Strategic Management Accounting - Literature review Example

Strategic Management Accounting Table of Contents Table of Contents 2 Literature Review 3 Role of Strategic management accountant and its contrast with traditional management accountant 3 The contribution of strategic management accounting techniques for increasing the global competitiveness 5 Practical implications 5 Critical View 6 Reference List 7 Literature Review Role of Strategic management accountant and its contrast with traditional management accountant Strategic management accounting which is one of the forms of management accounting emphasizes on the information related to the external and non-financial factors of an organization. The traditional management accounting is considered to be inadequate with its focus only on the manufacturing and ignores the effect of various other activities. The accounting reports provide incomplete sets of measures. The traditional reporting systems implemented by traditional management accountants include standard cost variance analysis or the budgetary control techniques, which do not focus completely on the processes. As a result they provide incomplete set of measures (Bowhill, 2008). The traditional management accountant fails to cover the assessment related to relative cost situation of its competitors. It is due to this reason that strategic management report is considered to be one of the most important forms of management accounting in the present days. The strategic management accountant emphasizes on the cost position, the procedure for an organization to achieve sustainable cost advantage and the cost of differentiation through which the products of an organization can be differentiated from others. The transition in the strategic planning and decision-making of the organizations can be seen through increasing incidence of various accounting tools like value chain analysis, balance score cards etc. The balance score card have been designed as one of the most effective performance measurement framework which evaluates the performance of the organization, employees etc (Smith, 2005). There are four main perspectives in the balance score card (Kaplan and Norton, 1996). The objectives of the balanced score card mainly focuses on achieving high profitability for the business enterprise, increasing the customer satisfaction, increasing the satisfaction level of the employees and creating high values for the existing stakeholders. The balanced score card is one of the most effective ways of designing strategies by means of which the organizational objectives can be achieved. It evaluates the performance of an organization from four main perspectives by creation of metrics, accumulation of data and analysis of the data that have been collected. The four perspectives include financial perspective, customer perspective, internal business perspective and learning & growth perspectives (Bischoff, 2011; Niven, 2005). The financial perspectives deal with factors such as growth in the income, return on equity, cash flow, sales etc. The perspectives evaluate and aid the determination of performance of any organization from the domain of profitability. This would further help in determining whether the present strategies are being executed in proper manner for the accomplishment of the objectives of the organization. The customer’s perspective directs towards the targeted niche to which the organizations want to cater their services and improve their performances (Mowen, Hansen and Heitger, 2008). The internal business perspective focuses on the improvement of the value provided to the shareholders by the organization. In this context, customer service, operating processes and innovation play significant role (Holl and Böhm, 2005; Eigenmann, 2007). The learning and growth perspective signifies the skills and core competencies of the employees. It also points at the technologies implemented which helps in formulating and utilizing the strategies. Another such framework is the value chain. The value chain deals with chain of activities which an organization operating in a particular industry performs for the delivery of the valuable products or services to the customers. The concept was first explained by Michael Porter. The value chain consists of nine elements (Handfield, 2011). The elements of value chain include: Primary activities 1. Inbound Logistics 2. Outbound Logistics 3. Operations 4. Marketing and sales 5. Services. Supporting activities 6. Firm infrastructure 7. Technology development 8. Human resource management 9. Procurement. The value chain concept acts as the decision supporting tool which helps in the formulation of competitive strategies by the organization (Recklies, 2001). The value chain helps in achieving the lowest or the highest costs, involving all the transactional, process and handling costs of the total supply chain. It creates value which exceeds the cost of offering the products and services and thereby generates a profit margin for the organization (Sridharan, Caines and Patterson, 2005; Supply Chain Innovation, 2011). There are various other accounting tools which increase the performance of the organizations by providing competitive strategies. The role of strategic management accountant includes highly integrated management approach that draws in all individual elements in the planning, implementation and control of the business strategies (Roslender and Hart, 2003). The strategic management accounting serves the decision makers or planners by providing them with information related to the financial implications of various alternative business strategies and thereby help in choosing the best strategy out of all the alternatives. The strategic management accountant provides a wider picture and long term strategies as compared to the traditional management accountant. The contribution of strategic management accounting techniques for increasing the global competitiveness Quality and productivity are two important watchwords in the business competition today. The companies not only measure the productivity but also insist high quality of market products for the customer’s satisfaction, sales increment and stimulating the profit earnings. Management accounting also includes the financial reporting. However, it had very limited emphasis on the factory floor. There was the necessity of a management project which would be oriented towards strategic accounting. Implementation of strategic initiatives within the organization includes Just in Time (JIT), Activity Based Costing system (ABC) and Total Quality Management (i.e. TQM). Under strategic management accounting techniques, the pricing decisions are based on accurate computation of the costs of the services and the units produced. Several studies provide evidences which claim that these strategic initiations have helped to improve the financial performance within the organization (Hendricks and Singhal, 1999). The activity based costing technique has made it easy to detect the overhead costs and thereby account for the product level cost and batch cost accurately (Cooper, 1990). It helps in reducing the complexity associated with the manufacturing costs and helps in identifying the best cost structure in diversified business environment. In a similar manner, the Total Quality Management has been one of the most effective models and broadly implemented by a large number of organizations all over the world. Practical implications The introduction of the above mentioned strategic accounting techniques help in the increase of the financial performance of the organizations in a number of ways. One of the best examples of the effectiveness of JIT business model is the performance of Coca Cola Company. The implementation of Just in Time strategy has helped in reducing the costs and stimulating the flow of the finished products to all the customers. There are many evidences which claim that the implementation of management initiatives i.e. ABC, TQM and JIT have direct or indirect affect on the financial performance of the organizations. According to Cagwin and Bouwman (2000), there are many evidences claiming that the activity based costing method improves the financial performance of an organization to a great extent. Total Quality Management is highly linked with the variance in the actual performances of the organizations. According to Kinney and Wempe (1998), The Just in Time model has positive impact on the return on investment within next four years of the adoption of the model. Thus evidences claim that the strategic initiatives are directly proportional to the financial performance of the organizations. Critical View In the present scenario, strategic management accounting has high influence on the formulation of business strategies. The business environment has turned out to be unpredictable and increasingly volatile in the present decades. Increasing competition in the industries has raised the threats of the businesses. In this condition, strategic planning with the objective of achieving organizational efficiency has become very difficult (Porter, 1985). In such case, the models suggested in strategic management accounting are highly effective to understand the risks associated with the industry and help to formulate strategies accordingly. The businesses implement developed accounting tools for increasing their efficiency in contrast to the traditional ones. The strategic components in the planning process of an organization include the mission, vision, long term objectives, operation plans and other scenarios. The inclusion of these components within the strategic planning process automatically strengthens the business strategies and enhances the scope of achieving competitive advantage in the market. The elements in the strategic planning process help in the budgeting process as well. Elements in the strategic planning process and budget Strategic Planning Budget Vision Assumptions Mission Marketing Plan Strategies & Long Term Goals Production plan & Logistics plan Long Term Operation Plan Capital Budget Projected financial statement Scenarios Human resource planning The aforementioned table represents how the components of strategic planning process help in the budget formation of the businesses. The concepts of strategic management accounting stress on the accounting methods and at the same time helps in formulating the business strategies. There is a gradual increase in the importance of strategic management. Based on its accounting models, the management can implement proper steps in order to modify the strategies as well as successfully implement them. Reference List Bischoff, A.L., 2011. The balanced scorecard: Applied on Ericsson AB. Norderstedt: GRIN Verlag. Bowhill, B., 2008. Business planning and control: Integrating accounting, strategy and people. Chichester: John Wiley & Sons Ltd. Cagwin, D. and Bouwman, M., 2000. The association between activity based costing & improvement in financial performance. Management Accounting Research, 13(1), pp. 1-39. Cooper, R., 1990. Cost classification in united-based & activity-based manufacturing cost systems. Journal of Cost Management, 4, pp. 4–14. Eigenmann, U., 2007. Design and implementation of a human capital oriented balanced scorecard in an engineering services unit. Norderstedt: GRIN Verlag. Handfield, R., 2011. What is supply chain management? [online] Available at: [Accessed 19 October 2013]. Hendricks, K. and Singhal, V., 1999. Don’t count them out. Quality Progress, 32 (4), pp. 35–42. Holl, R. and Böhm, S., 2005. Zero base budgeting using the balanced scorecard. Norderstedt: GRIN Verlag. Kaplan, R.S. and Norton, D.P., 1996. The balanced scorecard: Translating strategy into action. California: Harvard Business Press. Kinney, M., and Wempe, W., 1998. Further evidence on the extent and origins of JIT’s profitability effects. Working Paper, Texas, A&M University. Mowen, M.M., Hansen, D.R. and Heitger, D.L., 2008. Cornerstones of managerial accounting. Connecticut: Cengage Learning. Niven, P.R., 2005. Balanced scorecard diagnostics: Maintaining maximum performance. New Jersey: John Wiley & Sons. Porter. M., 1985. Competitive advantage: creating and sustaining superior performance. NewYork: Simon and Schuster. Recklies, D., 2001. The value chain. [pdf] Recklies Management Project GmbH. Available at: [Accessed 19 October 2013]. Roslender R. and Hart S. J., 2003. In search of strategic management accounting: Theoretical and field study perspectives. Management Accounting Research, 14(3), pp. 255-279. Smith, M., 2005. Performance measurement and management: A strategic approach to management accounting. London: Sage Publications Ltd. Sridharan, U. V., Caines, W. R. and Patterson, C. C., 2005. Supply Chain Management: An International Journal. Implementation of supply chain management and its impact on the value of firms. 10(4), pp. 313-318. Supply Chain Innovation, 2011. Operationalizing innovation. [pdf] Supply Chain Org. http://supply-chain.org/f/18%20-%20Claes%20-%20Operationalising%20Innovation%20From%20Supply%20Chain%20Strategy%20to%20Execution.pdf. Read More