control which provides surveillance within the organization. Management accounting can be understood as central to the management and control processes that defines the objectives, measures the progress and rewards and/or punishes our actions. According to Chapman, C. S. (2005), management accounting ought to respond to existing or upcoming events and changes in the business industry due to the fact that failure will result negative outcomes and negative progress in the performance of the firm. The improvement of management accounting information to include both the productive and the unproductive element s of a system is capable of changing the actions of the management in a manner that could create a positive or a negative decision depending on the results provided by the statistics. Chapman, C. S. (2005), continues that there has been a major shift in the focus from the traditional accounting practices which were then thought to solely affect managerial decisions. Some of the basic characteristics of the traditional management accounting include among others; 1. It put more emphasis on the productive time and effort in the organization 2. There existed minimum linkage to the other forms of internal performance measurement. 3. It focused on the efficiency of labor as the basic determinant of productivity. 4. The variation fro 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. 5. There were differences in products and services resulting from the inadequate treatment of indirect costs based on variations. 6. Measurements were tied to the monthly financial cycle raising questions on the relevance and timeliness of standard cost based information. Ineffectiveness was evident in these practices due to the fact that the key features of the organization were ignored. The trends in performance were also not trended to provide a long-term monitoring system but rather they were discarded resulting to the creation of a misleading image of the organization. This was because they were based on a short term base. ROLE OF MANAGEMENT ACCOUNTANTS IN FOSTERING INNOVATIONS In management accounting, innovations are stated as ideas, objects and practices which their developing firms classify as new. According to Hopper, T., Scapens, R. W., & Northcott, D. (2007), management accounting can be defined as the practice of measuring and reporting financial and non financial information needed by managers to make decisions that are directed towards the achievement of the organization goals and objectives. This is based in the fact that all innovations involve changes while not all changes involve innovations. Commitment has been made by the accounting expects ever since the late 80s in an effort to try and change the redundant accounting practices. They have advocated for a more vibrant and a more innovative advance to management accounting. The difference between traditional and innovative management accounting can be pointed to the intervention of cost control techniques. In the modern management accounting practice, cost accounting is used as the key method while traditional management accounting used variance analysis as their main technique. The latter was used to systematically compare actual and budgeted costs of raw materials as well as the labor used during the production period. The approach is still in use in some organizations but several innovative techniques have been put in place such as activity based costing and life cycle cost analysis which is specially designed to suit specific aspects of the modern business environments. Durry, C. (2008) affirms that the life cycle costing recognizes that the manager has the ability to change the cost of manufacturing a product while it is still at the design stage. This is more so because in most of the modern firms costs of manufacturing are largely determined by the level of activities that are undertaken in the company. The key to optimize effectiveness would be therefore to increase the efficiency of such activities by minimizing the machines break downs and quality control failures. ROLE INVOLVEMENT AND SUITABILITY OF INNOVATIONS INCENTIVES Although innovations can either be characterized as either being administrative or technical initiative, management accounting innovations are purely radical and administrative. However, in most innovations there is the involvement of new technical and administrative elements. Therefore, the implementation of some particular innovation necessitates the adoption of other technical and administrative innovations. Additionally, the putting in place of management accounting innovation results in direct benefits less often. They rather accrue indirectly through the behavioral change in an organization. This evidences the fact that the improvement of management accounting results to long term benefits to an organization after it has been put in place. Due to the fact that innovation is an important component of an organization’s business strategy, Coombs, H., Hobbs, D. & Jenkins E. (2005) notes that a successful business plan around innovation requires a firm grasp of the innovation process. He goes ahead to define innovation as composed of generation and mobilization of an idea, screening and advocacy, experimentation, commercialization, diffusion and implementation. He rather points out that the success of innovation process will be determined by the willingness of the participants to work out the different outputs, tensions and the concerns that are associated with each stage. Despite the fact that innovation is very crucial for business growth and development its implementation and management has proved to be very difficult to most firms in the global arena. Therefore, the success of a planned process will cause the management to adopt attractive strategies and measures in order for the members to fully participate. It will however be very demanding and taxing for the firms. Several measures can be put in place in order to encourage the staff to participate in the process. They include among others; rewards, incentives, promotions and improvement of their welfare in order for them to embrace the rather difficult change. To foster the development, smooth cooperation is encouraged in the running of the activities. Management accounting information is the core of any management system. Thus, if not well handled and analyzed it may lead to wrong decision making and which affects the performance of a firm. It is hence crucial prior to engaging in any management accounting panning or control, the accountant should understand that accounting information is affected by the modern business environments. These business environments are turbulent, dynamic and complex. This necessitates the use of accounting systems which are specially designed and created to withstand the environments. In the recent days, the roles of management accountants are crucial in the businesses because they have a close relationship with the firms. Some of the key roles of the management accountants include; a. They act as strategic partners and the providers of decision based financial and operation information. b. They are charged with the responsibility to manage the business team besides having to report on the relationships prevalent in the firm. Besides the reporting o the relationships, the management accountants’ reports also on their responsibilities to the corporation’s finance organization. c. Forecasting and planning on the future financial needs, decisions to be taken and the implications of the decisions made. d. Variance analysis e. Reviewing and monitoring the costs that are inherent to the business The finance department will however benefit in preparation of financial reports and reconciling of data to source systems. Seleshi, S & Birnberg, J. G. (2012). This is because it is charged with the responsibility of compiling of financial information from all segments of the organization. It is therefore a common belief that financial accounting is a spring board to management accounting. This is mostly because most corporations are shifting from emphasizing on financial accounting which is skewed towards compliance and thereby embracing management accounting which is more concerned with value creation and driving success in the business. The trait of flexibility prevalent in management accounting enables the management accountants to gain much knowhow in other fields and other functions within the organization. Some of this include in auditing, information management, marketing, valuation, taxation, logistics, pricing, insurance among others. In conclusion, a proper definition of management accounting is provided. Management accounting innovations has also been defined and its applications in modern organizations. The various participants in organizations have also been clearly outlined. Similarly their contributions to the innovation process have also been mentioned. Thus the role of management accountants and their contribution to the acceleration of management accounting innovation has also been analyzed. Therefore, management accounting innovations have contributed significantly to the success of modern organizations. REFERENCES John, Y. L. (2012). Advances in Management Accounting. Emerald Group Pub. Epstein, M. J., & Lee, J. Y. (2003). Advances in management accounting: Vol. 11. Amsterdam: JAI. Emsley, D 2(006), Discipline of Accounting and Business Law, School of Business , University of Sydney, NSW, Australia Hopper, T., Scapens, R. W., & Northcott, D. (2007). Issues in management accounting. Harlow: Financial Times Prentice Hall. Chapman, C. S. (2005). Controlling strategy: Management, accounting, and performance measurement. Oxford: Oxford University Press. Durry, C. (2008) Management and Cost Accounting. Thompson. 1, Pp 102-143 Coombs, H., Hobbs, D. & Jenkins E. (2005) Management accounting: Principles and applications Pp 1-30 Seleshi, S., & Birnberg, J. G. (2012). An organizational learning approach to process innovations: The extent and scope of diffusion and adoption in management accounting systems. Bingley, U.K: Emerald. Read More