Management Accounting InnovationManagers within organizations need management accounting information so that they are going to be more effective in their work as managers. Accounting for managers is different from finance accounting in many ways, as it is intended for the managers, who are not accountants by profession. Management accounting helps managers to ensure that the resources available in the organizations are put into good use and they are properly accounted for. Management accounting practices vary widely, but they can mainly be classified as traditional or innovative. Traditional practices have been there for many decades, and the reason why there has been a demand of change from these traditional practices to innovative ones is due to the fear that there will be an excess of management accountants who are not competent enough in the ever changing business environment (Drury, 2007).
This essay will mainly seek to analyze the how much management accounting innovation has become one of the core themes driving modern organizations today. Cost accounting, which entails assessment of the costs of production or business, is the major component of management accounting.
Management accountants use cost accounting as a tool in decision-making processes in the business regarding cost reduction and best use of resources. Therefore, if there are any reforms in the practices in management accounting, then most of these innovative reforms have happened in cost accounting more than any other area. Many reforms in traditional cost accounting have occurred, and the innovative Activity Based Costing, also known as the ABC innovation, is one of the major innovations in management accounting. The Balances Scorecard (BSC) method is also one of the innovations in management accounting (Sisaye, 2001).
The above two major innovations in management accounting will be analyzed in this essay in the light of the main purpose for the same. These two, however, are not the only innovations in managerial accounting; there are many other similar management accounting innovations. For the ABC and the BSC innovations, among many others, there are both proponents and sceptics. Proponents support the fact that these innovations are existent and that their application has been seen to work in practical managerial situations. Sceptics, on the other hand, do not believe that there is any solid evidence that these innovations are true and practical.
They believe that the evidence attached to these is sketchy and cannot be used solely. However, many studies from reliable international bodies have proved that these innovations in management accounting are true and that they are very effective when applied. These studies also show that modern organizations have majored on these innovations and adopted them into their accounting systems. The research findings also indicate that a huge percentage of those organizations that have not yet adopted these innovations into their systems are greatly considering doing so (Bhimani, 2003).
Activity Based Costing is one of the major replacements of conventional accounting methods. In conventional accounting methods, it is believed that more profits are associated with high volume of customers, loyalty of customers and customer satisfaction. However, over time, studies have shown that this is not fully true and that such information cannot be concluded on. Activity based costing is an innovation in cost accounting that basically operates by identifying processes in the organization that have the maximum number of events attached to it and assigning costs to such processes accordingly (Drury, 2005).
Therefore, a process that has more events of production (of goods or services) is assigned more costs than that process that has fewer events within it. The activity based costing method is greatly adopted into modern organizations, and accounting managers use this tool to increase profitability and to increase the value of stakeholders of the organization (Sale & Sharp, 2002).