Management Accounting Innovations in Modern Organizations - Essay Example

Analysis of a Research Institution Name Date Management accounting innovations in modern organizations Introduction Management accounting is a very important aspect in every organization which avails adequate and relevant information to managers at the right time and within the defined targets. Management accounting also monitors the performance of the organization as well as improving the efficiency of the organization in consistently meeting its objectives. New practices of management accounting have been discovered which are being adopted as organizations change from the traditional practices. The modern methods of management accounting allow managers to make informed decisions that minimize costs as well as adding value to the products and services. These modern practices also enhance the innovativeness of the organization and its flexibility such that it changes its performance to meet the demands of its clients. Modern organizations have adopted innovativeness in management accounting in designing, and implementing both financial and non financial information systems. New situations are arising in the business world which requires new techniques. Organizations are therefore changing their management accounting system to adapt to the new situation so that the overall situation of the organization can be improved (Chenhall, 2003). This paper discusses how innovation in management accounting is driving the modern organizations, examples of some modern methods of management accounting and the role of management accountants in driving this change. Innovation in management accounting The main role of management accounting being to provide information, it is very important for the management accountants to always be aware of changes in various situations that may affect the organization. According to the contingency theory of management accounting, the management accounting system is contingent upon situational factors such as the external environment, the organization’s strategies and mission, and technology among others. These situational factors are however constantly changing and are affecting most organizations. Management accountants have therefore become highly innovative to ensure that the organizations are up to date with the changing situations. Most organizations are changing their strategies and adopting new technology to withstand the highly competitive global market. The needs of the customers are also changing as new things are emerging in the market. Therefore the modern organizations are being driven by innovation in all their operations to ensure that their operations are value adding. Innovation is also enabling them to attract customers globally (Sisaye, 2001). Role of management accountants in driving innovation Basically all innovations involve adopting new ways of doing things in an organization. Management accountants in the modern organizations have the biggest role to play in ensuring that organizations are changing towards the new methods. Management accounting information that is required in the modern organizations differs from the traditional methods in that it has incorporated strategic management information, finance, and operational management information. In diffusing innovation in the modern organizations, the management accountants act as strategic partners to organization and to make decisions based on financial and operational information. According to Parker, (2002), management accountants are required to equip themselves with information that will enable them to offer integrated financial and strategic advice during decision making. The management accountants also have the duty of keeping up to date accounting information by always following –up the modern business environment which is complex and dynamic. This is important in the designing of accounting systems that are able to withstand the complex environmental conditions. This information will offer a basis for other managers to carry out an overview of the internal structure of the organization to ease the process by which functions are controlled in the organization. All the decisions involving management accounting creates a scorecard by which the outsiders will rate the overall performance of the organization. Therefore management accountants have the biggest responsibility in ensuring that all the operations in the organizations are value adding to both the organization and the customers. However, the modern management accounting require a lot of flexibility so that management accountants can gain the knowledge and experience that is required to run the modern organizations. This is in the fields of information management, pricing, marketing logistics. Recent changes in management accounting Modern organizations have turned to new management accounting systems so that they can withstand the global competition that is facing all types of businesses. In recent years, many organizations have experienced changes in the design of their organizations the competitive environment as well as in the information technology. The changes in the information technology have in particular brought innovations and changes in ways by which information is collected and analyzed within organizations. This has forced changes in management accounting which is an fundamental move in the modern organizations in the global society that is driven by technology. New techniques in management accounting have therefore emerged together with the new organization designs to respond to the changing competitive environments (Wnuk-Pel, 2010). Some of the new concepts that have resulted from innovation in management accounting include Just-in-Time production, Target Costing, and Activity Based Management (ABM) among others. A lot of emphasis has been put on quality, targets and cost. To ensure quality on their products, the modern organizations have adopted the new concept of just-in-time production where production is based on the orders placed by the customers. When a customer places the order, the organization sources for materials from reputable sources where quality is highly assessed from the supplier until the material is delivered to through reputable delivery chains. This process ensures that there is little inventory work and minimal work in progress therefore minimizing the costs the costs involved. The customer’s order is therefore met with high quality products and at minimal cost. This system uses back flush accounting which ensures that transactions are recorded at a particular point in time and also reduction in the accounting processes involved, tracings and controls so as to increase the efficiency in accounting, the quality and relevance of the accounting information. This will enable identification and elimination of weaknesses (Ross, 2003). Target costing method This is revolutionary method from the traditional pricing method where firms used to determine their costs for the goods and services from which they base the prices depending on this cost and the expected profit margin. This method had the disadvantage of forcing the firm to cut costs and this could compromise the quality that is delivered to the customers. However, in target costing method, the management of the firm starts by determining its ability to pay for the particular cost of products through its various means then align its production process in a manner that it will add value that is desired by the customers. The managers will therefore keep reviewing the firms operations and processes to determine the prices that the customers can pay to get the best quality as well as adding value in a cost effective method, reducing wastes and adding to other social benefits (Lucey, 2003). Target costing is a new method of costing and managing operations by use appropriate management information from the prices and using this information to make decisions that will add value to that is desired by the customers. It is different from the traditional costing methods cutting costs and enhancing quality which do not take into account what is valued by the customers. These traditional methods may use processes which do not value adding to the organization. Activity based costing method Traditional costing methods only consider one cost driver while allocating both the fixed and variable overhead. Activity based costing method is different from this in that overheads are allocated on more than one cost driver and also depending on the consumed activities. In activity based costing, assignment of costs starts with the activities that are the actual causes of the overhead, after which the costs of those activities are then assigned to only those products which are genuinely requiring those activities. For example, an organization may be making two similar products, A and B. Product A may be of low volume and may need activities such as additional testing, special engineering and more machines to set it up because of its small quantity. On the other hand, product B may a high volume product which requires little attention and no further activities. Therefore according to ABC, the costs will only be assigned to product A and nothing or very little will be allocated to product B. But with traditional methods, allocation will consider machine hours and allocate more on product B since it will have more machine hours (Doyle, 2007). This is a more accurate costing method as compared to the traditional costing met. The method also enables firm managers to in decision making because they offer accurate financial information that may be useful in cost reduction and also in making dictions on the type of products and their volume with the aim of maximizing profits and allocating scarce resources that can increase profits and maintain efficiency in operations. The activity based methods also ensures consistency of profitability and value addition to what the customers desire. Some of the factors that determine the success of the activity based costing method include the type of operations that are carried out, the size the firm, availability of the necessary skills by the firm managers and also the realization of the value of this system by the top management and willingness to provide the resources necessary for implementing the system (Lee, & Epstein, 2011). Conclusion Innovation in management accounting has made a difference in the modern organizations by bringing in new ways of managing financial records and also changing the ways in which accounting can help in improving businesses. The modern accounting methods are also very important for the current and future organizational operations since they implement a strategy that the organization will follow beginning with the accounting. To withstand the changing business environment, it is very important for organizations to invest in innovative management accounting methods that will add value and reduce operational costs. Management accountants have the greatest role to play in these innovations since they are the source of the required information. References Doyle, G. (2007). An institutional framework analysis of management accounting innovations: A comparison of for-profit and not-for-profit health care settings. Belfield Dublin: niversity College Dublin. Parker, L. (2002).Reinventing the management accountant. South Australia: Adelaide University. Wnuk-Pel, T. (2010). Accounting Innovations. Poland: University of Lodz. Chenhall, R. (2003). Management control systems design within its organizational context: findings from contingency based research and direction for the future. Accounting, Organizations and Society, 29, (3), 243-6. Lucey, T. (2003). Management Accounting. New York: Cengage Learning EMEA. Lee, J. and Epstein, M. (2011). Advances in Management Accounting, Volume 19. Wagon Lane: Emerald Group Publishing. Ross, P. (2003). Management Accounting Innovativeness: The Influence of Organizational and Contextual Factors. Sydney: University of Technology. Sisaye, S. (2001). Organizational Change and Development in Management Control Systems: Process Innovation for Internal Auditing and Management Accounting. Bingley: Emerald Group Publishing. Read More