CHAPTER TWO

Modern Management Control

Systems and Strategic Management
Accounting
Introduction
 Management control is a critical function in
organizations.
 Management control failures can lead to large
financial losses, reputation damage, and possibly
even organizational failure.
 Management control is the back end of the
management process.
Strategy Vs. MCSs
 Management control focuses on execution, and it
involves addressing the general question:
◦ Are our employees likely to behave appropriately? This
question can be decomposed into several parts:
 First, do our employees understand what we expect of them?
 Second, will they work consistently hard and try to do what is
expected of them – that is, will they pursue the organization’s
objectives in line with the strategy?
 Third, are they capable of doing a good job?
Strategy Vs…..
◦ Finally, if the answer to any of these questions is negative, what can be
done to solve the management control problems?

 All organizations who must rely on their employees to

accomplish organizational objectives must deal with these
basic management control issues.
 Addressing management control issues, therefore, involves
reflecting on how to influence, direct, or align employees’
behaviors toward the achievement of organizational objectives
consistent with the adopted strategy.
Strategies Vs..…
 Management control systems are tools to implement
strategies.
 Strategies differ between organizations, and controls
should be tailored to the requirements of specific strategies.
 Different strategies require different task priorities;
different key success factors; and different skills,
perspectives, and behaviors.
 Strategies are plans to achieve organization goals.
Strategy Vs……
 From a management control perspective, strategies
should be viewed as useful but not absolutely
necessary to the proper design of MCSs.
 When strategies are formulated more clearly, more
control alternatives become feasible, and it
becomes easier to implement each form of
management control effectively.
Strategic Management Accounting (SMA)
 SMA is dealing with strategy and management accounting.
 The term ‘Strategic Management Accounting’ was first
coined by Simmonds (1981, p26), who defined it as ‘the
provision and analysis of information about a business and
its competitors for use in developing and monitoring the
business strategy’.
 Thus, it lies at the interface between strategic management
and accounting.
SMA…
 Some scholars argue that SMA is a competitor-focused
technique (Bjøornenak and Olson 1999).
 Others view it as related to strategic positioning
(Roslender 1995) and particularly integrating
management accounting and marketing (Roslender and
Hart 2003).
SMA….
 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.”
 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.
SMA….
 The term 'strategic management accounting' was
introduced in 1981 and was defined as ‘the provision
and analysis of management accounting data about a
business and its competitors, for use in developing and
monitoring business strategy’.
 Since then several attempts have been made to refine
this definition and identify a set of techniques classified
under the banner of strategic management accounting.
Functions of SMA
 Many businesses use some form of management accounting,
whose functions include budgets, cost allocation methods
and cost-volume-profit or break-even analysis.
 Strategic management accounting goes beyond these
functions, focusing on how external factors (such as a
competitor analysis or political/monetary policy review) and
non-financial information can improve a company’s
operations.
Evolution of SMA
 Management accounting (factory accounting) in the
1960s was confined to job costing, cost computation,
cost evaluation, standard cost variance analysis, and
inventory control.
 However, the scope of work was gradually extended

to management control and decision making areas in

1970s, such as design and implementation of
management control system, financial information for
decision making, transfer price analysis,
responsibility accounting, and other product and
segment profitability analysis.
 Evolution…
 Management accountants were transformed from a factory
cost accountant to management accountants to look after
business operations by late 1960s and then have taken more
new roles in 1980s and 1990s in the wake of new business
order.
 Management accountants’ role in an organization was
changed from internal focused to dual focuses, both internally
and externally.
 Management accountants’ mindset was changed from
operations focused to strategic focused as well. New roles
increase demand for SMA knowledge.
 This makes strategic management accounting an appeal topic
to all management accountants.
 A comparison of the traditional
and strategic approaches to
management accounting

Traditional Approach Strategic Approach

Financial Focus Value Focus
Absorption costing for Cost Marginal costing, target costing
allocation
Cost control orientation Customer Value orientation
Internally Focussed Externally orientation
Performance Measurement Multi-dimensional performance
financial measurement and benchmarking

Fragmented systems Integrated Systems

Accounting and operational Enterprise resource planning(ERP) and
information separate accounting systems integration

Profit motives short term Profit motive longer term

Pricing short term cost orientated Pricing market driven and strategic

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Boundaries of SMA
 There are many definitions of SMA.
 The most apprehensible conceptual ideas came from Roslender and
Hart, which is “SMA is about making management accounting more
strategic (p.272).”
 The definitional concept has two implications:
◦ First, SMA is confined within the management accounting framework – the
design of management control system or provision of management

information to management for decision making and planning.

◦ Second, the orientation of the information extends to strategic
decision, planning, and control.
Boundaries….
 SMA can be further broken down into four focus
areas, which are:
(a) Competitors focus,
(b) Strategic cost management focus,

(c) Marketing focus, and

(d) Strategic value focus.

a. Competitors Focus
 Competitor analysis approach emphasizes the comparisons
of the firm with its rivals (competitors).
 Information is collected to facilitate investigation in
competitors’ accounts, cost structure, price, market share,
sale volume, and relative competitive position.
 Information can be sourced from public domain, such as
financial reports, business press, market database, or from
informal channels such as suppliers, sale team, or even
market intelligence agency.
b. Strategic Cost Management (SCM)
 SCM was particularly advocated from the US scholars (e.g.,
Shank, Govindarajan) who looked at strategic management
accounting from the strategic cost perspective the use of
management cost accounting in making strategic decisions.
 SCM sees the cost structure of a firm as the result of its
strategic choice from the specific strategic positioning the firm
was anchored, and where the firm has the competitive
advantages.
 Management information should be designed and used to
facilitate these strategic purposes.
b. SCM…
 Three central themes were recommended by Shank and
Govindarajan.
◦ First, SCM should assist strategic positioning analysis – the best

strategic choice in the market position based on both

market and internal conditions.

◦ Second, value chain analysis is employed to find out from vertical
industry value chains (from suppliers to ultimate end users) the
best combination of linkages which would deliver optimal benefits
to the firm from its competitive advantage in the market.
b. SCM…
 Finally SCM emphasizes that a firm’s design and use
of information pivot on its choice of generic strategy.
 Firms in cost leadership strategy would put more
weight on cost control, standard cost assessment, and
tight budgetary control, whereas firms in product
differentiation strategy would regard external
marketing cost analysis as utmost importance.
c. Marketing Focus
 Marketing focus approach emphasizes “the marriage
of accounting and marketing.”
 The leaders of this marketing focus approach include
Gupta, Roslender, and Bromwich who stress the
5

infusion of knowledge of these two disciplines to

promote SMA.
d. Strategic Value Focus
 Strategic value focus approach underscores the importance
of long-term value of a firm which comes from a careful
charting of the business objectives and implementation of
strategies to meet optimal shareholders’ value.
 Economic value analysis (EVA) and value-based
management (VBM) are the representatives of this
discipline in which Stewart’s advocates on strategic value
6

were acclaimed from academic, professional, and business

supporters.
d. Strategic Value…
 VBM framework emphasizes the creation of corporate value from
business objectives through identification, measurement, management
of business value drivers, monitoring strategies and action plans, and
linking strategic performance evaluation system to incentive and
reward system of the firm.
 VBM is an organization-based strategic management vehicle which
makes management accountants (or business controllers) in an absolute
advantageous position to navigate the corporate change.
 Nevertheless, it also asks management accountants to possess the
required calibers and confidence in managing change.
 SMA Techniques
The balanced scorecard
(BSC) – linked with strategy

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Other Tools of SMA
 Activity Based Management

 Attribute Costing
 Competitor Analysis

 Brand Valuation

 Target Costing

 Strategic Costing
MCSs Vs. SMA
 The role of a management accountant consists of
ensuring that operations are aligned with
organizational strategy and can be put in numbers
that can be managed and followed (Kaplan & Norton,
2008).
MCS vs. SMA..
 The concept of strategic management accounting is
related to the provisions and use of accounting
information by people in the organization such as the
management and the managers, for the purpose of
making business decisions that would allow them to
have competitive advantage and able to effectively
control the firms activity.
MCSs vs. SMA….
 Strategic management accounting is considered both
financial and non-financial in nature and it is often used
for the purpose such as making of decisions, execution
of decisions and controlling of decisions to ensure it
does not go beyond the boundary of such decision.
 Specifically, the accounting unit or department is
responsible to provide management accounting
information that is necessary and required by the
management.