The Role of Management Accounting Innovations in Organizations - Essay Example

The Role of Management Accounting Innovations in Organizations Name Institution Affiliation The Role of Management Accounting innovations in Organizations Introduction Innovations in the organizational management accounting has for the past decades been a subject of concern of many organizations. This concern has been facilitated by the need to move from the traditional management that could not address critical issues in accounting from managerial perspective. “Management accounting can be defined as the process of preparing management accounts which 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) These innovations include Activity Based costing (ABC), Balanced Scorecard (BSC), and management by objectives (MBO) and Performance management Systems (PMS). Proponents of such innovations have suggested that their application in organizational setting is beneficial. Surveys indicate that firms have at least adopted one of the innovations as an idea or have implemented it fully (Innes &Mitchell, 1995 quoted in Schoute &Wiersma). Research conducted by Schoute &Wiersma reveals a growing trend in organizations impetus for adoption of even more than one of these innovations. Therefore, the basic question is what the realizable benefits of institutionalization of innovations are and how these benefits can be determined (Foster & Young, 1997 quoted in Schoute &Wiersma). Characteristics of management accounting innovation There are a variety of characteristics that describe the innovation in management accounting. Management accounting innovation is influential in nature. Van de Ven (1993) remarked that most innovations involve new technical as well as administrative elements, and that the implementation of some particular innovation in general leads to the implementation of other, related (technical or administrative) innovations. There have been various definitions of innovations by different scholars of innovations. Rogers (1995) defines it as an idea, practice or object that is perceived as new by an individual or another unit of adoption. Management accounting according to Business Dictionary, refers to the process of preparing management reports and accounts that provide accurate and timely financial and statistical information required by managers to make day-to-day and short-term decisions. Therefore, management accounting innovation is that idea perceived as new which serves as the underlying design principle for financial or non financial information systems that aid managers in the decision making to attain organizational goals. Innovations which are characteristic to strategic management accounting (SMA) help to link strategy to value chain and as such, connect all organizational activities that revolve around cost objectives. These practices include activity- based cost management (ABCM) and integrated cost systems (Kaplan& Cooper, 1998 quoted in Hopwood, Christopher &Chapman). The advancements in innovations have been useful in addressing the concept of total quality management (TQM) which moves from the traditional linear-dimensional to multidimensional management approach. This approach has seen inclusive management practices that have addressed customer needs, suppliers, human resource and financials. The ABCM as a modern paradigm of management is an important tool in the measurement of cost against savings. The objective of activity based cost management is to create a system that effectively captures, allocates, and distributes costs by area of responsibility. This has enabled an environment in which responsibility management is possible hence improving a firm’s profitability (Zeisel, 1997). In this approach, goals are set against realistic and obtainable expectations on improvements in cost reduction. ABCM believes that costs factors must be determined before changes are implemented, accounted for in net present value and then spread along the changes that were adopted. Cost challenges have been addressed by the concerted efforts of ardent believers in cost innovation approaches. The challenge has been that of modeling an organization in which costs are traceable to the activities attributed those costs. ABCM as an efficient cost system has the ability to adequately allocate costs more directly, equitably and accurately. Functions that have for years been unquantifiable such as sales, Engineering, quality and purchasing, which traditionally do not account for their activities, can now be identified with the costs of their activities and how the costs of these activities contribute to product cost (Grieco & Pilachowshi quoted in Zeisel). This means that innovations in cost management have played a significantly important role in redressing traditional flaws that arose as a result of lack of proper system of relating costs with activities. The implementation of this idea signifies a rise from the hidden nature of some costs that could be considered under overhead cost. To managers, activity based costing system becomes an inherently important tool in the managing turnaround, irrespective of the management model employed. It therefore guarantees actual measurement of costs hence ensuring scientific management. ABCM as an innovation draws its relevance to elements of horizontal organization (HO). The ABCM systems are essential in operational and strategic issues, and are developed to be integral part of linking organization, product and customer mix decisions and transfer pricing (Hopwood, Christopher &Chapman). In essence, this change initiative in expenditure explains management’s ability to control costs that subsequently help to reduce impact of lack of proper controls that yield effects to customers through increased prices. Profitability of an organization is the core for firm’s operations and as such, firms strive to ensure that they pay back for the stakeholder’s investment and value for customers. Therefore the use of activity based cost management system provides a responsibility management that is more inclusive, more accurately measurable and which can be traceable. In this sense, the mangers are able to link the cost functionalities that resulted in the reported profits as opposed to the traditional cost allocation that was revealing. Future cost and cost impediments can now be forecast since management can use past accurate costs based on activities of its firm to give a fair view of the future costs that awaits their organization. This approach of measurement of cost in its real and absolute terms waives the company or firm the uncertainty that has been a characteristic of the traditional cost management. Firms have been able to beat the challenge of accurately reporting costs against the profit indices that arise as a result of cost activity. The principle of cause-effect has for many years been overlooked since the traditional costing could not link the activity with the subsequent resultant cost. This system is now usable by many managers in financial reporting. Information sharing is relevant in the organization for both internal and external users, and organizations have the responsibility of ensuring that information users get the most accurate out of the reports. Stakeholders have shifted the attention from the profitability to the cost concept since costs are the determinants of future profits. Organization response to the call for cost reductionist strategies has necessitated the need for inclusion of a costing system that can be measurable, controllable and manageable. The use of activity based costing system addresses this contingent need by ensuring that cost activities are controlled to ensure that there is minimal cost that drives the profits. Innovation in cost controls have also ensured that non value activities (NVAs) are eliminated from production line so as to remain with only those that are relevant and critical to the business operations. Many organizations today have continued to embrace the concept by sidestepping some activities that have been consuming profits under the guise of facilitating production. Inherent implementations have included restructuring of the work roles through fusion of production activities pertinent to maintaining an ongoing profitable firm. To adequately address the shortcomings of extended budget costs, managers have employed the system so as to be in line with the ever increasing cost aspects of firms. Innovative costing is an enabler for decision making by managers in an organization. Managerial groups can easily arrive at not only short term decisions but also long term decisions that have a lasting impact on future performance of the firm. Cost decisions adequately reached due to the inclusive nature of the system where both the managers and employees are responsible for the activities resulting in marginal costs in production processes. It has therefore ensured that employees are aware of the need for reduction in cost which subsequently yields benefits experienced by incremental profits. There have been great contributions of performance measurements systems (PMSs) in the field of management accounting. The establishment and implementation of measuring performance in a more elaborate and accurate manner has been a milestone in helping management accountants in making viable decisions that drive the firm. These performance measurement systems have for instance revealed the weaknesses in the use of some accounting procedures that have amounted to flaws in reporting of performance. To reliably make decisions, managers would dearly require the basis upon which to begin from. Previous performance information relating to profitability can be utilized by management accountants to lay forward strategies aimed at improving the existing levels. PMS have a more inclusive approach to the total measurement of aspects that remain critical to a firm’s operational activities. Management accountants use this system to evaluate their past performance against the set key performance indicators with some degree of reliability, certainty and setting up of future remedial schemes aimed at addressing the shortcomings of a previous performance period. Numerous application of performance measurement has been witnessed in many institutions both profit based and not-for-profit organizations. This has been so because most organizations have noted that its implementation yielded multiple results. The need for actual assessment of the profit yielding factors and their resulting impact on the profit and loss of a firm has grown enormously, and performance measurement has come in handy to redeem organizations from the inability to ascertain levels of performance. PMS have assisted in eliminating non performing elements that are present in a production process. Managerial accounting has borrowed a lot of literature from PMS that has proven to be of great usefulness to their circumstances. Redefining the importance of accounting by management has become one of the core focuses by many managers in organizations. Since the traditional indicators of performance have failed to clearly determine the key performance indicators, PMS on the other hand as an innovation has the ability to give guidelines on what involves performance and how to address performance issues affecting an organization. Most firms which have consumed innovations in management accounting have continued to reap the very benefits associated with such innovations. Balanced scorecard has extensively been employed as an attempt to address the inherent problem of measuring and managing performance. Balanced Scorecard (BSC) as innovation has created an immense positive contribution to the management accounting and general organizational progress today. Businesses require understanding of their working environment holistically in relation to technologies, processes, suppliers, employees and customers. Customer needs, need for skilled employees and processes that are sustainable are some of the items that firms require for future survival and growth. “It is a strategic planning and management system that is used extensively in business and industry, government and nonprofit organizations worldwide to align business activities to the vision and strategy of the organization, improve internal and external communications, and monitor organization performance against strategic goals”. (Balanced Scorecard institute) This concept was founded by Dr. Robert Kaplan and David Norton as a model of measurement of performance. In this respect, strategic and non-financial performance measures were added to the traditional financial metrics to give managers and executives a more balanced view of organizational performance (Balanced Scorecard institute, 2011). The report by the IBSC shows that BSC has the capacity to incorporate the financial and non financial aspects of management with the view of enabling managers to have a holistic approach to the challenge of establishing and measuring performance variables. Its application in human resource has a lasting impact on the strategic management. According to the IBSC, research conducted in hundreds of organizations showed that executives discovered that the scorecard supplied a framework and thus for many critical management processes: departmental and individual goal setting, business planning, capital allocations, strategic initiatives, and feedback and learning. Management accountants find balanced scorecards essential in linking strategy with action. Since strategy alone may not address the inherent challenges of the modern times, these strategies must be executable for an assured progress. In this regard, managers concerned with reporting are enabled to arrive at sustainable decisions that can transforms strategy into action so as to realize growth. The concept also stresses on the non financial factors that have influence on driving future success of an organization. Although the tool has financial concern, it also focuses on the external business environment such as derivation of customer satisfaction. Accounting as an internal process is critical. To assist in streamlining its functionality, BSC is a successful tool in redefining the key features that will yield a better and functioning accounting system that reflects the vision and strategy of the organization. Quality in accounting information is sometimes compromised either intentionally or otherwise, and the organization can easily combat this innate challenge. This is because BSC is able to assess the performance and progress of the “soft-tissue” intangible items that are still critical in the provision of results. Learning and growth is essential in an organization. BSC promotes the learning and growth aspects through establishment of programs that enhance performance improvement. BSC accommodates new changes and improvements and as such, management accountants have found this tool relevant in their firms. They have been able to reengineer their reporting techniques with the intent to satisfy the information needs of accounting information at all significant levels. Informational systems that form part of innovations serve to re-engineer customer management. Today, Information technology is an essential enabler of almost every organizational activity. The implementation information system has facilitated real time reporting of accounting information by management accountants. The historical and mechanistic means of preparing and reporting have been overcome by organizations which have fully embraced the need for an e-accounting system. Timeliness and accuracy has been improved in as far as organizational accounting and reporting is concerned. Internal and external information users have been cushioned from the rigid and time consuming nature of traditional and manual styles that are a characteristic of olden day accounting. It therefore implies that timely and reasonable accounting decisions can be derived by the managers relating to the performance of an organization. Application of IT systems has seen the development of customer relations systems (CRS). It is an ideal innovation that connects both internal and external customers in the daily maintenance of relationship between them and the organization with the view of enhancing feedback. Feedback in a communication line is essential and managers have invested in CRSs to lucratively reap from the advantages of efficient and effective communication systems. The management of both internal and external information is fully facilitated by in this context. Managers are able to invoke decisions that relates to both business environments through the use of automated information reporting systems. Information spread is crucial in the gaining of a competitive edge from the external business environment, and therefore managers have opted to adopt the most real time reporting mechanisms that will put their organizations on a better platform to influence the market. In conclusion, at least one of innovations in management accounting today has bee consumed either as an idea or exclusively implemented. Surveys conducted have revealing evidence that such innovations as balanced scorecards, activity based cost management, customer response service have beneficial to numerous organizations which implemented them. It is therefore significant to establish a notion that the contributions of innovations remain undoubted in today operations of organizations. Organizations should therefore correctly match their strategies with vision and fully execute innovations sought so as to realize their inherent benefits References Balanced Scorecard Institute (2011). The Balanced Scorecard. Retrieved on May 26, 2011 from http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/Default.aspx. Business Dictionary. (2011). Management accounting. Retrieved on May 26, 2011 from http://www.businessdictionary.com/definition/management-accounting.html Hopwood, A.G. , & Chapman, C. S. (2008). Handbook of Management Accounting Research. (Hopwood, A. G. Chapman, C. S., & Shields, Michael D.). Amsterdam: Elsevier Shoute, M, & Eelke, W. (2009). The evaluation of management accounting Innovations: Some methodological Issues. Retrieved on May 26, 2011 from http://dare.ubvu.vu.nl/bitstream/1871/1637/1/2001009A.pdf Zeisel, D.W. (1997). The Importance of Activity Based Costing in Managing a Turnaround. Retrieved on May 26, 2011from http://www.turnaround.org/Publications/Articles.aspx?objectID=1721 Read More