Management accounting is said to have a focus on internal activities such as cost analysis but other

techniques reconcile the inward nature of management accounting with the outward-looking focus of
strategy. In this essay, I will discuss three strategic management accounting techniques that demonstrate
this outward nature: activity-based costing (ABC), the balanced scorecard and customer profitability
profiles (CPP).

The first technique ABC helps a business identify different business activities and classify cost drivers.
This can then help them allocate resource costs efficiently; minimising the risk of over/under-assigning
costs to cost objects. Classifying these different activities helps the business identify the most valuable
activities for customers and managers can then focus on them to improve the business. For example, with
the case of the ‘Caribbean Internet Cafe’, ABC helped to identify profitability based on the success of an
investment. Managerial issues that came to attention from the ABC costing analysis included the cost
consideration of taxes and the owners’ salary as well as the Jamaican economy and market segment. This
information can help the founder decide whether the investment is worthwhile as well as the ideal strategy
that should be implemented for the success of the business.

Another technique that reconciles management accounting and strategy is the balanced scorecard which is
a method of measuring the business’ performance across multiple areas such as quality, cost, delivery, and
service. This method allows analysis of financial aspects, customer satisfaction, and growth. Weights are
allocated respectively to the chosen areas and the business is assessed to help identify areas that require
improvement. This will encourage the business to re-evaluate its strategy to improve the scores obtained
on the balanced scorecard. An example of this can be seen in the case of HTC where they analyse their
four suppliers. The scorecard helps identify which suppliers have the highest grade and those suppliers
which should be replaced. This method helps them form a strategy which changed the composition of
suppliers e.g. decreased dependence on supplier B due to scandals and economic uncertainty. Therefore it
is evident that the balanced scorecard is effective in reconciling management accounting and the outward
focus of strategy.

A third technique is customer profitability profiles which focus on segmenting customers into groups and
analysing the revenues obtained from each group, their respective costs and customer-level profits. This
method helps businesses assess customer value in the short and long term and identify the likelihood of
customer retention. For example, the customer profitability analysis for Spring Distribution highlighted
the groups which are currently unprofitable (groups G, H, I) and the groups which they should aim to
retain (groups A and B). A disadvantage of this method is the misleading nature of the long-term vs short-
term reports as not all costs are variable in the short run. Another factor managers must be cautious about

is dropping unprofitable customers due to short-term reports; these trends could change in the longer term
and could hence be a missed opportunity which competitors may take advantage of. It is therefore evident
that CPP is an efficient method in identifying profitable groups and ensuring customer retention as well as
investing in groups that have growth potential. This management accounting technique helps managers to
implement a longer-term strategy in improving the customer profitability ratios.

Overall, it is evident that the methods argued above help to reconcile the inward nature of management
accounting with the outward nature of strategy. ABC enables improved decision-making after assigning
costs and evaluating impacts on profitability, the balanced scorecard helps identify ways in which
recomposition within the business can create longer-term benefits (changing suppliers), and CPP enables
managers to identify customer segments that they should focus on to gain long-term profitability.