Issues in Management Accounting - Example

Issues in Management Accounting Name Institution Date: Issues in management accounting Introduction Management accounting is a process that involves preparation of management accounts that are essential in provision of financial and statistical information. The information provided must be accurate and able to support management agents in the decision making process. Management agents in this context include both the executive management and departmental managers. Financial reports provide information on accounts receivable, available cash, in-process inventories, raw-material inventories and outstanding debts. Management accounting varies in different organizations depending on the organizational structure and policy. The objective of this discussion is to analyze how management accounting innovation contributes to efficiency and effectiveness of the decision making process in an organization. The essence of managerial accounting innovation is the application of more relevant and effective methods in management accounting that result in better decision making in regard to analysis, allocation and control of an organizations key resources ( Zawawi and Hogue, 2010). An evaluation of modern accounting management will in this discussion focus on cost allocation, performance evaluation, target pricing, customer profitability analysis, management control and activity-based management. These aspects of management accounting innovation will be discussed under the following topics; 1. Management accounting innovation 2. Role of management accountants in management accounting innovation 3. Performance evaluation of management accounting innovations Management accounting innovation According to Chadwick (2000), management accounting incorporates aspects of accounting, management, finance and technology. These aspects are tailored to support successful achievement of an organizations’ strategy and objectives. Management accounting essentially provides the necessary information that can aid financial managers in analyzing financial implications of various business decisions. The primary objective of accounting management is to enhance an organizations overall performance. To this end, management accounting provides a framework for undertaking internal performance checks and audits, while providing information that enables managers to accurately assess the organizations competitive environment. Activity-Based Costing (ABC) and Balanced Scorecard (BSC) are significant examples of management accounting innovations that modern organizations have developed to enhance the decision-making process (Emsley, 2005). Activity-Based Costing is founded on the premise that eliminating events that disrupt production processes is more beneficial and cost effective for industries than cutting the cost of in-puts or raw materials. The assumption in the concept of Activity-Based costing is that costs in an industry are driven by activities that are involved in providing a service or in producing a product, and not by factors such as cost of labor. Management accounting provides the information that is essential in defining the objectives of an organization, developing of a framework for measuring performance progress, and guidelines for acknowledging and rewarding exceptional performance. Management accounting innovation is meant to enable an organization to respond timely and effectively to developments that are bound to influence the achievement of an organizations objectives in the industry. Innovations in management accounting have led to the inclusion of elements that are directly and indirectly related to production in organizational strategies. According to Chadwick (2000), modern organizations have shifted from traditional practices on accounting management which were developed with the objective of influencing the management’s decision making process. Traditional accounting practices were essentially focused on enhancing the efficiency of labor as single most significant factor that determined organizations productivity. Measurements in traditional practices were also based on monthly financial cycles, an aspect that raised questions on the significance and relevance of information that was based on standard costs. More emphasis was placed on valuation of inventories and efficiency in production, in disregard of other internal performance measurements. Role of management accountants in management accounting innovation In reference to Hunt and Morgan’s (2008) Resource-Advantage theory, organizations are better able to secure and sustain competitive advantage if they can effectively utilize their key resources. Organizations’ resources may be financial resources, human resources, organizational resources, or information resources. The human resources are particularly critical in enabling an organization to achieve strategic objectives, as they play the significant role of identifying, selecting, implementing and modifying strategies that determine the structure and processes in an organization. Accounting management essentially involves measurement and reporting of both financial and nonfinancial information that is required by managers to make appropriate decisions with the objective of achieving an organizations strategic goals and objectives. Previous research has shown that the role that accounting managers play in accounting innovation has been far less than adequate. For instance, a study that was undertaken to evaluate the role of CFO in adopting and implementing new management accounting systems concluded with results that were conflicting. According to the study, the ability of organizations adapting rationally to environmental and competitive situations was largely influenced by the individual characteristics of the CFOs. In a similar research carried out in the public service sector, it emerged that there were significant flaws and drawbacks regarding the adoption of management accounting innovations. The survey indicated that in the public sector, adoption of management accounting innovations was largely influenced by governments (Abraham, 1991). Accounting experts in recent times have persistently advocated for adjustments in accounting practices that are more or less redundant, and suggested adoption of more innovative and dynamic approaches to management accounting innovation. Differences in innovative and traditional accounting practices are exemplified in the development of new techniques in cost control. Cost accounting has in modern management accounting been used as the essential technique, while in traditional management accounting practices, there was more emphasis on variance analysis. Variance analysis involved a systematic comparison of budgeted and actual costs of inputs and labor that were used in production. Some organizations still employ this technique, but they are incorporated in more innovative models such as activity based costing and life cycle cost analysis. Such models are innovations that have been developed to enable organizations to better adapt to the modern and more competitive business environment. According to Durry (2008), life cycle costing is based on the assumption that managers are able to adjust costs of manufacturing products when they are still in the design stages. The explanation for this trend is that manufacturing costs in modern factories are to a large extend depended on the number and cost of activities that are involved in the production process, which can be managed to ensure efficiency is optimized through a reduction in quality control failures and machine breakdowns( Hopper, Northcott & Scapens, 2007). Cost allocation concentration essentially involves the criteria that are used in appropriating cost to production processes. According to Lamminmaki and Drury (2001), effective and accurate cost accounting is the single most important responsibility of accounting practitioners. This requires that accounting managers develop the necessary skill and expertise to accurately trace cost to specific products and services. Inaccurate allocation of costs has the disadvantage of managers making wrong decisions in regard to overall financial estimates for the production processes. According to Parsons and McDonald (1970), an accurate and reliable costing system is one that enables s the management to make the decisions that derive the organization in the right strategic direction. Parsons and McDonald emphasize that firms that effectively employ cost allocation concentration enhance the usefulness of financial information, exemplify better managerial practice, have better quality business operations, and subsequently make more valuable decisions. Traditional practices of price target focus involved organizations designing, manufacturing and supplying products and services in consideration of the profit that they could get. Modern target price focus in contrary lays more emphasis on the needs of an organization’s customers and their ability and willingness to pay. Performance evaluation of management accounting innovations Performance evaluation involves an evaluation of the effectives and efficiency of management and control systems in achieving the organizations goals and objectives. Management accounting innovations are essentially a deliberate administrative initiative. However, modern organizations when implementing management accounting innovations tend to incorporate technical elements into their strategy. The effectiveness or impact of accounting management innovations is not easy to assess, as the benefits of the innovations are normally not apparent in the short-term. The benefits in most cases are not direct, but are in the long-term reflected in behavioral change of the organization. As emphasized by Banker, Chang & Pizzini (2004), management accounting innovation is a critical aspect of an organizations strategic direction, and therefore the management should make a comprehensive analysis and plan of the innovation process before embarking on implementation. This is reiterated by Chenhall (2005), who provides an outline of the innovation process as involving several steps that include; generating and mobilizing of an idea, screening of options, experimenting, commercializing, diffusion and finally, implementation. More significantly, the efficiency and effectiveness with which innovations are implemented is largely depended on the stakeholder’s commitment to addressing the concerns and tensions that are inevitable during the process of implementation. Apparently, implementation of management accounting innovations has proved to be a daunting task for many organizations, with challenges arising in getting all the members of an organization and stakeholders to participate and contribute to the process. This calls on the organizations management to be proactive and creative in packaging the change strategy in a way that would be appealing to all employees. This may involve implementing a framework where exceptional contribution and participation is acknowledged and rewarded. A critical component of motivating employees’ to actively participate in new innovations is to develop training and awareness programs which provide knowledge on the significance of the processes of innovation. Successful implementation of management accounting innovation is largely depended on how well the unit managers are provided with adequate information pertaining to the process. This is essential in enabling the managers to evaluate the suitability of the internal structures in fostering effective adoption of innovations, and for the managers to be able to effectively control the implementation process. The innovations must be developed in a way that the provide a framework by which performance can be assessed and rated on regular basis Conclusion Organizations in the 21st century are compelled to make radical adjustments in strategy in order to deal effectively with the drastic evolution in technology and the challenges attributed to globalization. Modern organizations acknowledge the challenge of a radically transforming competitive environment that is a threat to their survival and competitiveness. Management accounting Innovation has been one of the core themes driving modern organizations. Management accounting Innovation is a process that contemporary organizations employ as a strategy of sustain a competitive advantage and realizing the organizations strategic objectives. For organizations to develop competence in management that develops effective strategies, emphasis must be on development of human resources that have the essential skills, knowledge, and experience in the core processes that support efficiency and effectiveness in achievement of organizational goals. References Banker, R D., Chang, H & Pizzini, M. J (2004), The balanced scorecard: judgmental effects of performance measures linked to strategy, The Accounting Review, Vol79 no. 1 , pp. 1-23 Chadwick, L. (2000) Essential Management Accounting. FT Prentice Hall. 2, pp 34-78 Chenhall, R. (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 Abrahamson, E (1991), Managerial fads and fashions: the diffusion and rejection of Innovations, Academy of Management Review, vol 16, no.3, pp. 586-612 Durry, C. (2008). Management and Cost Accounting. Thompson. 1, Pp 102-143 Emsley, D (2005), restructures the management accounting function: a note on the effect of role involvement on innovativeness. Management Accounting Research 16:2, pp. 157-178. Hopper, T., Northcott, D & Scapens, R (2007), Issues In Management Accounting, 3rd Edition, Financial Times Prentice Hall. Hunt, S., and Davis, D.., 2008. Grounding Supply Chain Management in Resource-Advantage Theory. Journal of Supply Chain Management. 44; 10. Lamminmaki, D. and Drury, C, 2001. A Comparison of New Zealand and British Product- Costing Practices. The International Journal of Accounting. 36: 329-347. Parsons, V. A. and MacDonald G. A., 1970. Standard Cost and Control System. 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