management accounting innovation in organizations

Management Accounting Innovation 1

Management accounting innovations in organizations

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Management accounting Innovation has been one of the core themes driving modern

organizations

Outline

Modern organizations manage to prosper and remain in the competitive environments

of business through constant innovations. This paper identifies the contribution of

management accountant innovations towards the organizations’ success. The paper is

therefore divided into;

1. Introduction

2. Management accounting innovation in modern organizations

3. Role of management accountants in driving innovation

4. Role involvement and suitability of innovations

5. Management Accountants and innovation acceleration


Introduction

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, p. 675-680).

Chadwick (2000, p. 676) highlights that management accounting uses accounting,

finance and management together with the leading edge techniques required to drive

successful businesses. It is a useful tool in advising managers about the financial

implications of various projects initiated; it can be used to explain the financial

consequences of business decisions made within a company. As an instrumental tool in

formulating business strategies aimed at enhancing desirable performance,

management accounting offers a platform for conducting internal audits and checks

besides being a parameter used to explain the impact of the competitive landscape

surrounding a business enterprise.

Management accounting innovation in modern organizations

According to Emsley (2005, pp. 14–16) several management accounting innovations

have in the last fifteen years been developed for use by most organizations, top on the

list being Activity-Based Costing (ABC) and the Balanced Scorecard (BSC).


Researchers in this field have attested to the fact that the adoption of ABC and BSC

coupled with other innovations has been beneficial for most firms. On the contrary, the

lack of hard evidence to support this fact has caused the skeptics to term innovations

anecdotal and non-systematic. Internationally, nonetheless organizations have either

adopted the innovations; are in the process of adopting the innovations; or are

determining the net benefits resulting from the adoption of the innovations. A common

characteristic in all the three cases is that most of the organizations are relatively larger.

Activity based costing recognizes that in a modern factory avoiding production

disruptive events is of essence than just reducing the costs of raw materials. The

concept of activity based costing deemphasizes direct labor as a cost driver rather it

dwells on activities that drive costs such as service provision or the production of a

product component. In view of the management control theory, management accounting

is understood as a mechanism for management control which provides surveillance

within an organization (Emsley, 2006).

Management accounting is central to the management and control processes that

define the objectives, measures progress and rewards or punishes performance in

organizations. Chadwick (2000) argues that management accounting ought to respond

to existing or up coming changes in the business industry because failure will negatively

impact on the performance of the firm concerned. This is basically due to the discipline

limits management perceptions, actions, and reactions to organizational events. The

modification of management accounting information to include both productive and

unproductive elements of a system is capable of changing management actions in a

manner that could create a positive or a negative decision depending on the information


contained in the statistics. Chadwick (2000) further states that the focus has greatly

shifted from traditional management accounting practices which were understood to

solely influence management decisions. The features of traditional management

accounting measurements and managerial implications entailed are;

a) Focused on efficiency of labor as the basic determinant of productivity and

capacity utilization

b) The measurements were tied to the monthly financial cycle raising questions on

the relevance and timeliness of standard cost based information

c) The variations from 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

d) The inadequate treatment of indirect costs based on variation caused differences

in products or services.

e) There was minimum linkage to the other forms of internal performance

measurement

f) Emphasis was on inventory valuation to the exclusion of management decision

needs

g) The emphasis on the productive time and effort of the organization

These practices were ineffective since the key features of the organization were

ignored; the trends in performance were not trended to provide a long term monitoring

system, rather they were discarded therefore giving a deceptive image of the


organization based on a short period of assessment. It is logical for any organization to

emphasize the productive capacity of resources invested, since the business world is

focused on assigning all costs of resources consumed to actual measurable output

(Kaplan, & Norton, (2001).

Role of Management Accountants in driving innovation

Innovations in management accounting are considered as ideas, practices or objects

that are recognized as new by the organization adopting the innovations. The

fundamental perception as new denotes that all innovations involve change, although

not all changes involve innovations. Therefore, management accounting is defined as

the practice of measuring and reporting financial and nonfinancial information needed

by managers make decisions that are geared towards the achievement of organizations’

goal and objectives. However, the role of Management accountants has not been

adequate in driving innovation in organizations according to the results of a number of

studies conducted in the field. A study to determine the role of the CFO in the adoption

and implementation of new management accounting systems was concluded with a

number of conflicting explanations. Firstly, individual differences between CFOs dictate

the organization’s use of innovation in management accounting. Similarly, the study

postulated that characteristics of CFOs moderate the level to which organizations adapt

rationally to environmental contingencies. Secondly, a study on dissemination of

management accounting practices in the public sector explored the manner and

methods of diffusion and drawbacks to the adoption of the innovations. The results of

the survey conducted on public sector managers indicated that the adoption of


management accounting innovations in the public sector organizations is to a greater

extend influenced by the government (Abrahamson 1991, pp. 586-592).

Since the late 80s accounting experts have been engaged in trying to change the

redundant accounting practices, they have advocated for a more dynamic and

innovative approach to management accounting. The difference between traditional and

innovative management accounting practices can be pointed to the invention of cost

control techniques. In the modern management accounting practice cost accounting is

used as the central method while traditional management accountants had variance

analysis as their principal technique. The later was used to systematically compare

actual and budgeted costs of raw materials as well as labor used during a production

period. The approach is still being used in some companies but it is blended with

innovative techniques such as life cycle cost analysis and activity based costing which

is designed to suit specific aspects of the modern business environment. Durry (2008,

p. 136) states that the life cycle costing recognizes that the manager has the ability to

change the cost of manufacturing a product when it is still at the design stage. This is

actually because in most modern factories manufacturing costs are largely determined

by the level of activities that run in the factory the key to ensuring effectiveness

therefore would be to optimize the efficiency of such activities by minimizing machine

breakdowns and quality control failures (Hopper, Northcott & Scapens, 2007).

Role involvement and suitability of innovations incentives

Although innovations can either be characterized as administrative or/or technical

initiative; management accounting innovations are purely radical and administrative.


However, most innovations involve new technical and administrative elements and the

implementation of some particular innovation necessitates adoption of other technical

and administrative innovations. Therefore, the evaluation of implementation impact is

often viewed as a global package of a number of components (both administrative and

technical innovations). Additionally, the implementation of management accounting

innovation less often result in benefits directly , but rather indirectly through the

organization’s behavioral change. Evidently, the impact of improved management

accounting information results in the long run after it has been put into use.

Because innovation is a crucial component of an organisation’s business strategy,

Banker, Chang & Pizzini (2004, p. 1-5) notes that a successful organizational plan

around innovation requires a firm grasp of the innovation process. Although many

organizations have not transparently defined the innovation process, Chenhall (2005, p.

395-403) outlines the innovation process as composed of generation and mobilization of

an idea; screening and advocacy; experimentation; commercialization; diffusion and

implementation. Most importantly, the success of the innovation process will be

determined by the willingness of the participants to work out the different outputs,

tensions and concerns that are associated with each stage.

Although the innovation process is a crucial component of most business strategies, its

implementation and management has proved difficult to most organizations. As such,

the complicated process necessitating the participation of all members in an

organization would prove generally demanding and taxing. Therefore, the success of a

planned process will cause the management to adopt attractive strategies in order for

the members to fully participate. Incentives in form of rewards, goals achievements and


retraining courses would easily temp an employee into participating in the ‘otherwise

difficult’ process of change. On the contrary, the cooperation between different

members in the different stages of the process is vital for the smooth running the

activity. In this context, the retraining courses ought to be conducted in unison for the

uniformity and transferability of skills to encourage unity, and thus success.

The information available from management accounting provides a platform for

managers to conduct an overview of the entire internal structure in order to facilitate the

control functions within an organization. Management accounting is responsible for

providing a scorecard by which an organization’s overall performance is rated by

outsiders. The managers use the same information to prepare various reports including;

reports based on how well managers or business units have performed assessed

against actual plans and benchmarks, reports geared at providing timely and frequent

updates on the key indicators like; orders received, order backlog, capacity utilization as

well as sales (Chadwick 2000, p. 122).

Other analytical reports are drawn to investigate existing or impending problems for

instance a decline in organization’s profitability especially based on a product line.

There are other reports which are used by mangers to analyze a developing business

situation or opportunity such that the decisions made can be geared towards improving

the current situation. Management accounting is a vital component in any company’s

management system, a better understanding of the same or failure is likely to greatly

affect the operation as well as the efficiency within the company (p.126).


Management accounting information is the core of any management system if not well

handled and analyzed it may lead to making wrong decisions which may affect the

company’s operation. It is therefore important that before engaging in any management

accounting planning or control the accountants should understand that, accounting

information is affected by the modern business environments which are typically

dynamic, turbulent as well as complex so accounting systems must be designed in a

way that will enable them withstand such environmental conditions (Coombs, Hobbs &

Jenkins 2005, p 25).

Management Accountants and innovation acceleration

In the process of measuring and reporting financial and nonfinancial information needed

by managers make decisions, management accountants play a much greater role in the

acceleration of the innovation process. The accountants’ effort should be linked with the

ultimate activity aimed towards the achievement of organizations’ goal and objectives.

In this context, the responsibility rested on their positions would finally contribute

towards the speedy achievement of organization’s goals.

The roles and actions of management accountants are sensitive in today’s corporations

because they have multiple relationships to the organization. Firstly, they act as

strategic partners and providers of decision based financial as well as operation

information. Secondly, they are charged with the responsibility of managing the

business team besides having to report relationships and responsibilities to the

corporation’s finance organization. Thus, the activities undertaken by management

accountants include; forecasting and planning, variance analysis and reviewing and


monitoring costs inherent in the business. These functions are the ones that present

dual accountability to the finance as well as the business team. In that case

accountability is more relevant to the business management team as opposed to the

corporate finance department because it is responsible for development of new product

costing , operations research, sales management score carding and client profitability

analysis (Durry, 2008). Consequently, the finance department will however benefit in

preparation of financial reports, reconciling of data to source systems and risk as well as

regulatory reporting because it is charged with compiling financial information from all

segments of the organization. It is therefore widely believed that financial accounting is

a spring board to management accounting since most corporations are moving from

emphasizing financial accounting which is skewed towards compliance to embracing

management accounting which is more concern with value creation and driving success

in the business.

Management accountants use the available information to make decisions geared at

delivering positive results within the organization irrespective of the set standards

because the application of the discipline varies from one organization to another.

Abrahamson (1991, 600-612) proposes that despite the flexibility there are fundamental

concepts that cut across the practice. For instance, transfer pricing a concept popular

in the manufacturing industry also applied in the banking industry where is used as a

method of assigning the interest rte risk of the bank to various funding sources as well

as uses of the enterprise. The bank’s corporate treasury department will assign funding

charges to the business unit for their use of the bank’s resources when they give loans


to clients, this concept is one of the conventions upon which management accounting

can be judged as having related or similar applications in the field of business.

The flexibility in management accounting enables the management accountants gain

knowledge and experience from various fields as well as functions within an

organization like; information management, efficiency auditing, marketing, valuation,

pricing and logistics. According to Seal, Garrison & Noreen (2009, p. 780-788)

management accounting stretches across three basic areas. Firstly, it covers strategic

management which entails advancing the role of the management accountant as a

strategic partner in the organization. The second is performance management, which is

aimed at developing the practice of business decision making, and managing the

performance of the organization; thirdly, risk management, which contributes to

frameworks and practices of identifying, measuring, managing and reporting risks to the

achievement of the organization’s objectives (Hopper, Northcott & Scapens 2007).

Conclusion

The paper examines the definition of management accounting and presents

management accounting innovation in modern organizations. Secondly, the paper

describes the practices in of various participants in the organization and their

contribution in the innovation process. Thus, the roles of management accountants,

appropriateness of innovation, acceptance of innovations, role of incentives, and

acceleration of innovation by accountants are analyzed. Therefore, management

accounting innovations have contributed a great deal in the success of modern

organizations.


References

Abrahamson, E (1991), Managerial fads and fashions: the diffusion and rejection of

innovations, Academy of Management Review, vol 16, no. 3 , pp. 586-612.

Banker, R D., Chang, H & Pizzini, M. J (2004), The balanced scorecard: judgmental

effects of performance measures linked to strategy, The Accounting Review, Vol

79 no. 1 , pp. 1-23.

Chadwick, L. (2000) Essential Management Accounting. FT Prentice Hall. 2,Pp 34-78

Chenhall, R. H (2005), Integrative strategic performance measurement systems,

strategic alignment of manufacturing, learning and strategic outcomes: an

exploratory study. Accounting, Organizations and Society, vol 30, no. 5 , pp. 395-

422.

Coombs, H., Hobbs, D. & Jenkins E. (2005) Management accounting: Principles and

applications. Pp 1-30.

Durry, C. (2008) Management and Cost Accounting. Thompson. 1, Pp 102-143

Emsley, D (2005), Restructuring the management accounting function: a note on the

effect of role involvement on innovativeness. Management Accounting Research

16:2 , pp. 157-178.

Emsley, D 2(006), Discipline of Accounting and Business Law, School of Business,

University of Sydney, NSW, Australia


Hopper, T., Northcott, D & Scapens, R (2007), Issues In Management Accounting, 3rd

Edition, Financial Times Prentice Hall.

Kaplan, R. S. and Norton, D. P. (2001) “Transforming the Balanced Scorecard from

Performance Measurement to Strategic Management: Part I”, Accounting

Horizons, 15 (1), p.p. 87-104.

Seal, W., Garrison, R. H., & Noreen, E.W (2009), Management Accounting, McGraw-

Hill, Pp. 675-788.

management accounting innovation in organizations

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