Accounting for Strategic Management and Control - Coursework Example

Accounting for Strategic Management and Control of School I. Introduction: Strategic Management Accounting (SMA) has been defined by Inman, 2005, as "a form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information." Inman, 2005, traces the history of SMA back in 1981, when Ken Simmonds, probably the pioneer writer on the subject, developed the above definition. It said that K. Simmonds saw it as the collection of management accounting information about a business and its competitors for use in developing and monitoring the business strategy. According to Simmonds, “The emphasis was placed upon relative levels and trends in real costs and prices, volume, market share, cash flow and stewardship of the resources (Paraphrasing made) II. Type Of Small/Medium Sized Enterprises (SMEs): Small and Medium Enterprises could include be defined as those not constituting large enterprise and normally less number of employees, less revenues and less average total assets as compared to the large enterprises. To give an illustration of what are these, Papola, no date, gives us different types of small and medium enterprises and these include groceries, bookstalls, traditional waist-loom, batik, screen printing, poultry, packaging, electrical shops, and similar. To understand more, let us take for example a case of medium size commercials entity in Macedonia.. Chapter 16, no date, page 2/30 defined said entity as a commercial entity that, in each of the last two accounting years, or in the first year of operations, has met the first criterion and at least one of the second and third of the following criteria: 1) the average number of employees, based on working hours, is up to 250 employees; and 2) the annual revenues are less than Euro 10.000.000 EUR in MKD equivalent; 3) the average value (at the beginning and at the end of the accounting year) of the total assets is less than 11.000.000 EUR in MKD equivalent. Based on the information above what classifies SMEs from the large enterprises is the number of employees, the amount of annual revenues and the amount of total assets. Hence, if the average number of employees exceeds 250, annual revenues reach 10.000.000 EUR and the average value of the total reaches 11.000.000 EUR, then the enterprise must be large. III. Traditional Accounting Versus Strategic Accounting: In an article by Inman, 2005, traditional management accounting is perceived as inadequate since it: concentrates on the manufacturing and neglects the high cost post-conversion activities; ignores the impact of other activities; fails to assess the relative cost positions of competitors; over-reliance on existing accounting systems; By contrast the same article said that the strategic management accounting purports to place emphasis on: the relative cost position; the ways in which a company may secure a sustainable cost advantage; (Inman, 2005) IV.SMA techniques: Some of the SMA techniques that maybe used include the following: 1. ABC system - This is otherwise known as activity based costing system. 2. ABC-and-EVA System – This is a modification of the ABC system. What is added here is EVA, which means Economic value added. In an article Success Through Strategic Management Accounting by Sri Srikanthan It enumerated 12 strategic management accounting practices in use by companies. It cited the works of Drury (2001) and Guilding, Craven and Tayles (2000) that identified 12 strategic management accounting. These includes competitive position monitoring; strategic pricing; competitor performance appraisal; competitor cost assessment; strategic costing; quality costing; target costing; value chain costing; brand value monitoring; lifecycle costing; attribute costing; and, brand value budgeting. (Srikanthan, Sri , 2004, p.29). “Target costing is used to determine the product cost based upon a top-down approach; that is based upon the target selling price less the target profit instead of the traditional bottom-up approach of detailed cost estimating. An understanding of these cost management tools can help SMEs improve their manufacturing excellence in the eyes of their customers in the supply chain.” (Creese, no date, page 4) V. Strategic Management Accounting for SMEs. To prove the advantages and benefits of SMA’s systems over traditional accounting systems, a field study conducted by Narcyz Roztocki, on the implementation of the proposed Integrated ABC-and-EVA System, (an example of SMA technique at two small manufacturing companies) is presented here.. The study said that the managers of the companies wished for their company names to remain anonymous. Therefore, they will be referred to as “Company X” and “Company Y” from here on. It must be noted as was noted in the study that prior to the field study; both companies were using traditional costing systems. The overhead was allocated to product lines based on direct labor hours. In both companies, managers felt that their traditional costing systems were not able to provide reliable cost information.” Summary of the Results The study noted the analysis showed that the ability of the Integrated ABC-and-EVA System to provide reliable cost information increases especially in cases where products are dissimilar, manufacturing technologies and equipment are diverse, and capital cost is high. In its analysis in the study it was noted between e companies studied, Company X had not only the higher capital costs, but also the greatest product diversity. As a result, the analysis showed a relatively high distortion in product cost between the ABC and ABC and-EVA systems. In addition it noted that the highest distortion in product cost between the TCA and ABC-and-EVA systems was observed in Company Y, which had the higher operating costs. In the case of Company Y, the report said that ABC component of the Integrated ABC-and-EVA System was able to trace operating cost accurately, compared to the TCA system which simply allocated operating cost based on direct labor hours. The study concluded that the findings for both companies are highly similar. It was right in confirming earlier findings that traditional accounting systems often provide inaccurate, incomplete, and unreliable cost information. It found arbitrary allocation of operating and capital costs may often lead to distortions in product cost. It was further suggested the results that the ABC system alone, though able to manage operating expenses, shows deficiencies, especially when capital investments are substantially diverse. It noted that when capital investments are substantially diverse (because of variation in production volume, technology, setups, materials or product complexity, for example), the ABC system is no longer a reliable strategic management tool for successful decision-making. Another significant result of the study is that the managers of each company in the field study expressed great satisfaction with the reliability and completeness of the Integrated ABC-and-EVA System. In fact, the report said: “They regarded the System as a very useful strategic managerial tool. Because of this implementation, the managers also changed certain corporate policies. These changes included adjustments in product costing, marketing strategies, and perception of customer profitability. Overall, this field study demonstrated that the integration of a costing system with a financial performance measure in the form of Integrated ABC-and-EVA System will help manufacturing companies maintain an effective long-term business strategy.” (Roztocki, 2005) (Paraphrasing made) VI. What issues SMEs might face trying to develop a strategic management accounting system? Issues are possible problems that SMEs might face trying to develop a strategic management system The article on Theory And Practice in SME Performance Measurement Systems by Mel Hudson, Andi Smart, Mike Bourne describes the Theoretical relevance of strategic (Performance Measurement (PM) for SMEs as follows noting differentiated number of key characteristics of SMEs from large enterprises as follows: personalized management, with little devolution of authority; severe resource limitations in terms of management and manpower, as well as finance; reliance on a small number of customers, and operating in limited markets; flat, flexible structures; high innovatory potential; reactive, fire-fighting mentality; informal, dynamic strategies. Mel Hudson, Andi Smart, Mike Bourne emphasize the significant differences in the structure and philosophy of SMEs indicate a need to assess the relevance of the strategic PM development process, as described in the typology, for use in this context. The authors in their efforts to illustrate the importance of an effective development process for introducing new systems into SMEs; a case study on the development of TQM in SMEs was studied (Ghobadian and Gallear, 1997). This case study highlighted the critical issues when developing a new system within a SME. The main finding, the authors said, was that resource implications – particularly that of management time – means that the implementation process is markedly more taxing for SMEs than larger companies. The authors then concluded that a well designed development process, with a clear focus and effective project management, would improve efficiency and increase the likelihood of success”. (Hudson, M., Smart, A. & Bourne, M., no date) Considering the characteristics of SMEs above, the recommendation in the study may not be practically carried over especially because of the severe limitations in terms of management and manpower as well as finance. VII. Conclusion The usefulness of SMA for every SME is beyond question. This is because as proven in the application of the SMA above to two separate SMEs and with the corresponding conclusion that the owners thanked the researchers and even went to the extent of revising companies including those of proper costing. We have seen that the implementation of an integrated Activity- Based Costing and Economic Value Added System in two small manufacturing firms resulted in the integrated approach outperforming both traditional cost accounting and standard Activity-Based Costing methods. Further findings from two small companies show that the reliability of cost information obtained by this integrated system increases substantially when differences in capital usage exist. The study concluded that factors that could create these differences in capital usage and lead to distorted cost information. It also said that using actual data from the field study, possible distortions to product cost because of a homogenous capital cost allocation are also examined. The study came up with conclusion that the impact of this integrated approach on the decision-making, strategic planning, and long-term business performance of the two participating companies is discussed. The above is convincing enough to show usefulness of the product but as seen in the issues that might be faced by would be adaptors of the SMA in some SMEs , limitations as to the human power and the financial resources could place a problem. But if the adaptors would see the benefit of having SMA from not having SME would be willing enough to venture in adopting SMA’s in their business. Bibliography: 1. Chapter 16 SMALL AND MEDIUM-SIZED ENTERPRISES, no author, no date, page 2/30, [WWW document].URL www.sei.gov.mk/download/Questionnaire/3-16 - SMEs.pdf Accessed December 24,2005) 2. Creese, Robert C., no date, Cost Management In Lean Manufacturing Enterprises And The Effects Upon Small And Medium Enterprises [WWW document].URL http://www.iprod.auc.dk/misg/papers/creese.pdf#search=target%20costing%20for%20%20SMEs. (Accessed December 27, 2005) 3. Papola, T. S., no date, Experience Sharing: Presentations by Participants from Chapter 3 of Women Entrepreneurs in Mountain Areas: Proceedings of a Regional Workshop 21-23 Dec 1999, Kathmandu, Nepal. (case studies).(Accessed December 24,2005) 4. Inman, Mark Lee, 2005,.Student Accountant Online, Strategic management accounting, 01 Nov 1999 Online, (Accessed December 24,2005) 5. Srikanthan, Sri , Dec.,2004, Success Through Strategic Management Accounting , (Accessed December 24,2005) (Srikanthan, Sri , 2004, p.29). 6. Roztocki, Narcyz ,The Integrated Activity-Based Costing and Economic Value Added System as a Strategic Management Tool: A Field Study, State University of New York (SUNY) at New Paltz, School of Business (Accessed December 24,2005) 7. Hudson, M., Smart, A. & Bourne, M., Theory And Practice In SME Performance Measurement Systems, no date, (Accessed December 24,2005) Read More