TOPIC 2

STRATEGIC MANAGEMENT
ACCOUNTING

1
 Discuss the differences between traditional
and strategic management accounting
 Identify the strategic issues in MA
 Describe the issues conceptually
 Explain approaches used in handling the
strategic issues
 Discuss the role of management accountant
in confronting the issues
 Discuss strategic environmental MA

BKAM 3033 – Topic 2

2
 an integrated set of actions aimed at
Strategy securing a sustainable competitive
advantage.

- a process of designing a mission

Strategic statement, setting long-term goals
planning and objectives, and establishing
strategies.
- a long term plan.

BKAM 3033 – Topic 2

3
 long term planning, implementation and
Strategic controlling which provides a framework
management for all the actions managers take and
how they are assessed.

Strategic the role of mgt accounting in the

management strategic analysis, planning and control
accounting of org.

BKAM 3033 – Topic 2

4
BKAM 3033 – Topic 2
5
Why Traditional Management Accounting is
not sufficient to provide information for
strategic decisions?

BKAM 3033 – Topic 2

6
Conventional SMA
Historical Prospective

Manufacturing focus Competitive focus

Existing activities Possibilities

Reactive Proactive

Overlook linkages Embraces linkages

Data orientation Information orientation

Internal External

BKAM 3033 – Topic 2

7
Ability to acquire, allocate and utilize
resources in line with the needs of
environment is very crucial, so the focus of
management accountant, therefore, should
be outwards and forward.

BKAM 3033 – Topic 2

8
• The following “strategic functions” that information provided by
a strategic accounting system should support:
. environmental analysis;
. strategic alternative generation;
. strategic alternative selection;
. planning the strategic implementation;
. implementing the strategic plan; and
. controlling the strategic management process.

• This information should, therefore, be:

• mostly non-financial;
• focused on the future;
• both internal and external; and.
• based on reliable projections of the future.

9
 What is SMA

The Chartered Institute of Management

Accountants [CIMA], U.K. defines strategic
management accounting as, ‘A form of
management accounting in which emphasis is
placed on information, which relates to factors
external to the firm, as well as nonfinancial
information and internally generated information’.

10
What is SMA

11
What is SMA
• To summarise: SMA represents a development of MA that should
cooperate and provide strategic information for strategic management,
marketing and other managerial functions.

• SMA adopts:
• A more outward-looking orientation in focusing on the customers,
actual and potential competitors, and markets in general;
• An orientation to the internal resources and organizational
capabilities (intellectual capital);
• A forward-looking orientation that allows to create and achieve
competitive advantages and enhance organizational performance,
and
• Both financial and non-financial measurement typologies.

• To attain its objectives SMA considers a greater management

accountant’s involvement in managerial functions and in the strategic
decision-making and the use the use of MA practices with a strategic
orientation.

12
13
14
15
 Life Cycle Costing (LCC),
 Kaizen Costing
 Target Costing (TC)
 Benchmarking.

BKAM 3033 – Topic 2

16
 LCC – strategic analysis tool/discussed
in form of life cycle cost management
and life cycle cost analysis.
 Kaizen Costing – effort to reduce costs
of existing products and processes
continually.
 TC – the difference between the sales
price needed to capture a predetermined
market share and the desired per-unit
profit.

BKAM 3033 – Topic 2

17
 Benchmarking – a close phenomenon to
competitor accounting. Competitor
accounting is a special accounting-based
form of strategic level benchmarking,
which does not include cooperation with
the object of this comparison activity.

BKAM 3033 – Topic 2

18
 Life Cycle – defined as the period of a
product in the market. Life cycle analysis
should consider the period between birth
and decease which studies:
◦ the phases of life,
◦ the repeated patterns that occur during life, and
the causes an effects of incidences,
 aiming at something that can be
recognized and learned from the earlier
life cycles of the items under study.

. BKAM 3033 – Topic 2

19
 Life cycle costing defined as the total cost
of ownership of a system during its
operational life where it embraces all costs
associated with the:
◦ feasibility studies,
◦ research, development,
◦ production,
◦ maintenance, replacement and disposal
◦ support, training and operating costs
 Whole life cost, the total cost of ownership
over the life of an asset, also commonly
referred to as "cradle to grave" or "womb to
tomb" .

BKAM 3033 – Topic 2

20
 Product research, development and planning
phase:
◦ Market research
◦ Product design
◦ Product development
 80% to 85% of product’s total life cycle costs
are committed by decisions made in the R &
D stage.

21
 Product manufacturing and sales phase
◦ This stage offer offers little opportunity for
engineering decisions to reduce costs.
 To reduce costs – product & process costing,
modern production technologies, facilities
layout, benchmarking, JIT, kaizen.
 Sales phase:
◦ Introduction;
◦ Growth
◦ Maturity
◦ Decline & abandonment.

22
 Post-sale service and disposal phase
 Although the costs for service and disposal
are committed in the R&D phase, the actual
service stage begin once the first unit of a
product is in the hands of the customer.
 Disposal costs include those associated with
eliminating any harmful effects associated
with the end of a product’s useful life.

23
Figure 2.1 Cost committed and incurred during a products lifecycle

24
25
Strategies and Techniques in Management
Accounting- LCC
• Traditional management accounting procedures have focused
primarily on the manufacturing stage of a product ’s life cycle.

• LCC focuses on costs over the product ’s entire life cycle to

determine whether profits earned during the manufacturing phase
will cover the costs incurred during the pre-and post-
manufacturing stages.

• A large proportion of a product ’s costs can be committed or

‘locked in ’during the planning and design stage (see Figure 2.1).

• Cost management can be most effectively exercised during the

planning and design stage.

BKAM 3033 – Topic 2

26
Benefit of life cycle costing

(i) It results in earlier action to generate revenue or

lower costs than otherwise might be considered.
There are a number of factors that need to be
managed in order to maximize return in a product.

STRATEGIC MANAGEMENT ACCOUNTING

(ii) Better decision should follow from a more accurate
and realistic assessment of revenues and costs
within a particular life cycle stage.

(iii) It can promote long term rewarding in contrast to

short term rewarding.

(iv) It provides an overall framework for considering

total incremental costs over the entire span of a
product.
27
 Kaizen Costing – defined as the maintenance of
present cost levels for products currently being
manufactured via systematic efforts to achieve
the desired cost level.
 Kaizen means improvement which contain two
elements- improvement and continuity. One
important advantage is its low cost setup.
There is basically not much investment in
terms of equipment. It is more of using the
already existing resources and information to
reduce cost.

BKAM 3033 – Topic 2

28
29
30
31
32
Strategies and Techniques in Management
Accounting - Kaizen Costing
• Kaizen costing is applied during
manufacturing stage, both of new and
existing products.
• Focus on value and profitability.
• Kaizen costing activities should be a part of
process of business improvement
continuously, with improvement s in quality,
product functionality, and service jointly.
• Kaizen costing aims to reduce costs of
processes by a pre-specified amount relying
on employee empowerment.
33
Strategies and Techniques in Management
Accounting - Kaizen Costing

Standard Costing Kaizen costing

Concepts: Concepts:
Cost control Cost reduction
Goal – to meet cost Goal – to achieve cost
performance standards reduction standards
Techniques: Techniques:

Who has the best Who has the best

knowledge to reduce knowledge to reduce
costs? costs?

34
35
36
37
38
39
40
41
 Target Costing – is a relatively new concept
first adopted by some Japanese companies in
the early 1970’s. it is a procedural approach to
determining a maximum allowable cost for an
identifiable, proposed product assuming a
given target profit margin.
 In the late 1970s and early 1980s Komatsu, a
heavy equipment company, used TC to develop
products similar in quality and functionality to
its competitor, Caterplillar.

BKAM 3033 – Topic 2

42
 Has two objectives:
i) To lower the costs of new products so that
the required profit level can be ensured
while the new products meet the levels of
quality, delivery timing, and price required
by the market.
ii) To motivate all company employees to
achieve the target profit during new
product development by making target
costing a company wide profit
management activity.

43
44
 Target cost = Selling price – Required profit
margin.
 Under TC, the decision to produce a good or
service depends on expected costs developed
in the design phase.

45
 Strategies and Techniques in Management
Accounting - Target costing
• Focuses on managing costs during a product/service’s planning
and design phase.
• Involves the following stages:
1. Determine the target price which customers will be prepared
to pay for the product.
2. Deduct a target profit margin from the target price to
determine the target cost.
3. Estimate the actual cost of the product.
4. If estimated actual cost exceeds the target cost investigate
ways of driving down the actual cost to the target cost.

• Iterative process involving:

1. Tear-down analysis
2. Value analysis and functional analysis

• It is important that target costing is supported by an accurate

costing
46
An example of target costing

47
48
Traditional U.S. Cost
Market research to determine
customer requirements
Product specification
Design
Engineering
Supplier pricing
ESTIMATED COST
Desired profit margin
= TARGET COST
Expected selling price – Estimated
cost
Manufacturing
Periodic cost reduction
Japanese Target Costing
Market research to determine
customer needs and price points
Product specification & design
Target selling price
(and target product volume)
-
Target profit
=
(VE & supplier cost reduction)
Manufacturing
Continuous cost reduction
49
Strategies and Techniques in Management
Accounting - Kaizen Costing vs Target Costing

• Kaizen costing is applied during manufacturing stage

whereas target costing is during planning stage.

• Kaizen costing focuses on production processes

whereas target costing focuses on the product.

BKAM 3033 – Topic 2

50
 Product development and design phases are
long and complex;
 The production process is complex;
 The market is willing to pay for differences in
quality or function;
 The manufacturer can push some cost
reductions onto suppliers and
subcontractors;
 The manufacturer can influence the design of
subparts.

51
 Benchmarking – definition:

As a process of studying and adapting the best

practices of other organizations to improve the firms
own performance and establish a point of reference
by which other internal performance can be
measured (Atkinson et al., 2012)

A process by which a firm identifies its critical

success factors, studies the best practices of other
firms (or other units within a firm) for these critical
success factors, and then implements improvements
in the firm’s processes to match or beat the
performance of those competitors (Blocher, Chen &
Lin, 1999)

BKAM 3033 – Topic 2

52
 Also referred as “best practice benchmarking” or
“process benchmarking”.
 Types of benchmarking:
◦ Internal benchmarking
◦ Functional benchmarking
◦ Competitive benchmarking
◦ Strategic benchmarking
◦ Product benchmarking
◦ Process benchmarking
◦ Generic benchmarking

53
54
 Stages of the benchmarking process:
◦ Stage 1 : Internal study and preliminary
competitive analyses
◦ Stage 2: developing long-term commitment to
the benchmarking project and coalescing the
benchmarking team
◦ Stage 3: Identifying benchmarking partners
◦ Stage 4: Information-gathering and sharing
methods
◦ Stage 5: Taking action to meet or exceed the
benchmark.

BKAM 3033 – Topic 2

55
56
 Provides direction and impetus for
continuous improvement;
 Identifies the ‘best practices’;
 Expose performance gaps.

57
 Porter’s approach
◦ Porter’s 5 forces
◦ Porter’s competitive advantage
◦ Porter’s value chain
 Simmond’s approach
 Bromwich’s approach
 Ouchi’s approach
Porter’s Approach
 Michael Porter in 1980’s.
 Premised on two basic questions:
 How attractive, from the viewpoint of long-
term profitability, are different industries?
 What is the enterprise’s relative position in its
industry?

59
60
Porter’s 5 Forces in formulating & implementing
strategy:
 The threat of new entrants
 Do certain factors such as economics of scale, product
differentiation, capital requirement, protect the firm fr
newcomers?
 Do other factors such as govt regulations & policies
restrict competition?
 To what degree is the firm protected fr competition fr
new entrants to the industry?

 The threat of substitutes

 Will the presence of readily substitutable products
increase the level of intensity of competition for the
firm?
 Eg. plastics, glass & fiber-foil exert pressure on the
metal can market., electronic alarm system vs security
guard market, fax machines & electronic mail vs
express delivery.

61
 The rivalry amongst existing companies
 Intense rivalry can be result of high entry barriers,
rapid product innovation, slow growth in total market
demand.
 How intense is the overall industry rivalry facing the
firm?
 The bargaining power of supplies
 The greater the bargaining power of a firm’s suppliers,
the greater the overall level of competition facing the
firm.
 The bargaining power of suppliers will be higher when
the group of suppliers to the firm is dominated by a
few large firms, and when these suppliers have other
good outlets for their products.
 Eg. soft-drink firms sell to fast-food restaurant chains
& athletic teams that hv strong bargaining power.
 The bargaining power of consumers
 The greater the bargaining power of a firm’s
customer, the greater the level of competition facing
the firm.
 Barg. power of cust. will likely be higher if there are
relatively low switching costs and if the products are
not differentiated.
62
63
Cost leadership strategy

 aims to be the lowest-cost producer

-product design;
-scale economics;
-experience curve
 To provide the same or better value to
customers at a lower cost than offered by
competitors.
 Example: A company might redesign a product
so that fewer parts are needed, lowering
production costs and the costs of maintaining
the product after purchase.

64
65
66
 In this strategy:
-offer some unique dimension
-generate customer value
-be difficult to copy
 Strives to increase customer value by
increasing what the customer receives
(customer realization).
 Example: A retailer of computers might
offer on-site repair service, a feature not
offered by other rivals in the local market.

67
ENTERPRISE STRATEGY TOPIC 6 68
69
•directed at narrow segments
-avoid strategy distraction
-compete with limited resources
-reduce competitive pressure
-bypass competitor skills/assets
• Example: Paging Network, Inc., a paging
services provider, has targeted particular
kinds of customers and is in the process of
weeding out the nontargeted customers.
• Competitive advantage is based on either
cost leadership or product differentiation.

70
71
There is risk in the focus approach. The niche
targeted may be small and fail to justify the
company’s attention. In addition the niche may
shrink or disappear altogether over time as
consumer tastes and fashions change.
72
 Definition of SMA by Simmonds:
The provision and analysis of management
accounting data about a business and its competitors
for use in developing and monitoring the business
strategy
 Emphasizes on:
Real cost and price
Volume
Market share
Cash flow
The proportion demanded of an enterprise’s total
resources
 The focus shifts from the analysis of cost per se to
the value of information
* Data orientation vs Information orientation

73
 The significant of competitive position as
being the basic determinant of future
profits & of the enterprise value.

 According to Simmonds, profits emerge

actually from the competitive position of a
business firm and not from internal
efficiencies.

74
 Bromwich define SMA as;
- The provision and analysis of financial
information on the firm’s product markets and
competitor’s cost and cost structures and the
monitoring of the enterprise’s strategies and
those of its competitors in these markets over a
number of periods.
 Focus on identifying the distinctive characteristics
of market offering in order that these might be
costed.
 To secure competitive advantage, cost positioning
relative to rivals, should be conducted.
 Purpose of analysis: the attribution of costs which
are normally treated as product costs to the
benefits they provide to the customer.
 Recommended approach: List separately the
benefits to consumers contained in the market
offering, then to relate costs to these.
75
 Addressed the need for external orientation
which focuses on the product offer that can
satisfy customer needs but, at the same time,
takes into account the product attribute
costs.
 It is also possible to interpret as satisfaction
of customer needs the achievement of a
desired target profit/cost.

76
◦ Dr William G.Ouchi, management theorist
introduced Theory Z in 1981.
◦ Traditionally, strategy has been viewed as the
response of an org to environment.
◦ A growing u/standing that strategy of an
enterprise, its structure, people who hold
power, its control system, the way its operates
reflect culture of org.
◦ Ouchi suggested that Japanese commitment to
democratic leadership that resulted in
increased quality, increased productivity and
decreased costs while making workers at all
levels full partners in business.
77
 Environmental cost management

• Becoming of increasing importance because:

1. Environmental costs can represent a large proportion of
operating costs in some companies.
2. Demands from society for companies to become
environmentally friendly

78
 Environmental management accounting
(EMA):
 “the identification, collection, analysis, and
use of information needed for internal
decision making and external reporting”
 Two types of information:
◦ Monetary;
◦ Physical.

79
 Monetary:
◦ Material costs of product outputs – purchase costs
of natural resources that are converted into
products.
◦ Material costs of non-product outputs – costs of
water, that become non-product output, such as air
emissions and waste.
◦ Waste and emissions control costs – costs of
handling, treating and disposing of all forms of
waste and emissions (solid, hazardous waste, air
emissions, etc).

80
 Monetary:
◦ Prevention costs –
◦ Research & development cost – that relates to
environmental issues.
◦ Intangible costs –future liabilities, future
regulations, company image and stakeholder
relations.

81
 Physical:
◦ Quantity of air emissions;
◦ Tons of solid waste generated;
◦ Gallons of waste water generated;
◦ Pounds of packaging recycled;
◦ Total amount of water consumed.
 ISO 14000

82
 Compliance
 Strategy development
 Systems and information flow
 Costing
 Investment appraisal
 Performance management, and
 External reporting.

83
 ENVIRONMENTAL COST
◦ Incurred because of poor environmental quality
◦ Environmental quality cost
◦ Link to creation, detection, remediation and
prevention of environmental degradation
◦ Type of environmental cost
 Environmental prevention cost
 Environmental detection cost
 Internal failure environmental cost
 External failure environmental cost

84
 Environmental prevention cost
◦ Objective: to minimize, if not eliminated, the
amount of waste material generated.
◦ Include: all costs associated with training
employees, evaluating and selecting suppliers,
evaluating and selecting equipment to control
pollution, designing process to reduce
environmental problems etc

85
 Environmental detection costs
◦ Cost of activities executed to determine if products,
processes and other activities are in compliance
with environmental standards.
◦ Environmental standards:
 Regulatory laws of governments
 ISO 14001
 Environmental policies developed by management
◦ Examples: auditing environmental activities,
inspecting product and processes, carry out
contamination test etc

86
 Internal failure environmental costs
◦ Cost of activities performed because of
contaminants and waste have been produced but
not discharged into the environment.
◦ Examples: operating equipment to minimize or
eliminate pollution, treating and disposing of toxic
materials, maintaining pollution equipment etc

87
 External failure environmental costs
◦ Costs of activities performed after discharging
contaminants and waste into the environment
◦ Two types: realized and unrealized
◦ Realized: incurred and paid for the firm
◦ Unrealized: caused by the firm but incurred and
paid by parties outside

88
 Definition by the Brundland Report
◦ To meet the needs of the present without
compromising the ability of future generations to
meet their own needs
 Combines three dimensions: social, economic
and environment

89
 Social
Socio- Eco Justice
efficiency

Economy Environmental
Sustainable
development

Eco-efficiency
90
 Sustainability – the goal of the process of
sustainable development
 Sustainable development – balancing concept
between economic growth and environmental
protection

91
 Application of the control system to
environmental management
 Is about learning how people in the firm
manage to control environmental issues as a
whole
 Ensures that environmental issues are dealt
with through a continuous process
 Similar to management control system
◦ Planning, action, measurement, comparison between
plans and actual outcomes, feedback and revision of
expectation for future periods

92
End of Topic 2

93