Strategic Management Accounting: Concepts and Processes - Essay Example

? STRATEGIC MANAGEMENT ACCOUNTING Strategic Management Accounting Strategic Management Accounting isconcerned with the field of management accounting and its main emphasis is upon data and information that is exogenous to an organisation, information that is non-financial and to some information that can be generated from within the organisation. Management accounting is considered to be useful when it properly displays an external image and a futuristic picture for an organisation. Strategic Management Accounting on the other hand can be distinguished from other management accounting activities through its extensive external orientation; this extensive external orientation includes focus towards customers, competitors, suppliers and all other stakeholders that get affected by the organisation’s normal course of business. Historically the role of management accounting conferred to operational level budgeting, target setting and control with little or no influence towards strategy development. With the passage of time, this trend has been changed because of Strategic Management Accounting as nowadays this trend and focus has been driven towards strategy formulation and development (Kader et al, 2006). This strategy formulation and development makes management accountants to participate in formulating strategies within the organisation and this practise has been highly encouraged because these management accountants have a better operational level knowledge hence it helps in better goal congruence as well as proper implementation at the lower level of an organisation (Puolamaki, 2006). The most popular techniques that are used within Strategic Management Accounting are the Balanced Scorecard approach and the Activity Based Costing system. The Balanced Scorecard approach focuses on both the financial as well as non financial factors that may affect an organisation, besides these factors, it also looks upon the factors that have an external influence on to the organisation as well. The Activity Based Costing system on the other hand focuses on the financial aspects of an organisation in depth and this further helps in target setting, budgeting and variance analysis (Kaplan, 2006). There are many different techniques that are used within the strategic management accounting system. Each and every technique has its own unique approach, role and relevance. The applications of all these different techniques vary in accordance with the different situations that arise within the organisation. The more often used techniques and their particular significance and role is mentioned below. Cost Volume Profit (CVP) Analysis CVP analysis is affiliated with cost accounting. The main attribute of this technique is to compute break even in the break even analysis which would further help in calculating the targeted income sales. The basic assumptions that are involved in calculating the CVP analysis are the same as that of break even analysis. Although this technique is used by numerous companies, it has some limitations that are highly criticised. One of the major criticisms of using these techniques is that it uses different assumptions where it is deemed that the unit variable costs within any company’s production department are constant with the unit revenues. A proper CVP analysis would be required to assess the benefits gained from any particular deal, all the fixed cost and the variable costs would be summed up to assess the benefits that could be availed in more than one given scenario {(as illustrated in the Tani Kimura Company example (Choosing Plant Location)}(Horngren et al, Chapter 3, 2012). Job Costing and Process Costing Job and process costing are two methods that lie within the scope of cost accounting. Job costing involves the computation of costs in a construction or batch form. All the relevant costs that are incurred within a particular job are recorded within their respective ledgers and hence they are finally added up together to give the total costs of that particular job. Process costing on the other hand sums up all the direct and indirect costs incurred in the production of any given product. These costs are added up using the operational i.e. process method. Process costing is considered to be a method of costing that involves a sequential flow of operations or processes and as the flow operates the costs are recorded based upon the different process through which a products passes through. Although both these costing methods may seem similar, the practical approach really distinguishes them from each other. The job costing method records costs with respect to the jobs and the batches whilst process costing records costs with respect to the different process involved within the production of that particular department. Process costing is usually more popular with companies that produce similar products that are of the same kind e.g. Petroleum companies having similar products i.e. Petrol with kerosene oil being its by-product. Activity Based Costing (ABC) Activity Based Costing is a costing technique that has grown very much in popularity. This costing technique identifies the cost drivers which are later used to charge costs to those products based upon the usage of the activity. Cost drivers are best described as those factors which cause a change in the cost of an activity. The ABC system requires a lot of detail before it can be successfully implemented the amount of detail required lies at the manager’s discretion under which the production department lies (Ayvaz et al, 2011). To operate a successful ABC system, a manager should perform certain activities: The manager should point out the factors that determine the cost of an activity i.e. the manager should identify the cost drivers. Gather the costs linked with each cost driver and add them up to form a cost pool Finally charge costs to the products based upon their respective activity usage. Once this system is properly implemented, great results are achieved by gaining cost reduction and eliminating wastages (Steadmen, 2008). Although a large amount of companies are great admirers as well as followers of the ABC system, few of them that have used the system and pioneered it include the USAA Federal Savings Bank where the project managers have clearly shown their interest and commitment towards the ABC system, their interest have helped them to link financial matters with other operational matters and this as a result has gained admirable efficiency within the bank’s operations (Horngren et al, Chapter 5, 2012). Benchmarking and Variance Analysis Benchmarking is a technique through which a company’s performance is measured, keeping in view, some pre-determined targets and standards. The basic idea of benchmarking is to improve the performance of an organisation by comparing its activities with those similar organisation’s activities that are deemed to be the best. Benchmarking enables precise comparisons to be made between organisations. Benchmarking is more suited to those organisations that have fallen behind with respect to the market in which they operate (Horngren et al, Chapter 7, 2012). Variance analysis is the process in which total difference between expected and actual result is analyzed. These differences are further analysed to understand whether the variance i.e. the difference is favourable or adverse. When the actual results are better than the expected results, the variance is considered to be favourable and vice versa. Variance analysis is more concerned with the financial aspect whilst the Benchmarking technique can be used to analyse the financial as well as other non-financial issues. Benchmarking is really helpful as it promotes sharing of information within as well as external to the organisation. It also helps in assessing a firm’s existing position and provides a basis for establishing standards of performance. Variance analysis on the other hand help in identifying those areas that are under achieving, hence after identification of these areas, proper technique can be sought to reduce the adverse effects and proper strategy can be formulated to gain favourable results. Successful followers of variance analysis technique are Starbucks whilst for Benchmarking, the best example is of Xerox and LL Bean. (Hoque, 2004). Inventory costing- Variable costing, Absorption costing and Throughput costing Variable costing is a method of costing that only focuses on the variable costs incurred in the production of a product. Absorption costing on the hand focuses on the variable costs as well as other overhead costs that are incurred in the production. These overhead costs are absorbed at a pre-determined absorption rate. Absorption costing deals with overheads in three stages i.e. allocation, apportionment and absorption. Throughput costing is considered to be a cost and management accounting system that operates in a Just in Time environment. Throughput costing assumes that a manager has a given set of resources and using those particular resources, that manager has to generate sales revenue. It is a system which aims to increase throughput i.e. cash generation from sales rather than the profit (Horngren et al, 2012). Target Costing for Target Pricing and Kaizen Costing Target costing involves setting a target costs by deducting a pre determined profit margin from a competitive market price. Through the target costing and the target pricing method, a target cost is designed for each function. The functional costs are summed together to produce total product target cost for one particular year. Once the product has been in production for a year, the actual cost incurred in the first year of production becomes the initial point for further cost reductions. Toyota is considered to be one of the finest followers of Kaizen costing. (Horngren et al, 2012) Life Cycle Product Budgeting and Costing Life cycle product costing and budgeting includes the identification of costs at different periods of a life cycle. Costs are calculated at all the different life cycles and these are further used for budgeting purposes so as to ensure that costs are properly monitored and controlled at the relevant stages of a life cycle. Life cycle costing is an accumulation of costs with respect to its entire product life cycle. The users of such techniques are usually those companies which offer perishable goods or those companies that are technology bound e.g. cell phone companies (Horngren et al, 2012). Customer Profitability Analysis (CPA) Customer Profitability is considered to be the difference between the profits gathered from any given customer with respect to the costs that have been incurred in order to keep a relationship with that particular customer. If a customer is deemed to be unprofitable, the company should have proper policies to address such issues and to avoid such customer totally as soon as it becomes evident that the customer is unprofitable. Large multinational organisations tend to keep record of their customers and hence only those customers are followed that give a positive result. Just in Time and Inventory Management. Just in time is the process of inventory management where raw materials are only purchased on times when their need is of the highest priority i.e. raw materials are only acquired when there are none left within the production department. This procedure is followed in such a smooth and efficient manner that it does not stops the production process. This method helps in reduction costs through reduced holding and warehousing costs. Many Japanese companies are huge admirers and followers of the JIT technique. All these technique and many more techniques such as the Balanced Scorecard technique can be used in accordance with the culture and the management philosophy prevailing within an organisation. If a company is more focused towards the financial aspects, techniques such as the ABC, variance analysis and the CVP can be used. It is more appropriate that a company focuses on both the financial as well as non-financial issues prevailing within an organisation and hence the Balance Scorecard approach is more suitable. Bibliography ABDEL-KADER, M. G., & LUTHER, R. (2006). Management accounting practices in the UK food and drinks industry: research report. London, CIMA. BETTY W. STEADMAN. (2008). Implementing the Activity Base Costing System: A Case Study on Dakota Office Supply. Business Intelligence Service. EDNAN AYVAZ, & DAVUT PEHLIVANL. (2011). The Use of Time Driven Activity Based Costing and Analytic Hierarchy Process Method in the Balanced Scorecard Implementation. Canadian Center of Science and Education HOQUE, Z. (2004). Strategic management accounting: concepts, processes and issues. Rollingsford, NH, Spiro Pr. HORNGREN, C. T., DATAR, S. M., & RAJAN, M. V. (2012). Cost accounting: a managerial emphasis. Upper Saddle River, N.J., Pearson/Prentice Hall. KAPLAN, R. S. (2006). THE COMPETITIVE ADVANTAGE OF MANAGEMENT ACCOUNTING. JOURNAL OF MANAGEMENT ACCOUNTING RESEARCH. 18, 127-135. LIBERATORE, M. J., & MILLER, T. (1998). A Framework for Integrating Activity-Based Costing and the Balanced Scorecard into the Logistics Strategy Development and Monitoring Process. Journal of Business Logistics. 19, 131 Puolamaki, E. (2006). The role of strategic management accounting in the strategy formation. Turku School of Economics and Business Administration. Read More