Variable Costing and Segmented Income Statement
The current financial statements are at a risk of providing inconsistent and unbalanced business information. Basically, financial statements should provide true, consistent, and clear financial information. Nonetheless, the accounting institutions all over the world recommend for the use of absorption costing which does not clearly show all the components of cost in an income statement. In brief, absorption costing is an accounting method that consolidates all business costs as product cost. In effect, it ignores the elements of variable costs and fixed costs in production (Dury, 2008). To remedy this situation, financial governing institutions should encourage for the use of innovative accounting methods such as variable costing and segmented income costing. Noteworthy, this accounting method separates all the elements of costs in the production of goods and services. Accordingly, it shows a clearer picture of the business position. Evidently, detailed and clear information enables investors to determine which companies they will invest. In turn, this affects the rate of growth and performance of an organization. Effectively, this determines the overall economic program of a country.
Measurement of Innovation
On a similar vein, it is important for businesses to be able to measure the level of business innovation. In general, the level of business innovation directly determines the probability of business success on future operations. In addition, it also shows how secure the enterprise is from threats by competitors. Basically, the measure of innovation entails an understanding of the key performance indicators that directly and indirectly affect a good or a service (Dury, 2008). Evidently, each key performance indicator has an opportunity and a risk. In essence, an increase in opportunities on the key performance indicators leads to an increase in the likelihood of the innovation becoming a success. Similarly, an increase in threats on the key performance indicates an increase in the chances of the innovation failing.
Advantages and Disadvantages of Measuring Innovation
Evidently, the measurement of innovation has a lot of advantages as it directs the management on the need for implementing a certain innovation. Notably, some of the advantages of measuring innovation in goods and services industry include evaluating the rate of implementation, changes in technology, the need for patents, the rate of idea generation, and improvement of business processes. In addition, measurements may indicate important information on the impact of the innovation on the financial markets such as the success rate in the market, research and development efficiency, and the ease of use of the innovation (Weygandt, 2010).
Notwithstanding, measurements of innovation have weaknesses of providing inaccurate and inconsistent information. For example, the measurements may be able to indicate a high rate of implementation of innovation; nonetheless, the high rate shown may not guarantee success in the business (Weygandt, 2010). Furthermore, most ideas that are thought to be innovative are never patented since they are usually found not to be new during the implementation stage. Moreover, the rate of development of innovative ideas is usually low. Consequently, this undermines the importance of measuring the rate of innovation in an organization (Weygandt, 2010).
Model for Measuring Innovation
Evidently, there are various ways of measuring innovation, all of which aim at identifying the various effects of the new discoveries. Basically, innovations may be done to either increase a business’ profits, market size, or reduce costs. On the same note, businesses should identify the needs of their customers so that they may provide innovations that are of highest value to them. In light of this, businesses should understand that some customers want to get services fast, while others prefer slow but high-quality ones. Similarly, some buyers may be willing to pay more for expensive brands; on the contrary, other may prefer cheaper ones.
Accordingly, one of the most effective methods of measuring innovation is the Innovation Value Chain (IVC) method. Noteworthy, IVC demonstrates the innovation process as a sequential process that involves idea generation, development, and diffusion (Gamal, 2011). Typically, the idea generation process involves identifying the needs of the society or business (Gamal, 2011). For example, in a business where the costs of production are high, the research team may raise questions to try and look for possible ways of reducing them. In essence, they may raise the following questions. Are there cheaper ways of producing the company’s products? Can the fixed costs in the business commodities be absorbed by other products to minimize the average total costs of each unit? Additionally, the key performance indicators at this level may include the quality of ideas generated within a specified unit.
Correspondingly, the development stage is done based on the ideas generated in the first stage. For example, in order to reduce the burden of fixed cost in the production process, the research team may tell the management to start producing a new product. Thereafter, if this idea is selected, it is financed to enable full implementation and development. Correspondingly, if the idea is successful it is spread to other departments. In effect, this is the diffusion stage (Gamal, 2011). Noteworthy, if the research team successfully manages to produce new products, they will need to involve the production and sales department. In effect, this will lead to more revenue and profits for the business. Basically, this process may be shown in the table below.
Table 1: The Innovation Value Chain
Creation of units.
|Cross-Pollination. Collaboration Across Units||External Creation with parties outside the firm.||Selection
Screening and initial funding.
|Development Movement from idea to results.||Spread Dissemination across the business.|
|Key Questions||Does the research team have ways of minimizing average production costs in the company?||Do other departments have creative ideas on how the company can reduce its average production costs?||Should the company look for innovative cost-reducing ideas from outside firms?||Is the business competent to screen and fund the new idea?||Is the business competent to turn the new idea into a viable product?||Is the business competent in diffusing the new idea to all the business departments?|
|Key performance indicators (KPI)||The number of high-quality ideas generated within the unit.||The number of high-quality questions generated across business departments.||The number of high-quality ideas generated from external businesses.||Percentage of the new ideas that are funded.||Percentage of business ideas that lead to revenue generation and cost reduction. Period expected to attain maximum sales levels.||Percentage of market penetration in desired markets, and customer groups. The period expected to attain full diffusion.|
In summary, the use of variable costing method and segmented accounting is necessary for representing accurate and clear financial records. In addition, it ensures that the business shareholders can clearly evaluate the performance of all the company’s activities. Importantly, the development of new innovations and their successful implementation is necessary for enabling future success of the business. In light of this, governments should adopt the use of variable costing and segmented financial system. On the same vein, businesses should prudently analyze their new innovation in so that they are effective in enabling it attain its objectives.
Dury, C. (2008). Management and Cost Accounting (7th Ed.). London, UK: South-Western Cengage Learning.
Gamal, D. (2011). How to measure organization innovativeness? An overview of innovation measurements. Retrieved fromhttp://www.tiec.gov.eg/backend/Reports/MeasuringOrganizationInnovativeness.pdf
Weygandt, J., Kimmel, P., & Kieso, D. (2010). Managerial accounting: Tools for business decision making (5th Ed.). Hoboken, NJ: John Wiley & Sons Inc.