Management Accounting Innovation as a Core Theme in Driving Modern Organizations - Essay Example

Management Accounting Innovation as a Core Theme in Driving Modern Organizations [Name of Student] [Professor’s Name] [Subject Title] 19th May, 2012 Management accounting innovation Introduction This paper researches and analyses a management accounting issue. Specifically, the paper researches and analyses whether management accounting innovation has been one of the core themes driving modern organisation. In this paper, innovation has been used to mean the successful introduction of an idea that is perceived as new in a given system. Large scale use of an idea is what determines the success of an innovation. The paper has shown that an organization needs to be innovative in order to gain a competitive advantage over their competitors - failure of which the organization can be driven out of the market. Change is a must for any organization. Therefore, it is important for organizations to deal with changes in order to survive. The intensity and speed of management accounting changes in the market place is sending shockwaves to all market participants. Organizations’ competencies and product portfolios are expanding and going global and since competition is intensifying and life is becoming more and more complex by day, organizations’ profit margins are shrinking, hence organizations are only left with two choices – either change or go under. Horngren & Harrison (2009) observes that these changes provide both opportunities and challenges. The changes in environment have resulted in various new techniques and approaches to existing techniques. One of these new emerging techniques is strategic management accounting. Traditional management accounting is basically an information system whereby providing information is a management requirement in policy formulation, planning and monitoring organization transactions, and selecting the appropriate course of action from the available opportunities. It had various limitations that can be overcome through strategic management accounting. Traditional management accounting mostly works under stable environment in national boundaries and emphasizes on tangibles and quantities (Weygandt, et al., 2009). It focuses more on financial accounting and cost systems that are aligned to the financial reporting systems. Moreover it has a short-term perspective, annual planning and control functions among others. However today’s business environment has become far more challenging and demanding for organizations as a result of global competition, rapid innovation and increasingly demanding customers. Accordingly companies now demand better management accounting information, for instance; quality of products, customer satisfaction, and customer retention. According to Fess and Warren (2004), management accounting is a central part of management concerned with identification, presenting and interpretation of information used for: strategy formulation; planning and monitoring activities; making decision; maximizing the use of scarce production factors, and safeguarding of assets among others. Planning is where the management specifies the necessary steps in directing the organization towards its goals and objectives. These plans will be both long term and short term in nature. For instance, the management will be concerned with what costs will be incurred in the future so that appropriate plans and decision can be made in good time. Controlling is where managers study the accounting and other reports coming to them and making comparison against the plans set earlier (Bromwich, 1989). These comparisons show where operations are not proceeding effectively or where certain persons need help in carrying out their assigned duties. Management accounting systems provide sound bases of information for financial control. The intention of a good managerial accounting system is getting important data for transactions relating to the organization. The system should inform the top management about organization position at a particular point. The data should be easily available within management accounting system. This is because management accounting concerns itself with provision and usage of accounting related information to management in the organization to offer the managers the ground of making undisputed decisions which enables them to be efficient in managerial issues of the organization. For instance, an organization with a smart retail management system enables the organization to maintain adequate stock to meet customer’s demand. Lack of sufficient inventory slows down cash inflows in the organization whereas too much inventory is costly for the organization because of holding cost. Decision making is where managers attempt to make rational choices among alternatives. An important factor in making that choice is the financial implication of the various alternatives. Correctly presented accounting information can be of great value to the management in decision making. Pricing decisions are complex and many interacting factors need to be considered, for instance, the type of market in which the organization operates; the degree of competition; demand and elasticities of demand; the cost structure of the product and the organization, and the state of the economy among others. Pricing is not simply a cost based decision; although past costs and expected future costs are factors to be considered in the pricing decisions. Information has grown to become one of if not the most priced organisational resource. To this end many organizations are now spending billions of dollars in installing new management accounting information systems or in upgrading existing ones. This can be explained by the observed trends in information and communication technology (ICT). Some of these ICT trends include connectivity which is concerned with the interconnection of computers and other digital devices to enhance the issue of data sharing, resource sharing and data communication. Digital convergence is whereby digital devices from different industries are brought together to form one multipurpose device for purposes of assessing information and distribution of information. The most driving factor for the observed trends in ICT is technological revolution. This revolution has brought about rapid changes in products, processes, systems, structures, and productivity among others. Therefore, in order to keep pace with these changes organizations need a good system of information access, management and distribution. A change in technological means development of technology used in the organization over time. As noted in Steven, Roby and Gregory (2008) technological change can be uninterrupted or additional change and interrupted or a breakthrough change. Technological change is creation of new knowledge that is applied to practical problems. Technological change impacts on decision making since organizations must recognize that they require innovative leaders who understand the dynamic environments that the organizations operates in, and can make a distinction between them. Faced with these difficulties, leaders need to be equipped with suitable skill sets like good communication, critical thinking, flexibility, and negotiation abilities. They should be assisted with the required resources for making good decisions that are beneficial to the organization. The way in which communication is facilitated, information exchanged, and commerce carried out has been revolutionalized by the internet. Technology is dynamic and efficient management calls for more knowledge in technology so that organization can manage its resources by developing, maintaining or keeping their competitiveness. Even though technology has helped organizations in saving time and minimizing cost by conducting commerce and trade in real-time, it can also aid in disseminating sensitive information regarding practices of the organization, trade practices and development of new product in real time. Hilton (2004) notes that for strategic management accounting to be successful a number of techniques and approaches especially cost management systems are necessary. Some of the approaches include: product attribute costing; target costing; life cycle costing; competitor analysis; customer profitability analysis, and balanced scorecard. Product Attribute Costing is the characteristics of the product for which customers actually pay. Management accountants can play an important function here in valuing the given characteristics and in monitoring and reporting regularly on these costs. Product features enable managerial accounting to explain the link between the combination of features offered and the mix of production factors to be engaged. Management accountants also need to be concerned in the determination of the costs of any package of features at a competitive level. Product attribute costing is a customer-oriented technique and uses cost information. Target costing involves determining the price at which clients will be willing to offer and then deducting a ‘target’ profit mark-up from the target selling price. Resultant cost is the target cost that is then compared with the actual cost. Management needs to examine ways of minimizing the actual cost to equal the target cost. Lifecycle costing - organizations make profit only during the sales phase, but it incurs cost at product-planning and design phase, manufacturing and sales phase and after sales service phase. Life cycle costing traces costs and revenues on a ‘product-by-product’ basis over several periods throughout the lifecycle. This enables management to understand the cost consequences of developing and making a product and also in identifying areas in which cost reduction efforts are likely to be most effective (Hall, 2004). It gives essential information on product pricing too. In Lifecycle costing, cost is estimated and accumulated over the entire product’s lifecycle. Competitive information - information regarding the competitor is important for any organization. Competitive information is available through public sources, such as press, annual reports, official institutions’ statistics as well as informal sources, for instance customers, sales’ personnel, other competitors and suppliers, consultants, industry specialists, trade centres, competitors' old employees among others. This information needs to be analyzed and interpreted well. Customer profitability analysis involves the application of a management accounting technique which is an activity-based costing approach to customers in order to identify customer-wise cost and profitability. Activity-based costing is useful in segmental profitability analyses as well. Balanced scorecard is a technique used in strategic management for communication and evaluation of accomplishment of the mission, strategy and objective of the organization. Performance is measured on the basis of four perspectives which are customer perspective, financial perspective, internal processes perspective and the learning and growth perspective. This shows that the role of management accountants is becoming more integrated, interdisciplinary and outward in focus. Focus is not only financial but also non-financial information. Management accounting calculates the performance of an organization for making decision, motivating and coordinating through the use of techniques like cost allocation, transmit prices, product-costing, responsibility centres, measurement of performance and budgeting. Activity-based costing (ABC) is one of management accounting innovations. It is a costing model which identifies organization’s activities and assigns each activity cost to all products and services based on the actual consumption (Gaffikin, 2008). Through this method an organization is able to estimate the cost of each product and service for the purposes of identification and elimination of products that are unprofitable and reducing the selling price of overpriced products. Since ABC is a useful tool for understanding products and customer cost and profitability, it is used to support strategic decisions like outsourcing, pricing, and identification and measurement of process improvement initiatives. Conclusion Management accounting role depends on other activity areas within the organization. Therefore, the role of management accountant is wide because there is need to make critical decisions that impact on the organization. Innovation plays a greater part in providing solutions that are incorporated in the decision making process hence organization continues to grow in strength. References Bromwich, B., (1989). Management accounting: Evolution not revolution, CIMA Publishing. Fess, E. and Warren, C., (2004). Accounting principles. Canada: Southwestern Company. Gaffikin, M. (2008). Accounting theory: Research, regulation and accounting practice. Sydney: Pearson Education. Hall, A., (2004). Accounting Information Systems, 4th ed. Ohio: South-Western Publishing Co. Hilton, R. W., (2004). Managerial Accounting: Creating Value in a Dynamic Business Environment. New Delhi: McGraw-Hill Publisher. Horngren, C. T., & Harrison, W. T. (2009). Accounting (7th ed.). Upper Saddle River, NJ: Pearson Prentice Hall. Steven, R. J., Roby B. S., and Gregory, J., (2008). Managerial Accounting: A Focus on Ethical Decision Making. New Jersey: Cengage Learning. Weygandt, J. et al., (2009). Managerial Accounting: Tools for Business Decision Making. New York: John Wiley and Sons. Read More