STRATEGIC MANAGEMENT ACCOUNTING [ACC 5508]

CHAPTER-1: INTRODUCTION

BACKGROUND

The Chartered Institute of Management Accounting (CIMA) defines

management accounting as follows: “management accounting is the sourcing,

analysis, communication and use of decision-relevant financial and non-financial

information to generate and preserve value for organizations.”

This is quite different from the strategic management accounting definition.

According to CIMA, strategic management accounting is defined as “a form of

management accounting where emphasis is placed on information which relates

to factors external to the entity, as well as non-financial information and internally

generated information.”

From the above, it is seen that external factors are a key component of the

concept of strategic management accounting. Strategic management accounting

involves the evaluation of external information regarding competitors in the

marketplace, political/monetary policies affecting the market, current trends in

prices, share and costs. The result of this evaluation is then focused on the

available resources of the firm. So, management can determine the needed

responses of the organization in order to be at the top in the market.

In carrying out this analysis, management brings three basic elements to

play: (1) Quality (2) Cost, (3) Time.

Enterprises evaluate the relative implication and importance of these three

factors on their customers and the entire market and draw out strategic paths of

actions to put them at the top of the competitions. This is carried out most

effectively using behavioral, technical and cultural analysis that provides both the

information and actions the firm has to take to beat the competition. Strategic
planning and SWOT analysis are two well-known tools to assist this process. A

management accountant’s role could include preparing and updating such a tool.
Simmonds views strategic management accounting as the provision and analysis of man-
agement accounting data about a business and its competitors which is of use in the development
and monitoring of the strategy of that business. Cooper and Kaplan state that strategic accounting
techniques are designed to support the overall competitive strategy of the organization,
principally by the power of using information technology to develop more refined product and
service costs.
Bromwich has given the following definition of strategic management accounting:
“provision and analysis of financial information on the firm’s product markets and competitors’
costs and cost structures and the monitoring of the enterprise’s strategies and those of its
competitors in these markets over a number of periods.”
Innes defines strategic management accounting as the provision of information to support
the strategic decisions in the organizations. Strategic decisions usually involve the longer term,
have a significant effect on the organization and, although they may have an internal element,
they also have an external element.
CONCEPT OF STRATEGIC MANAGEMENT ACCOUNTING
1. The attempt to incorporate strategic ideas into management accounting by taking generic
strategy tools and looking at what management accounting information can be used to
support strategy.
2. That it is designed to align management accounting with marketing management for
strategic positioning. This view looks at the marketing tools used by business and uses
management accounting within those tools.
3. That it is just a name to group together many of the contemporary approaches in
management accounting that have developed which have a strategic implication. There
are a number of contemporary approaches to management accounting which have been
marked as strategic management accounting techniques because of their external and
market oriented content.
DEFINITION AND EVOLUTION
Strategic management accounting (SMA) can be defined as "the process of
identifying, collecting, selecting and analyzing accounting data for assisting
the management team in strategic decision making and organizational effectiveness
assessment.

SMA is a systematic process to identify, record, classify and summarize information not
only internally oriented but also externally oriented market driven, customer focused and provide
managers with a range of techniques and tools to facilitate strategically- oriented decision
making.

SMA extends management accounting as it is externally (market and competition)

focused and extends the use of data from purely financial to include financial and non-financial
data to provide information to support management decisions. Give the focus it is strategic in
nature, whereas management accounting can be more operational and tactical (short term) in
focus. Hence strategic managerial accounting can be defined as: the use by managers of strategic
management accounting to support their decision making in a competitive environment. In order
to fully appreciate the development of strategic management accounting it is necessary to
evaluate the changes to the external environment of organizations over the last 30 years. The first
main changes has been in relation to the competitive environment of organizations. There have
been significant changes from the opening of barriers to trade allowing for global competition
which in turn has been possible because of advances in technology. The increase of competition
has had the effect of shortening the lifecycle of products. This means that organizations have to
work harder to develop new products and services and have less opportunity to recoup costs and
generate profit before the decline of the product or service. The improvement in technology has
given more information to the customer allowing the customer to make better informed decisions
about which products and services they wish to buy and also to allow the customer to be more
proactive in selecting products and services which tailored specifically for them.

In particular, the empowerment of customers has resulted in three key challenges for businesses:

 Prices are being forced down because customers are able to find a much wider sources
of alternatives.
 Quality is being forced up as business compete to attract the customer
 Greater variety in the product/service offering is necessary to attract the customer.
 Additionally a number of new management techniques have been adopted by firms in
light of the above concerns, such as total quality management, just in time and other methods to
rationalize the cost of production and consumption. The above development have forced
organizations to consider their positions in the markets, their prices and their costs in a different
way than they had done in the past. Definitions of strategic management accounting began to
spring up the earliest pioneer of which was Simmonds (1981) whose definition has subsequently
been incorporated into the CIMA definition which is:

A form of management accounting in which emphasis is placed on information

which relates to factors external to the firms, as well as non- financial information and
internally generated information (CIMA official terminology, 2005, p.54)

A number of definitions have appeared over the years but no definitive definition of what
it is, or what techniques it contains, have been consolidated over the last 30 years.

SMA is the merging of strategic business objectives with management accounting

information to provide a forward looking model that assists management in making business
decisions. Unlike management accounting, which focuses on internal accounting metrics, SMA
strategy evaluates external information reading trends in costs, prices, market share and cash
flow, and their impact on resources, to determine the appropriate tactical response. The strategic
element of management accounting requires enhanced intelligence about competitors, suppliers
and technologies.

Here is an example to properly illustrate the strategic management

accounting definition works in practice:

A coffee retail shop that wants to stand out of the competition, satisfy

customers in terms of quality, cost, and time, and still make maximum profit and

save costs can apply strategic management accounting. Based on the technical,

behavioral and cultural analysis carried out on the market and customers, the

management might discover that to stand out of the competition, cost is a major

factor. In a move to reduce costs, it might decide to sign a contract with suppliers

of coffee to supply at a fixed price for a given period of time. This will help the firm
reduce the price at which they can sell to customers, keep profit high and thus be

at the top of the market in terms of sales.

They might, however, discover that time is the major factor and may decide

to sign a contract with construction companies and real estate holders to construct

outlets at various points in the locality to reach customers quickly, and thus be at

the top of the competition in terms of time.

In conclusion, strategic management accounting goes beyond internal

affairs to include all other external data and information. It aims to take strategic

steps to beat the competition in the marketplace.

SPECIFIC DEFINITION

Simmonds “the provision and analysis of management accounting data about a business
(1981, p. 26) and its competitors for use in developing and monitoring business strategy”
Bromwich “the provision and analysis of financial information on the firm’s product
(1990, p. 28) markets and competitors’ costs and costs structures and the monitoring of the
enterprise’s strategies and those of its competitors in these markets over a
number of periods”
Roslender “SMA is identified as a generic approach to accounting for strategic
and Hart positioning, defined by an attempt to integrate insights from management
(2003, p. accounting and marketing management within a strategic management
255) framework”
Agasisti et “the identification of a set of information to support strategic decisions”
al. (2008, p.
2)
Langfield- “SMA entails taking a strategic orientation to generation, interpretation and
Smith (2008, analysis of management accounting information, and competitors’ activities
p. 206) provides the key dimension for comparison”
Tillmann and “SMA can broadly be defined as being the use of management accounting
Goddard systems in supporting strategic decision making”
(2008, p. 80)
Ma and “the body of management accounting concerned with strategically orientated
Tayles information for decision making and control”
(2009, p.
474)
Lord has identified the following components of strategic management accounting:
(i) Extension of traditional management accounting’s internal focus to include external
information about competitors.
(ii) Relationship between the strategic position chosen by a firm and the expected emphasis on
management accounting (i.e. accounting in relation to strategic positioning).
(iii) Gaining competitive advantage by analyzing ways to decrease costs and/or enhance the
differentiation of a firm’s products, through exploiting linkages in the value chain and optimizing
cost drivers.
TECHNIQUES OF STRATEGIC MANAGEMENT ACCOUNTING:
There are many things which fall within the jurisdiction of strategic management accounting.
Strategic management accounting uses different approaches/techniques to achieve strategy
execution, to develop integrated approaches to performance measurement.
Some of the strategic tools for performance measurement are:
 Kaizen Costing
 Theory of constraints (TOC)
 Bench Marking
 Activity-Based Management (ABM)
 Life Cycle Costing
 Target Costing
 Customer Profitability
 Value Chain Analysis
 Cost of Quality
 JIT ( Just in Time) System
 Relevant Cost and Revenue
 Pricing Decisions
 Flexible Budget
 Responsibility Reporting
 TQM ( Total Quality Management)
 Transfer Pricing
 Balanced Scorecard
 EVA (Economic Value Added)
 ABC (Activity Based Costing) and so on.

OBJECTIVES OF SMA
SMA provides information for taking the decisions of long period as well as short period,
changes in organizational objectives, the resources to be used for attaining these objectives. The
policies are governing for acquisition and use of these resources and attaining the objectives.
Aligning management accounting with marketing for better strategic positioning. Essentially
this means using management accounting within the company's marketing tools

The aims of this subject are:

 To develop the skills of the professional accountant in creating, managing and enhancing
sustainable value to the organization through the use of various strategic management
tools and techniques.
  To examine techniques for developing, implementing, measuring and monitoring the
performance of an organization to provide feedback for improving strategies.
General Objectives

On completion of this subject, you should be able to:

 Explain the role of strategic management accounting in supporting strategy development

and the day-to-day operations of an organization
 Explain and apply the strategic management process and organizational and industry
value analysis to understanding value drivers, cost drivers and the reconfiguring value
chains.
 Explain the role of performance measurement and control systems in value creation,
strategy implementation and monitoring performance to improve strategies
 Apply strategy management accounting tools and techniques to improve the contribution
and sustainability of value-creating activities.
 Discuss the role of project selection, planning, monitoring and completion in strategy
implementation.

COMPARISON OF THE TRADITIONAL & STRATEGIC APPROACHES TO

MANAGEMENT ACCOUNTING
Traditional Approach
Financial Focus
Absorption costing for cost allocation
Cost control orientation
Internally focused
Performance measurement financial
Fragmented Systems
Accounting and operational
information separate
Profit motives short-term
Pricing short –term cost oriented
Strategic Approach
Value focus
Marginal costing, target costing
Customer value orientation
Externally orientation
Multidimensional performance
measurement and benchmarking
Integrated systems
ERP and accounting systems
integration
Profit motive longer-term
Pricing market driven and strategic

OBSTACLES OF SMA
Strategic Management Accounting has not become a branded technique widely marketed by
consultants in the same way as ABC, EVA and BSC. One reason may be that many companies
are already responding to business challenges by following the principles that comprise SMA
without a conscious adoption of an SMA package. A more serious problem maybe that
traditionally management accountants have a performance rather than a learning orientation.
Thus, rather than look for new data (outside the organization and traditional accounting systems)
and fearing failure, management accountants stick to the familiar. To accountants, the familiar
usually means financial data. Furthermore, although the data for SMA may be held in different
functional areas of the organization (such as marketing), there may be a reluctance to share with
other functional areas such as management accounting. In short, the data for SMA is usually
available somewhere, the difficulty is pulling it together in an organizational context. One
advantage of the BSC is that it offers a neat format for integrating financial and non-financial
data.

TARGET COSTING

Target costing is a system under which a company plans in advance for the price points,
product costs, and margins that it wants to achieve for a new product. If it cannot
manufacture a product at these planned levels, then it cancels the design project entirely.
With target costing, a management team has a powerful tool for continually monitoring
products from the moment they enter the design phase and onward throughout their product
life cycles. It is considered one of the most important tools for achieving consistent
profitability in a manufacturing environment.

Target costing is most applicable to companies that compete by continually issuing a stream
of new or upgraded products into the marketplace (such as consumer goods). For them,
target costing is a key survival tool. Conversely, target costing is less necessary for those
companies that have a small number of legacy products that require minimal updates, and
for which long-term profitability is more closely associated with market penetration and
geographical coverage (such as soft drinks).

The target costing concept has limited application in a services business where labor
comprises the primary cost.
Target costing is not just a method of costing, but rather a management technique wherein
prices are determined by market conditions, taking into account several factors, such as
homogenous products, level of competition, no/low switching cost for the end customer, etc.
when these factors come into the picture, management wants to control the costs, as they
have little or no control over the selling price.

CIMA defines target cost as “a product cost estimate derived from a competitive market
price.”

Target Costing= Selling Price-Profit Margin.

PRODUCT PROFITABILITY
The amount of profit that a particular product or service makes in a particular period:
The Senior Manager is responsible for the overall product profitability throughout development
and implementing the long term product plan. Product profitability analysis will identify which
products are the most profitable and therefore most critical to the entire company.
 

LIFE CYCLE COSTING

Life cycle costing, or whole-life costing, is the process of estimating how much money
you will spend on an asset over the course of its useful life. Whole-life costing covers an asset’s
costs from the time you purchase it to the time you get rid of it.
Buying an asset is a cost commitment that extends beyond its price tag. For example,
think of a car. The car’s price tag is only part of the car’s overall life cycle cost. You also need to
consider expenses for car insurance, interest, gas, oil changes, and any other necessary
maintenance to keep the car running. Not planning for these additional costs can set you back.
The cost to buy, use, and maintain a business asset adds up. Whether you’re purchasing a car, a
copier, a computer, or inventory, you should consider and budget for the asset’s future costs.
CUSTOMER PROFITABILITY ANALYSIS

Customer Profitability Analysis (in short CPA) is a management accounting and a credit

underwriting method, allowing businesses and lenders to determine the profitability of each
customer or segments of customers, by attributing profits and costs to each customer separately.
CPA can be applied at the individual customer level (more time consuming, but providing a
better understanding of business situation) or at the level of customer aggregates / groups (e.g.
grouped by number of transactions, revenues, average transaction size, time since starting
business with the customer, distribution channels, etc.).

LEAN ACCOUNTING

Lean accounting describes the financial reporting practices used by a company that embraces
lean thinking: focusing on the value delivered to the client and on waste elimination, through
better workflow and material management.

An important purpose of Lean Accounting is to reduce the work required for the
routine accounting, control, and measurement system so as to free up the time of
the accountants (and others) so as to give them time to work on more strategic activities that
drive the company forwards.

The general purpose of accounting is to gather, analyze, and communicate a company’s

performance, position, and cash reserves - all types of information used to make decisions on
how to best manage a business.

As a result of traditional manufacturing processes making it challenging to accurately measure

costs, in the 1920s, cost accounting focus started to shift from information for
planning to information for control. This led to businesses turning to cost allocation, rather than
cost tracking, and that slowly became the new norm.

Aside from directly synchronizing accounting with a company’s strategy, Lean accounting also
works to reduce any wasteful practices from finance management, to limit those processes to a
minimum, and ensure that financial control does not grow to create an organizational and costly
overhead of its own.

A similar waste reduction is applied to the Lean understanding of assets. Traditionally, the cost
of excess capacity, e.g. more available team members in a service company, extra inventory in
manufacturing, was carried over to the customer. Just in Time, one of the pillars of Lean, flipped
this on its head, placing focus on producing only what’s needed & when it’s needed, and
reducing inventory to almost nothing.

VALUE CHAIN ANALYSIS

Value chain analysis (VCA) is a process where a firm identifies its primary [inbound logistics,
operations, outbound logistics, marketing & sales and service] and support activities [firsm
infrastructure, human resource management, procurement, technology] that add value to its final
product and then analyze these activities to reduce costs or increase differentiation. Value chain
represents the internal activities a firm engages in when transforming inputs into outputs.
Value chain analysis is a strategy tool used to analyze internal firm activities. Its goal is to
recognize, which activities are the most valuable (i.e. are the source of cost or differentiation
advantage) to the firm and which ones could be improved to provide competitive advantage. In
other words, by looking into internal activities, the analysis reveals where a firm’s competitive
advantages or disadvantages are. The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do. If it competes through cost
advantage, it will try to perform internal activities at lower costs than competitors would do.
When a company is capable of producing goods at lower costs than the market price or to
provide superior products, it earns profits.