Management Accounting Innovation - Essay Example

? Management Accounting Issues [Institute’s Management Accounting Innovation Introduction Today, management accounting is another name for cost accounting. However, it was not always the case, these two had different definitions and objectives but with increase in accounting development and in modern term, any difference that had previously existed in between management and cost accounting is now blurred. Now management accounting is seen as synonymous with cost accounting. Dury in 2008 (as cited in Boyns & Edwards, 2013, p. 22) stated “It is apparent from an examination of the literature that the distinction between cost accounting and management accounting is extremely vague” and he did not distinguish between these two even in his work. Although authors like Horgen, Datar and Foster 2003 (as cited in Boyns & Edwards, 2013, p.22) provided separate definition of these two terms, it is difficult to see where they draw a line in-between these two. They defined management accounting as “It measures and reports financial and non-financial information that helps managers make decision to fulfil the goals of an organization” and defined cost accounting as “measuring and reporting financial and non-financial information relating to the cost of acquiring or utilizing resources in an organization”. As evident from these definitions, there is actually no difference in these definitions besides the shift of focus. Where one focus on achievement of organizations goal, the other focus on cost of resources that will help the organization to achieve it resources. It is evident that management accounting is the accounting, which will help organization in achieving its objectives. The widely accepted definition of management accounting according to the Chartered Institute of Management Accountants, is "the process of identification, measurement, accumulation, analysis, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources. Management accounting also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities" (CIMA Official Terminology, 2005). History The belief about the history of management accounting is that it existed even before the incorporation of large multi-national organizations. The small organizations doing business at that time also had the need to survive in the long run and needed the maintenance of positive cash flows to achieve this survival. These organizations needed some to direct their affairs to achieve their objectives. Those allotted the position of responsibility to achieve these objectives clearly needed specific information and details of the business to ensure long-term survival. As these details were supplied in form of accounting information, these firms were following management accounting even at that time. However, as there is no tangible proof to verify this history, it has not allotted much importance (Boyns & Edwards, 2013). The basic start of management accounting is associated with E.I du Pont de Nemours and Company, common name DuPoint. In 1903, the owners of the company Coleman, Alfred and Pierru du Point took a challenge upon themselves, which lead to the proper establishment of management accounting. The company was majorly a gunpowder manufacturing company, a very successful company facing severe competition, it was at that point its owner decided to start “forward integrating” by establishing their own network of branch sale offices throughout the whole United States. They also initiated “backward integration” by buying out numerous of their supplier, with this they emerged as the largest vertical company in the United States. This huge structure of the organization created frenzy on how to manage it and lead to the innovation and use of management accounting techniques of budgeting and return on investment so that the actual need for money and actual profit earned by each division of the company is assessed properly (Richmond University, n.d.). Initial Accounting Techniques In the early 1950’s, production was a simple process and management accounting was focused on using labours as a means of assigning overhead to the products. Production cost was evaluated by budgets and financial control of the production process. A voucher system of bookkeeping was created to control and record disbursement. Information for decision-making and control was acquired from market prices (Graner, 1965). Throughput, working capital and internal accounting system for evaluating cost were developed. New cost measurement techniques for productivity analysis and linking profits to product were also developed (Askaranay, 2004). In the 1960s, the focus of management accounting shifted to providing information for planning and control purposes. It was then management accounting acquired the status of a management activity (Kader & Luthar, 2004). In the 1980s, the innovation started truly in management accounting. This innovation was mainly due to increased competition powered by technological development and world recession. For example, the start of use of computer and robotics help improve the quality of the control process and reduce cost of those processes. The use of personal computers also changed the manner and amount of information that a manager could access (Ashton et al., 1995). New management and production techniques were introduced to compete with the challenges of that time and cost was controlled through reducing the waste of resources. “In short, cost and management accounting innovations in 1980s can be identified as: Activity based costing, Target costing, Value-added management, Theory of constraints, Vertical integration, Private labels and Benchmarking” (Kader & Luthar, 2004). The 1990’s was wan era on increase change and shift in the focus of management accounting. The development in technology and expansion of world wide web led to the appearance of e-commerce. This e-commerce appearance resulted in emphasizing the challenges of global competition and shifting of management accounting focus to creation of value through the efficient use of resources (Ashton et al., 1995). The major cost and management accounting techniques in that period were “activity based costing (ABC); activity management (AM) and activity based management (ABM); local information system (LS); balanced scorecard (BS); life cycle costing (LCC) and target costing (TC); strategic management accounting (SMA)” (Askarany, 2009).  Need for Innovation in Management Accounting: No one reason can be specified for the changes that occurred in management accounting. Various factors contributed to this change. One of the major reasons was however, the competitive environment of the 1990s and the increased global competition at that time was one of the triggers for that change and innovation (Bjornenak & Olson, 1999). More important than the outside competitive environment is the perception of the managers for that environment. If managers perceive themselves to be working in great competition, they will automatically shift focus to market and consumers. The increased technological development in information technology also had a profound effect on organizations and caused a major change in the nature of work in the organization (Burns & Scapens, 2000). Significant changes in the organization structure also contributed towards the need for change in. “For example, in UK in 1970s, there was a wave of acquisitions and mergers, with the creation of conglomerates, by 1990s, organizations were moving in the reverse direction. The trend was then for de-mergers, with companies focusing on core competencies, and outsourcing non-core activities” (Burns & Scapens, 2000). These changes in technology, competition and organization structure all played an important role in changing the nature of management accounting. Besides, what motivated innovation in management accounting was the drawback of old techniques of management accounting, which were not able to work with this increased competitive environment. The drawbacks include the sole focus on the labours as a major of productivity, attachment of measurement to the monthly financial cycle that affected the relevance and timeliness of the information based in standard costing. The focus on inventory valuation, productive time and the weak linkage to the other forms internal performance measures are some of the reason that tradition management accounting almost failed to keep up with the developments in organization and required a change in it (Chadwick, 2000). Innovation in Modern Organizations Most organizations in the last fifteen years have developed numerous innovations in the management accounting techniques; activity based costing (ABC) and balanced scorecard (BSC) tops the list of these innovations. Researchers have agreed that organizations have earned large benefits by adopting ABC and BSC, along with other innovations in their management process. However, there is extreme lack of evidence to support this fact and so this results in sceptics terming innovation as non-systematic and anecdotal. Despite of it, a large number of organizations have adopted these innovations; are in the process of adopting these innovations; or are determining the benefits that will result in with adoption of these innovations. A common point of all of these organizations adopting or in the process of implementing these innovation is that these are relatively larger organizations (Emsley, 2006). In modern factory organizations, it is more important for them to avoid production disruptive events than just focusing on reduction in cost of raw materials and ABC technique recognizes this change. ABC focuses on activities that drive the cost for example service provision and production of products by a company, it deemphasize the focus on direct labour as a cost driver. Management control theory describes management accounting as a surveillance providing mechanism within an organization (Emsley, 2006). Information regarding both productive and unproductive elements of a system is included in the modified management accounting information (Chadwick, 2000). It has the ability to change management’s decision in to positive or negative, depending upon the information contained in the data. Despite lack of hardcore evidence, it is very evident with the accounting policies being followed by large organizations thorough out the world that management accounting is an essential part of the management. It occupies a key position in making modern organizations achieve success and fight competition. However, it depends upon the abilities of the management and how they wish to utilize these innovative techniques of management accounting. Conclusion The paper aimed to identify the correct and most recent concept of management accounting that is adopted by the organizations of today. After clearly indicating that management accounting today is an amalgamation of cost accounting and the accounting, which provides information to the managers the paper, aimed to describe in details the history and the accounting techniques of the management accounting so that it is clear that what are the innovation in the management accounting techniques that took place and when. Describing in detail about the need for change and innovation in management accounting exhibit that what were the demands of modern organizations, and how previous method of management accounting would have been in sufficient to accommodate those demand. This need for change signifies the importance of management accounting in organizations and how organizations could not do without management accounting and that is why brought these innovations so that they can perform business in a helpful manner. Every element of this paper in short was an attempt to describe that how management accounting is contributing towards the success of modern organizations, resulting in being a driving force behind them. References Ashton, D., Hopper, T., & Scapens, R. (1995). The changing nature of issues in management accounting, in issues in management accounting. New York, NY: Prentice Hall. Askarany, D. (2009). An investigation into the diffusion of cost and management accounting innovations in Australia. AAA 2010 Management Accounting Section Meeting Paper. Retrieved from http://ssrn.com/abstract=1445439 or http://dx.doi.org/10.2139/ssrn.1445439 Bjornenak, T., & Olson, O. (1999). Unbundling management accounting innovations. New York, NY: Management Accounting Research. Boyns, T., & Edwards, J. (2013). History of management accounting. London: Routledge. Burns, J., & Scapens, R. (2000). The Changing nature of management accounting and the emergence of ‘hybrid’ accountants. London: Springer. Chadwick, L. (2000). Essential management accounting. New York, NY: Prentice Hall. Eaton, G. (2005). CIMA Official Terminology. London: CIMA Publication. Emsley, D. (2006). Discipline of accounting and business law. Sydney: School of Business, University of Sydney. Graner, S. P. (1954). Evolution of cost accounting to 1925. Tuscaloosa: University of Alabama Press. Kader, M. A., & Luther, R. (2004). An Empirical investigation of the evolution of management accounting practices. Essex: University of Essex. Richmond University. (n.d.). History of management accounting. Richmond University. Retrieved from http://blog.richmond.edu/acct305s11/files/2011/01/history-of-mgmt-accounting.pdf Read More