Friday, June 21, 2013

IMPORTANCE OF MANAGEMENT ACCOUNTING

1.0.0 Introduction It is common knowledge that any commercial organization that hopes to attain success and achieve its organizational objectives has to engage in a constant process of improvement. Nevertheless, in the modern day it has become clear that continous improvements alone are not enough in ensuring the success of a commercial venture. A commercial organization also has to engage in constant reinvention and innovation so as to keep up with the modern day commercial realms that are not only volatile but also very dynamic. As a matter of fact, Hamel (1996) claims that “pursuing incremental improvement while rivals reinvent the industry is like fiddling while Rome burns”. Innovation is a concept that has gained increased importance in different fields, for instance, academic and business fields. Emsley (2005, p. 157) claims that innovation is very important in the modern day organizations due to the fact that it equips firms with the capacity to adopt to and endure business environments that are very unpredictable and dynamic. This paper argues that management accounting innovation has been one of the core themes driving modern organizations. 2.0.0 Management Accounting Most of the successful organizations in the current day are able to attain success, accomplish their organizational objectives and remain competitive as a result of continous innovations. Management accounting is also frequently referred to as managerial acounting. Management accounting is described as the process in which management accounts are formulated for the purpose of equiping managers with fiscal and statistical information needed to engage in effective decision making processes. The Institute of Management Accountants (IMA) defines management accounting as “a proffession that involves partnering in Management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation of an organization’s strategy”(Boer, 2000). Management accounting is involved in the provision and utilization of accounting information to managers in commercial organizations. The management accountants avail information regarding the organization’s outstanding debts, available monetary resources, in process inventory, accounts receivable and raw materials in the organization. According to seal et al (2009, p. 675) management accounting frameworks vary from one firm to the next depending on the configuration of the firm as well as the business policies and strategies that it applies in its commercial operations. Management accounting is different from financial accounting information in a number of ways. Firstly, management accounting is not historical but rather inclined towards the future of the organization. In addition to this, instead of being case based, management accounting models are characterized by a level of abstraction which allows them to support decision making processes in commercial organizations. Unlike financial accounting, management accounting is not announced publicly but confidentially utilized by the management in a commercial organization to make effective decisions. As a consequence of the important role it plays in the decision making processes of managers, management accounting is computed in reference to the requirements of managers. Chongruksut (2009, p. 116) describes the main purpose of management accounting innovations as equiping managers with the information they need to support and make their decision making processes more effective. The increase in global competition and greater advancements in manufacturing contexts necessitate the creation of effective management accounting techniques. The most significant management accounting innovations in the last ten years include operational control systems (OCS), activity based costing (ABC), target costing (TC) and balanced scorecards (BC) (Emsley, 2005). The innovations that characterize management accounting are described as notions, objects and sets of procedures that are perceived to be emergent and new in the firm in question. Consequently, in spite of the fact that not all organizational transformations are characterized by innovation, all management accounting innovations are typified by changes in the commercial organization. A number of investigative studies conducted to determine the role played by management in driving innovation have revealed that this role has not adequately fulfilled. 3.0.0 Importance of Management Accountants in Driving Innovation Cooper and Dart (2009, p. 4) state that the term “management accounting change” is utilized in the modern day to refer to the shift in the roles that the modern management accountant is expected to play. This has been as a consequence of the development of the management accountant’s role as an advisor of the managerial decision making process as well as the acceptance of emergent accounting and management techniques in modern day commercial organizations. Schoute and Wiersma (2009, p. 5) posit that the innovations formulated by management accountants are perceived as being mostly administrative transformations that are radical in nature. The innovations may also be technical; the carrying out of a certain type of management innovation in a firm tends to bring about the implementation of other related innovations. According to Abrahamson (1991, p. 586) a survey carried out on a number of managers from the public sector revealed that the acceptance and implementation of process in management accounting is closely related to the creation of cost control procedures. While the conventional accountants inclined towards the utilization of variance analysis as their main modus operandi, the main technique for modern day management accountants is that of cost accounting. In the traditional method of variance analysis accountants would determine the budgeted and real expenditures of an organization’s raw materials and labor utilized in a particular period of production and then analytically compare the two. In spite of the fact that there are a number of commercial organizations which apply the variance analysis technique, currently it is combined with modern innovative practices for instance activity based costing (ABC) and cycle cost analysis (CCA). Boer (2000, p. 314) points out that the efforts and functions fulfilled by modern day management accountants are very important to the commercial organization due to the fact that they have an assortment of associations with the company. First of all, management accountants are vested with the responsibility of fulfiling the role of strategic partners and providing organizational managers with operation and financial imformation for purposes of decision making. In addition to this, management accountants are expected to manage business teams in the commercial organization as well as present a report to the organization’s finance system regarding the relationships and duties in the organization. Accountants are expected to undertake the functions of forecasting and planning, assessing and managing the expenditure of a commercial organization as well as carrying out activities of variance analysis. It is as a consequence of these responsibilities that management accountants in the present day are perceived as being tasked with the dual responsibility of undertaking roles in both the finance and business team departments. Abrahamson (1991, p. 600) claims that management accountants make use of resources and information available in the firm to formulate decisions that are aimed at ensuring that positive outcomes are attained in the commercial organization. Cooper and Dart (2009, p. 6) point out that there are a number of themes that characterize the roles played by management accountants in driving innovation for modern day commercial organizations. Firstly, the importance assigned to technical knowledge and traditional competences in the modern organizations has reduced. Although these conventional techniques are still esteemed, they are perceived as playing a supplementary role particularly in the non-financial functions assigned to the management accountant. In addition to this, Cooper and Dart (2009, p. 6) further state that the practice of management and leadership has become of greater concern to the management accountant as they come up with innovative concepts aimed at enhancing the competitive edge and success of commercial organizations. The modern day management accountant is not only interested in the financial aspects of a commercial organization but also other aspects such as the human resource, organizational transformation and risks that the company is exposed to. As management accountants endevor to fulfill their new roles, it is only inevitable that their working techniques and methodologies will also change (Cooper and Dart, 2009, p. 6). Management accountants’ role in speeding up the process of innovation in commercial organizations has increased particularly in regard to the sets of procedures involved in the evaluation and report of fiscal and non-fiscal information to managers for purposes of decision making. All the actions and efforts of management accountants ought to be connected to enabling the commercial organization attain its set objectives. The functions fulfilled by management accountants are thus perceived as accelerating the attainment set goals in commercial organizations. 4.0.0 Conclusion This essay has described in detail the phenomenon of management accounting innovations in modern organizations. The transformed role of modern day management accountants has also been deliberated on in detail. In spite of the consensus that has characterized the transformation of the management accountants’ functions, empirical evidence in the modern day reveals that these transformations have not been adequately translated into practice. The efforts and functions fulfilled by modern day management accountants are very important to the commercial organization due to the fact that they have an assortment of associations with the company. Management accountants are expected to fulfil the role of strategic partners and also provide organizational managers with operation and financial information for purposes of decision making. Furthermore, management accountants are expected to manage business teams in the commercial organization as well as present a report to the organization’s finance system regarding the relationships and duties in the organization. Management accounting innovations play a very significant role in ensuring that modern organizations remain successful, attain their set business objectives and are able to reamain competitive in the financial realms and markets that are typified by a high level of volatility and dynamism. 5.0.0 References Abrahamson, E., (1991), “Managerial Fads and Fashions: The Diffusion and Rejection of Innovations”, Academy of Management Review, Vol. 16, No. 3, pp. 586- 612 Boer, G., (2000), “Management Accounting Education: Yesterday, Today and Tomorrow”, Issues in Accounting Education, 15(2), pp. 313-334 Chongruksut, W., (2009), “ Organizational Culture and the Use of Management Accounting Innovations in Thailand”, Ramkhamhaeng University International Journal, Vol. 3 (1), pp. 113-119 Cooper, P. and Dart, E., (2009), “ Change in the Management Accountant’s Role: Drivers and Diversity”, School of Management- University of Bath, Working Paper Series, pp. 4-10 Emsley, D., (2005), “Restructuring the Management Accounting Function: A Note on the Effect of Role Involvement on Innovativeness”, Management Accounting Research, Vol. 16, pp. 157-177 Hamel, G., (1996), “Strategy as Revolution”, Harvard Business Review (July/August) Schoute, M. and Wiersma, E., (2009), “The Evaluation of Management Accounting Innovations: Some Methodological Issues”, Research Memorandum ARCA- Vrije Universiteit Amsterdam Seal, W., Garrison, R. H. and Noreen, E. W., (2009), “ Management Accounting”, McGraw-Hill, pp. 675-788