Strategic Management Accounting - Essay Example

Running head: strategy and management accounting 6th April Introduction Business strategy refersto the means through which firms set out to achieve their desired objectives. Another term that can be used to refer to the business strategy is long term business planning. By covering 3 to 5 years, business strategy is concerned with major resources such as raising capital to build a plant or a factory. Similarly, strategies aim at deciding on what products that the company will introduce in a certain market. In business, corporate strategy entails the overall strategies that are adopted in an organization that consist of multiple business units that operate in various markets. One of the major aspects of corporate strategy is that it determines how a firm as a whole supports and impacts the value of the business units within it. Strategies at the business unit level are focused at competing successfully in the markets by adopting unique ways to make the firms be winners in the market (Burns and Warren, 2013). Management accounting on the other hand refers to the process of preparing management reports as well as accounts that aims at providing accurate financial and statistical information that is required by managers in order to make daily short term decisions. One of the notable aspects of management accounting is that it produces weekly and monthly reports that touch on internal audience. This paper seeks to identify the relationship between strategy and management accounting and its impact on government agencies. Strategic Management Accounting In their effort to remain competitive, firms create a relationship between the strategy and management accounting to come up with strategic management accounting. This refers to the type of accounting that focus at internal factors as well as external factors. These include industry-wide financials, upcoming trends and averages (Clinton, 2006). The effective merging of strategic business objectives with management accounting has resulted to a competitive advantage of many companies such as Toyota, Coca-Cola, and Malaysian service organizations among others. Unlike the management accounting that focuses only at the internal accounting metrics, strategy management accounting evaluates the impact of the strategies adopted by companies on the resources and come up with the appropriate action to handle the issues that emerge. This implies that for the strategies to fit well in the management accounting, there must exist an enhanced intelligence that touch on suppliers, technologies and competitors. Studies indicate that formulation of clear strategic priorities is vital in any organization but in order to achieve competitive advantage and enhance the organizational performance, the strategic direction must be supported by appropriate control and management information systems. According to Cadez and Guilding 2008, business strategies is an important factor that affects the use of strategic management accounting techniques and once the SMA is effectively combined with business strategy, the performance of the organization is positively enhanced. In the contemporary business atmosphere, rational managers strive to achieve effectiveness in their organizations by seeking to achieve a fit between the SMA techniques and strategies adopted. The conceptual framework below indicates the relationship between business strategies and SMA techniques. Management accounting triangular structure As the governments seek to improve the performance of its agencies including the tax collecting authorities and public sector services, they emulates the triangular structure to relate the strategies employed with the management accounting used. According to the study by Grant (2014), organizations and agencies can use three attributes of strategic management accounting. These include technical, cultural and behavioral. Technical analysis entails enhancing the understanding as well as providing information on the event that has been measured. The behavioral metric on the other hand promotes actions that are focused at achieving the firms and agencies strategic objectives. The cultural element on its part, establish a shared set of beliefs within an agency and organizations. The three elements that are mostly used by the well established and successful companies are important in attaining the strategy management accounting. Strategic triangulation of management accounting In any organization or government agencies, the major strategic elements are based on time, quality and cost. Organizations use these tenets to differentiate themselves from other firms within the same or different industry. Each organization evaluates the relative significance of the three factors as predicated on its client size as well as the demands and preferences made by the local and global markets. In some cases, organization demand products based on the primary issues of cost and time. Similarly, some customers demand brands that are of high quality and are not concerned about the cost factor. As the competition becomes still in local and international markets, some companies have embarked on various cost reduction strategies an aspect that has made it to increase their profits. For example, Coca-Cola Company, the global leader in the soft drink industry is now focused at reducing its operational costs. As the result of reduction of profit to $1.71 billion from $1.87 billion in 2014, Muhtar Kent, the chief executive officer, indicated that the company will initiate a $1 billion cut of the annual costs by 2016. The plan aims at reducing the supply and data management expenses in addition overhauling its marketing programs. On its part, Toyota has embarked on improving its quality. The company has established an engineering quality improvement division in addition to the special committee that is responsible for improving the quality of its brands thus reducing the possibility of its recalling. As more companies enter the telecommunication industry, where AT&T and Verizon are the notable leaders, time of making calls has become a major issue of facing off the competitors. The competitors have embarked on reducing the cost of the calling time in order to attract more customers. In addition, the rivals provide free calling time or internet in order to create a strong relationship with their consumers. Within the government agencies, effective communication has also been achieved as the result of proper time management and data storage through the use of integrated information technology. Some government agencies have also been noted to reduce their labor force through firing some of their workers in order to reduce costs. Illustrating strategic management accounting In order for any company to effectively face off its competitors, there is need to identify the areas that generates its strengths. Additionally, an organization should identify the value of its assets so as to have a clear control of the costs of assets’ maintenance and acquisition. According to the studies done on Tesco, the London based retail store, the company fixed asset base was its more than 6,700 stores. Based on this factor, Tesco management came up with strategic partnerships with various construction companies in its effort to lower costs and maintains brands of high quality. Another approach that makes Tesco to remain competitive, attain high profits and provide high tax to the government is monitoring competitor product pricing in its effort to reduce customer prices and expand its market share. Another strategy that Tesco has adopted is signing of consultancy agreement with information technology companies for example Forrnax ICT. In this way, the company is in a position to acquire information technologies ate reduced prices thus increasing its profits. As the retail industry attract more firms locally and globally, Tesco has taken a unique strategy to reduce its production costs in its facilities. This is noted by the way the company negotiates with its suppliers to have the prices of their raw materials reduced. Similarly, Tesco looks for suppliers whose prices are low. Strategic focus on firm environment Given the competitive nature of the contemporary business atmosphere in almost all in all sectors, it is imperative for organizations to identify the ways to deal with their competitors. Firm’s awareness of the competitive condition in its industry is an important differentiation between traditional management accounting systems and strategic management accounting. As noted earlier, strategic management accounting main focus is the environment. This implies that the firm focus is on how it relates with the customers, suppliers, government, and financial institutions among other stakeholders. Another good example of environment that organizations must identify how they relate with them includes potential competitors. For example, once a firm notes that by going global it will meet stiff competition, it can contemplate on acquiring or merging with potential competitors. In this way, a firm will not only reduce the possible competition, but it will expand its market share thus attaining adequate revenue to address the increasing costs. An organization’s intelligence can indicate that a need to have lower prices as a way of facing off the competitors. Strategic management accounting is also essential in evaluating the organization’s up-stream that is the suppliers cost structure as a way of determining if a firm can renegotiate with the possible suppliers. Impact of the strategy-management relationship on government agencies As the result of positive relationship between strategies and management accounting, a forward looking models that guide management of government agencies in making sustainable decisions. First there has been information revolution. During the 20th century, collection and processing of information posed quite a number of challenges. In addition, the cost of information on the management was high. However, with the merging of strategies and management accounting government agencies are now able to maintain sophisticated database accounting systems. Through proper management of resources by the well developed strategies, the cost of designing, implementing and running government agencies has become affordable. Globalization has also notable impact on the management accounting. With the globalization taking its course, a more competitive environment has emerged an aspect that requires implementation of accounting systems that are accurate relevant and provides reliable information. Additionally, the emergence of multinational entities has increased the importance of transferring the prices among the agencies. Transfer price refers to the amount one division of a government charges another division for a product sold immediately. Some of the major areas that transfer pricing is applied includes taxation, production in decentralized firms, and in the international trade negotiations (Merwe, 2011). Lastly, globalization has improved the pace of change in the management accounting. It is worth to note that recent innovations in the field of strategy management and management accounting originated in Japan. As the result of stiff competition between Japanese and US companies, the latter have now turned into using the strategies. Another notable impact of the relationship between strategy and management accounting is that it has led to the increasing importance of the service sector. Before 1980s, manufacturing organizations were noted to adopt sophisticated management accounting systems. As time went by, the service sector played a major role in the economy an aspect that led to establishment of more service companies. Some of the service sector that use quite a number of resources and adopt management accounting at the same time includes transportation, health care and financial institutions. Government agencies are now able to undertake customer costing which refers to the cost of servicing an individual customers. As a result, the service sectors are able to control the costs, increase revenue and improve the services given to the customers. Conclusion The merger between business strategies and management accounting is one of the important aspects that have brought change in the manner businesses and government duties are conducted. Strategies, which refer to the means of attaining the goals of a company, should be effectively established to ensure they fit with the management accounting. As noted in the paper, the use of strategic management account by Toyota, Coca-Cola and Malaysian companies have made the firms to remain competitive in the international market. Key areas that strategic management accounting covers includes management accounting triangular structure and strategic triangulation of management accounting among others. As government agencies continue to use strategic management accounting, it has positively impacted on the way they perform their duties. For example, in the taxation process, the agencies are able to identify the collect tax and transfer it to the revenue authority. References Burns, Q and Warren, O. (2013). Management Accounting London: , McGraw-Hill. Clinton, D. (2006). Management Accounting - Approaches, Techniques, and Management Processes. Cost Management May/Jun. Grant H.(2014). Examples of Strategic Management Accounting. Available from http://smallbusiness.chron.com/examples-strategic-management-accounting-18149.html Merwe, A. (2011). Presentation at IMAs annual conference - Managerial Costing Conceptual Framework Session. Orlando: Macmillan. Read More