Innovation in Management Accounting - Term Paper Example

Issues in Management Accounting Student’s Name: Course: Tutor’s Name: Date: Word count: 1,993 (content plus refernces) Introduction Modern organisations do not have much choice but to embrace innovations that make them competitive. Similarly, modern organisations have found the appeal of innovations in management accounting irresistible due to the role they play in enhancing the information provided to managers and executives. This paper will identify ways through which management accounting innovation has been one of the core themes driving modern organisations. The paper argues notes that for the innovations to be regarded a key theme that is considered in the decision-making organs of many organisations, they must have been diffused and accepted in the same organisations. Additionally, and as happens with other innovations, management accounting innovations must have acquired social legitimisation through scrutiny by scholars, researchers and analysts. The innovations in management accounting Scouring through literature (Langfield-Smith, 2008; Scapens & Bromwich, 2001), it is clear that accounting tools and concepts such as the Balanced Scorecard (BSC), Activity Based Costing, Activity Based Management, Economic Value Added, Target Costing, and Strategic Cost Management are some of the innovations that have occurred in management accounting in the past two decades. Most of the aforementioned innovations are according to Ax and Bjornenak (2005), concepts whose copyright owners have acquired trademarks and began selling them to other groups. According to Bradford and Kent (1977), an innovation is a new idea that is introduced successfully into a social system. Subsequent to the foregoing definition, Wnuk-Pel (2011, p. 7) defines management accounting innovation as “strategic management accounting to connect the strategies to value chain and link activities across the organisation that relates to cost objects”. In the 1990s, the adoption of accounting management innovations was rated as fair by authors such as Chenhall and Langfield-Smith (1998) and Innes and Mitchell (1995). By 2009, Schoute and Wiersma (2009) note that many organisations had already adopted the innovations and even those that had not were considering doing so. The foregoing can be interpreted to mean that the innovations in management accounting have indeed penetrated many organisations. Generally, management accounting innovation is characterised by “the emergence accounting techniques” (Zawawi & Hoque 2008, p.2). Drawing a distinction between contemporary and traditional management accounting techniques, Chenhall and Langfield (1998) state that unlike the latter, the former focus on strategy by combining the financial and non-financial information of an organisation. This statement is reinforced by Chenhall (2008) who argues that management accounting innovations help organisations to engage in strategic management by connecting cost objects to the value chain and relating the two to organisational strategies. The question on whether the innovations have indeed become a core theme in driving modern organisations would however need some further analysis. The phases of innovations in management accounting According to Abdel-Kader and Luther (2003) innovations in management accounting developed in four stages: Before the 1950s: In this period, management accounting concentrated on determining the cost of production and controlling the same. 1950 to 1965: In this era, management accounting concentrated on presenting information, which would be used in planning and controlling organisations. 1985 to 1995: In this era, management accounting concentrated on the need to reduce resource wastage. Considerations were made into the use of robots and computers for quality improvement and cost reductions. According to Kaplan (1984), traditional accounting models used prior to 1984 could not be adequately used in the new organisations, which were at the time using advanced manufacturing technologies. Writing later, Zawawi and Hoque (2008) observe that the development of the ABC and the BSC was a result of the remarks made by Kaplan in 1984. 1995 to date: Management accounting concentrated on creating value through prudent use of resources. Notably, value creation in this era has to factor in organisational improvements brought about by improved technologies, the World Wide Web and electronic commerce. The new innovations in this era are touted by Abdel-Kader and Luther (2003) as having been “designed to support modern technologies and management processes such as total quality management and just-in-time productions systems, and the search for a competitive advantage to meet the challenge of global competition”. As management accounting models changed, so did organisations, which found it necessary to embrace changes therein. Bjornenak and Olson (1999) for example observe that organisations were willing to embrace management accounting models that generated external, non-financial and disaggregated data, since they understood that such data would help them understand the external business environment better. Notably, as a core theme driving modern organisations, management accounting innovations had to be diffused across organisations. Different studies indicated that among factors that led to the diffusion and adoption of the innovations included: global competition and enhanced technologies (Waweru, Hoque & Uliana, 2004); performance gaps and the need to catch up with market leaders and government influences (Lapsey & Wright 2004); and managerial decisions and support and organisational structures (Abernethy & Bouwens, 1995). Grandlund and Lukka (1998) further observe that the rise of consultancy firms targeting multinational organisations willing to be globally competitive is one of the underlying factors which explains the diffusion and penetration of management accounting innovations. The innovations have been fronted as tools that could be used to enhance organisations’ financial performance, and hence the overall performance (and competitiveness) of firms. Evidence in literature that the foregoing is true is offered by Davis and Albright (2004), who found out that firms reported superior financial performance after implementing BSC. Other reasons include support by the management especially if it is believed that the management accounting innovations are technically efficient. In a study conducted by Brown, Booth and Goacobbe (2004), it was found that institutional isomorphism and firm size were some of the reasons why management preferred to adopt innovations in management accounting practice. If Brown et al.’s (2004) sentiments were true therefore, it is thus possible that (some) modern organisations take up innovations in management accounting just to mimic like organisations. Whether such mimicking is beneficial to organisations is however a discussion outside the coverage of this paper. Although the benefits of adopting management accounting innovations are accessed through the attainment of competitive advantage, Ax and Bjornenak (2005) observe that propagators of the innovations, their efficiency, and characteristics all play a role in determining how widely acceptable such innovations are. As firms seek to become more effective, competitive and profitable, they literally hold on to any new ideas of attaining such statuses. For some, management accounting innovations offered tools for controlling finances and determining costs. Other reasons cited by Abdel-Kader and Luther (2004) include management control and planning, waste reduction in business resources, and value creation through prudent use of resources. Some innovations like the Balanced Scorecard (BSC) have been dubbed “a management fashion” (Jackman, 2008, p. 2). To earn the foregoing label, they must not only be acceptable among organisations, but also resonate with prevailing business (or management accounting) problems or challenges. In other words, the innovations must be geared towards providing solutions to prevailing problems or challenges. Empirically, the management accounting innovations, though widely popular, do not always work. The responsibility to judge the viability of each innovation in an organisational context however lies with the management. Notably, and as organisations embrace management approaches that enhance their performance and relative position in the market, Hoque (2003) observes that the adoption of management accounting innovations is inevitable. Hoque (2003) for example observes that firms that have taken up the Total Quality Management (TQM) approach find the implementation of BSC as an important undertaking especially for purposes of identifying multi-dimensional factors as observed in the internal environment through BSC. Hoque (2003) adds that an organisation that has TQM in place is able to identify ways of rewarding and motivating their employees better; signal the priorities that managers need to consider; and identify financial and non-financial needs. Such assertions from Hoque (2003) could thus be interpreted that for as long as theorists and researchers continue developing new ways of enhancing organisational performance, management accounting innovations will continue being part of the core themes driving organisations. Finally, it is important to underscore that effectiveness of innovations as suggested in the innovation diffusion theory has a role to play in cementing the position that management accounting innovations have as a core theme driving organisations (Wnuk-pel, 2010). However, it is also important to note that without social legitimisation, the innovations in management accounting could not have attained the prominent position they have in organisational theory. Conclusion Innovation in management accounting relates cost object to value and further connects the two to strategies in the organisation. As indicated in this paper however, the role that such innovations have towards driving modern organisations can be explained by multiple factors. Such include the association between management accounting innovations and improved organisational performance. The diffusion of such innovations often relies on the propagators, its characteristics and efficiency. An element of fashion has also played a role in the diffusion and acceptance of management accounting innovations. Ultimately however, this paper notes that the responsibility of deciding whether an innovation is viable in a specific organisation lies with the management of that organisation. Based on the different factors raised in this paper, it is clear that much as the effectiveness of management accounting innovations is an important feature in enhancing their diffusion and acceptance among organisations, social legitimisation is also an important component that has played a critical role in positioning such innovations in modern organisations. References Abdel-Kader, M., & Luther, R. (2003). An empirical investigation of the evolution of management accounting practices. Works Paper, University of Essex. Abernethy, M. A., & Bouwens, J. (2005). Determinants of accounting innovation implementation. Abacus, 41(3), 217-240. Ax, C., & Bjornenak, T. (2005). 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