Management Accounting Innovation - Assignment Example

Management Accounting Innovation Managers 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). There are many benefits of using the activity based costing innovation and adopting it into the organization. First, this innovation helps the accounting managers to identify areas or processes in the organization that are least profitable and hence reduce costs in these areas. Unprofitable customer groups are also easily identified in this activity based costing innovation. In addition, processes and customer groups that are most profitable to the organization are identified, and therefore more costs are directed towards such processes and groups so that profitability of the organization will be increased. The activity based costing also enables prediction of profits, losses, expenses and resources needed for processes based on factors like the volume of production and the expenses spent on resources (Smith, 2007). The activity based costing also enables managers to easily spot areas and practices that may be the root cause for reduced productivity and profitability or lack of profitability in the organization. Financial accountability is also made easier with the activity based costing innovation because it is easier to identify exact costs that have gone into any process whatsoever, since cost matches with profitability. The activity based costing is a tool that enables managers to have better decision making skills hence making them more competent in effecting improvements in an organization. Managers who use this tool are also able to employ a better marketing mix in their trade. What’s more, activity based costing puts the organization in a position where it is easier to bargain with the customers more effectively, with the organization being the bargaining party that has more power than the customers (Walker, 2008). The activity based costing is a tool that most modern organizations have adopted in their costing systems, and it is a tool that has seen these organizations make better quality products and services at better and more competitive prices in the market, yet maintaining profitability. With the activity based costing innovative method, organizations are now able to make more profits in shorter periods of time yet still maintaining high value for its customers. Many organizations have modelled this method, and it has been proved to work effectively in reducing overall costs of production and increasing profitability. The activity based costing is not a tool that is implemented once for the changes to occur; rather, it is one that is continuously used in the organization’s costing so that profitability and maximum customer value will be maintained. The activity based costing innovation is a tool that has been proved to work for any type of enterprise by ensuring that this enterprise maximizes on profitability while ensuring increased and strengthened value for its customers, and even its stakeholders (Smith, 2007). However, sceptics believe that the activity based costing method still has many shortcomings. For instance, sceptics question the ability of the activity based costing method to assign all costs perfectly on processes and customer groups. For instance, they believe that the activity based costing cannot assign costs and overheads such as the salary entitled to the CEO of the organization. Such costs, they believe, can only be grouped as costs used to sustain the organization, and assigning such costs to processes and customers is impossible because of lack of proper methodology for such assignment of costs in the activity based costing method. The only way through which such costs can be allocated to products, services and to customers is by using vague and random methods, and this alone beats the purpose for using the activity based costing method, which is intended to provide necessary exact information to managers (Sale & Sharp, 2002). However, this is the only shortcoming identified by sceptics, and this is not therefore enough to disprove the effectiveness of the activity based costing method. Because of its proven effectiveness in organizations, many modern and state organizations are employing this method in their costing. For instance, the United States Marine Corps and the UK Police have adopted the activity based costing method into their systems of costing, and this method has been proved to effectively increase profitability, better use of resources and higher customer value. In addition, better accounting of finances has been achieved in these groups because of implementing the activity based costing method. There are ongoing improvements on this management accounting innovation, and many government authorities of finance are encouraging costing and accounting specialists to improve the activity based costing method by making it handy in activities such as setting of taxes and duties, budgeting, allocation of funds and sharing of costs (Bragg, 2006). The Balanced Scorecard is another leading innovation in management accounting, which was originated by two doctors, Robert Kaplan and David Norton. This method works by making activities in the organization parallel to the vision that the organization has. It is a major tool used in strategic planning in management. In the past, the Balanced Scorecard method was simply used by managers to evaluate performance in the organization. Today, the v method is more than a tool for evaluation of performance, but it is used for strategic management and planning. Therefore, instead of just being used to measure the organization’s performance, the Balanced Scorecard is used to enable managers to know what to do and what measures to implement into the organization so that better performance will be attained (Walker, 2008). The Balanced Scorecard innovation came as a modification of traditional costing methods, which were rather vague and poor. This innovation in management accounting is used to enable the managers of an organization to know exactly what steps to take in order to ensure balance in financial matters thereof. In other words, the Balanced Scorecard innovation is a tool used by managers to put the organization’s vision into action. Not only does the Balanced Scorecard method enable feedback on the processes happening within the organization, but it can also give feedback on the results obtained from without the organization, so that both the internal and external feedbacks can be used for strategic planning (Bragg, 2002). There are four major perspectives related to an organization’s vision and strategy that the Balanced Scorecard looks into; financial, customer, learning and growth and internal business processes. In the financial perspective, the main question this method asks is the way of appearance of the organization to its stakeholders for maximum profitability. In the financial perspective, the Balanced Scorecard innovative method seems to be in sync with conventional accounting methods, in that both methods seem to agree on one thing; that proper, timely and straight forward financial records are vital for good image portrayal to stakeholders so that confidence will be built hence reaching to a point of maximum profitability (Smith, 2005). In the customer perspective, a similar question is asked; “how should the organization appear to customers if maximum profits are to be released?” in this perspective, the importance of focusing on customer satisfaction is stressed on. This is because unsatisfied customers will definitely look for alternative and better methods of getting the products and services they need, from different sources. Therefore, the financial image of the organization is not used as the main strategy for profitability, because the financial image may be good presently only for the organization to collapse in the future because of poor customer focus. After all, customers are the main reason why a business exists and why the business is sustained. Therefore, the Balanced Scorecard method helps improve on customer focus by enabling managers to come up with methods through which types of customers will be studied and the processes via which products and services are availed to customers will be analyzed for better strategies (Bragg, 2007). In learning and growth, the Balanced Scorecard method seeks to cause the managers of an organization to ask themselves what can be done to sustain the ability to change thus ensuring realization of the organization’s goals and vision. For the organization to achieve its goals there is need for constant and consistent adaptability to change. If this is the case, then the managers are able to implement a strategy through which continuous changes can be achieved. One of the best ways of ensuring this is by seeing to it that the employees of the organization are subjected to training. It is quite necessary that employees continuously learn because of the fact that the business world is one characterized by rapid changes in trends, strategies and technology. The employees of an organization are its first resource, and the organization needs to invest in making these employees more knowledgeable for better performance. Apart from direct training of employees, the organization needs to ensure that employees are mentored within the organization. In addition, better communication and relationship among employees should be ensured (Barnwell, 2006). In the perspective of business processes, the Balanced Scorecard innovation seeks to cause the managers to ask themselves what business processes must be done extremely well to achieve maximum satisfaction of customers and stakeholders. The measures and strategies employed in this perspective by the Balanced Scorecard method are meant to enable the managers to have intimate knowledge of processes and knowledge of the extent to which these processes are effective in ensuring that the organization’s mission is accomplished. For this to be achieved, the managers need to thoroughly study the organization, not just relying on the observations of an external consultant of the organization (Smith, 2005). The Balanced Scorecard innovation in management accounting is important because it enables the managers to put their focus on the strategies rather than just measuring the performance of the organization. In addition, the Balanced Scorecard method enables reduction of costs in the business by enabling specific focus on the activities and processes that matter the most. The organization is also able to have an alignment between the activities it does and the vision it has. With the Balanced Scorecard method, future performance and profitability is also secured because of ensuring the security of customer and stakeholders’ satisfaction (Bragg, 2006). Accounting is a department in any organization that is of great consequence to the success or failure of the same. Even though there are no fixed strategies for management accounting as long as the management accountant delivers, it is better to be careful in choosing costing and accounting practices that will increase the capacity of the organization to make more profits, utilize resources better and satisfy customers and stakeholders better. Modern organizations know this, hence the reason why most of them have adapted the innovations in management accounting into their costing systems. This is because these management accounting innovations have been proven to work in any type of organization, whether it is public or private, non-profit making or profit making and large or small (Walker, 2008). Modern organizations have embraced changes and innovations inn costing, thus enabling these organizations to get to a position of greater competitive advantage. These innovations have also been used by these modern organizations to achieve the organizations’ goals by improving the decision-making processes and strategic management practices of these organizations. Adapting these innovations has greatly helped the organizations to have better sustainability and maximum profitability. Though these innovations have flaws and shortcomings within them, the better part of these innovations is effective, and modern organizations have gone ahead to implement thee innovations, flaws or no flaws. After all, even the conventional accounting methods have their share of flaws. The management accounting innovations are being developed and improved every day, and the future of these innovations in management accounting is promising to the organizations that embrace this change. References Barnwell, H. (2006). CIMA Learning System Test of Professional Competence in Management Accounting. New York: Elsevier. Bhimani, A. (2003). Management Accounting in the Digital Economy. London: Oxford University Press. Bragg, S. M. (2006). Accounting Control Best Practices. New Jersey: John Wiley and Sons. Bragg, S. M. (2002). Accounting Reference Desktop. New Jersey: John Wiley and Sons. Bragg, S. M. (2007). Management Accounting Best Practices: a guide for the professional accountant. New Jersey: John Wiley and Sons. Drury, C. (2007). Management and Cost Accounting. New York: Cengage Learning. Drury, C. (2005). Management Accounting for Business. New York: Cengage Learning. Sale, J. T. & Sharp, D. J. (2002). Advances in International Accounting, Volume 15. New York: Elsevier. Sisaye, S. (2001). Organizational Change and Development in Management Control Systems: process innovation for internal auditing and management accounting. Emerald Group Publishing. Smith, J. A (2007). Handbook of Management Accounting. New York: Elsevier. Smith, M. (2005). Performance Measurement and Management: a strategic approach to management accounting. New York: SAGE. Walker, J. (2008). Fundamentals of Management Accounting. New York: Elsevier. Read More