The Imperative of Adopting Strategic Management Accounting at Jessup - Research Paper Example

 The Imperative of Adopting Strategic Management Accounting at Jessup EXECUTIVE SUMMARY Jessup, an advertising and public relations company, requires knowledge of the benefits of incorporating a strategic management accountant in its processes. The role of SMA is to perform many traditional tasks of management accounting, with an emphasis on external market conditions that contribute to final service output and long-term positioning of the business in relation to competition and brand relationships with consumers and other relevant buyers. To incorporate a strategic management accountant role, relevant costs and revenues versus irrelevant costs and revenues must be considered, using activity-based costing methods and routine environmental/competitive analyses. This report highlights the role of strategic management accountant and makes a recommendation to Jessup about the most viable opportunity for incorporation into the existing business model. 1. The key roles of SMA at Jessup There are distinct differences and similarities to the role of strategic management accounting versus traditional management accounting function. Management accounting is most largely considerate of the existing systems that drive business productivity and cost recognition (Wilson and Chua 1993). Management accounting function includes service life cycle analyses, rates and volumes analyses, capital budgeting, sales forecasting, and cost allocation (Friedl, et al. 2005). The activities associated with management accounting are inter-linked with traditional accounting function, expanding into a more operational role with considerations of the impact of production, procurement, and resource utilization within the firm. Strategic management accounting maintains many of the same economics-based functioning, with less emphasis on existing systems and more emphasis on long-term imperatives for the business. SMA also considers the cost structures of the business, with more responsibility for the inter-dependencies between strategic goal attainment, specific product and service markets, analysis of competitor costs, and competitor strategies (Wu, 2007). Thus, strategic management accounting is a holistic view of the organisation that extends far beyond production and operations, instead assisting leadership in understanding better strategic decision-making based on broad external environment analyses and cost distributions throughout the firm to achieve these goals. It is further analysis of the traditional management accounting function, with emphasis on trends in costs and pricing models, market share and cash flows as it relates to strategic positioning on the competitive market (Collier and Gregory 1995). Thus, the strategic management accountant would recognise the homogenous nature of the competitive market and utilise costing, structural modelling, and the entire value chain to determine how best to structure the business, allocate costs, and improve market position. With these definitions in mind, strategic management accounting function would be incorporated into Jessup with a focus on the marketing concept which is an imperative to success in key markets. The SMA would be given flexibility to understand the dynamics of existing budgetary constraints or opportunities, conducting routine environmental and competitive analyses to determine the most effective operational strategies and capital investment to achieve strategic success. The role of the SMA would be to develop a “profit-linked performance system” that measures productivity and price recovery by first recognising important business units that contribute to market success (Banker, et al. 1993). Strategic business units involved in the advertising function, whether related to advertising development or tangible distribution of integrated marketing communications, would be identified by the SMA and correlated with expenditures within the business. Business unit-level strategies allow the SMA to focus on specific target market environments to determine what the most effective and valuable investments would contribute to better strategic positioning from a marketing perspective (Cheong 2009). Because Jessup is a mid- to large-sized organisation seeking potential expansion and growth, not all advertising and public relations strategies are contained within the parent business unit. Thus, the SMA would develop a framework for better staff organisation and restructuring and also establish various control systems in operations to promote effective delivery of strategic objectives (Banker, et al. 1993). Thus, the SMA must be given considerable flexibility to examine profit margins, budgets and determine the scope of operations to achieve goals in advertising and public relations. Since the majority of Jessup profit function is built around the marketing function, significant emphasis on service delivery and design must be considered. By limiting the business to only a traditional management accounting function, internalized affairs receive the most consideration, not allowing for more intensive examination of external opportunities or threats to gaining market share and profit (Chapman 2005). The majority of strategic management accounting functions are built on such models as Porter’s Five Forces and competitive SWOT Analyses that link the business function to the external market dynamics. The SMA, for Jessup, will determine trends in consumer attitudes and purchasing behaviours, linking this to costing, pricing and service positioning, to determine a better forward strategy for the long-term as compared to competing companies. Essentially, the SMA must be given flexibility to determine how all elements of the value chain, not just operations, impact competitive strategy. In many ways, Jessup requires a strategic management accountant for the pursuit of brand management accounting, linking accounting data and needs with brand improvement and customer loyalty (Roslender and Hart 2006). It is only when the SMA has been able to determine the influence and impact of external market trends that appropriate internalized cost allocation and restructuring can be determined. This is something not viable through traditional management accounting function and it is something required of Jessup to achieve market success. In the case of Jessup, this will involve examining brand sentiment with key demographic groups, strategies for segmentation and targeting, and specific areas of business operations that require removal of cost redundancies or new allocations for better business performance. Incorporating a strategic management accountant will require access to procurement, information technology, human resources, research and development, and the ability to conduct routine quantitative or qualitative analyses of the external market. Findings from this data are then linked to traditionalist management accounting functions to determine where efficiency or inefficiency currently exists in operational areas to achieve profitable long-term business positioning against competing advertising and public relations firms. 2. Understanding relevant and irrelevant costs and revenues Before the SMA can be of value to Jessup, the individual must understand the difference between relevant and irrelevant costs and revenues. Relevant costs are those costs that are crucial to attaining quality decision-making (Banker, et al. 1988). Jessup maintains certain costs that are unavoidable, even when a process or strategy has been modified or redeveloped, which are irrelevant costs. Certain fixed costs would be considered irrelevant costs in strategic management accounting. These costs would include payroll, which is linked to human capital allocation required to achieve a strategic goal. Regardless of whether organisational restructuring is required to achieve maximum success in the market, the labour required to achieve productive and quality outputs remains relatively stable and is thus an irrelevant cost, since decision-making does not impact its stability. Other relevant costs include opportunity costs, which are costs incurred for focusing on a new strategic imperative that could have been applied to other business functions or systems. Profit that has been obtained through technology and tangible resources might be better applied to different alternative strategies, thus potential revenue gains from different cost allocation must be considered relevant (Cagwin and Bouwman 2002). If the strategic management accountant determines that resources should be applied to more intensive integrated marketing communications campaigns based on external analysis of competition, lost contingency opportunities for further profit gains linked with alternative strategies should receive accounting recognition. Relevant costs also include those costs which are avoidable, such as closing an underperforming business unit not achieving strategic profit goals. The strategic management accountant, after examining budget constraints and proper allocation, made a decision to improve strategic position by removing redundant operating costs (e.g. inventory holding costs, utilities, etc.). In this situation, the costs are associated with business decision-making and fluctuate based on cost allocation and budgeting. Any cost that is associated with a change in strategy or restructuring of business process is a relevant cost. Sunk costs are irrelevant costs. Sunk costs are those that were incurred due to historical decision-making, such as previous asset purchases where accounting practices have identified depreciation (Wang and Yang 2001). If outsourcing is to be considered for temporary assistance in an advertising focus, this would be considered relevant costs for Jessup. Salaries for temporary outsourced staff (e.g. guerrilla marketing) would be relevant to decision-making and thus included in budget analyses and allocations. Purchase of materials used in this outsourcing function, though fixed with the parent company, would be relevant costs in the strategic management accounting function. It is, again, all costs affected by current and future decision-making that contribute to profit or revenue by a newly adopted strategy. Relevant revenues, similar to relevant costs, are those that are achieved through the process of new decision-making by the SMA. Income achieved through specific strategic processes that can be applied to new investment or restructuring activities is considered in the accounting function. Irrelevant revenues are those involved with pre-existing production capacity. However, these costs become relevant if the SMA determines a renovation of capacity for output and new revenues are achieved through these changes (Banker, et al. 1988). The SMA must be able to distinguish between which revenues are associated with strategic imperatives developed in real-time as compared to established assets and systems contributing income developed historically. Several numerical examples can be applied to better illustrate relevant versus irrelevant costs. Assume that relevant costs for Jessup include direct materials used for a new strategic imperative, as well as temporary outsourced labour for advertising design and development. This project will maintain variable overhead and variable selling costs for each market and consider relevant revenues being earned through change processes. Relevant revenues, £300 per ad unit x 100 units sold = £3,000 Relevant costs Materials £2.50 per unit x 50 units needed = £125 Labour £6.50 per hour x 10 units needed = £65.00 x 20 days = £1300 Variables £500 Total Relevant Costs £1925 Total Relevant Revenue £1075 This traditional accounting method determined a total relevant cost for the new project, subtracting from the relevant revenues earned in this new system. Thus, the SMA must be considerate, in this hypothetical example, that relevant costs are 65 percent of revenues earned. In this case, the high cost margin would be considered unacceptable, thus requiring adjustment to improve revenues or lower costs to achieve the final goal of better competitive position or improved profitability. 3. Activity-Based Costing Activity-Based Costing (ABC) is an effective acronym as it represents three distinct inter-dependencies in the business for the SMA. It represents specific resources, activities, and final service output, an ABC approach. Resources are linked to activities in operations which leads to effective and timely service outputs. Activity-Based costing analyses the tasks required to achieve service outputs and the costs associated with resource procurement and allocation. In the case of Jessup, this would include the purchasing function, inventory costs within the environment for task activities, and the overheads for achieving final service or advertising output. The benefit of introducing activity-based costing is that it allows the strategic management accountant to horizontally allocate specific operational tasks that are aligned with specific market imperatives. It is understood that there are inter-linkages between the producing processes of the organisation and the human competencies required to achieve final service or advertising output (Zimmerman 1997). Activities-based costing allows the SMA to understand human capital constraints or opportunities to facilitate more effective outputs. Thus, it can recognise better training imperatives to reduce the cycle time, as in the case of Jessup, between advertising mock-up and final distribution of the integrated campaigns. By having a more emphasised focus on task relationship with resources, redundancies in the process can be eliminated or streamlined with better technology utilisation, training, or even recruitment and retention investment. Another benefit of activities-based costing is that it helps the SMA to recognise what specific drivers are creating costs within the three-tiered system. Exhibit 1 illustrates a model to identify these drivers and where they fit within the system. Exhibit 1: A Model of ABC Source: Institute of Management Accounting (2006). The model of activity-based accounting provides a window into why specific costs are incurred in the processes and lays the template for using evaluation tools for better cost control. Exhibit 2 illustrates a common cost recognition tool where pricing models are an imperative in understanding how to meet strategic objectives with finished advertising materials or the provision of public relations services and achieve profitability through the ABC method, where PFTBLT represents total profitability for a task. Exhibit 2: A Formula for Activity-Based Costing to Reduce Variable Time Source: Banker, et al. (1993). Managerial and Decision Economics, 14(1). As illustrated by Exhibit 2, variable costs in the process, as well as current price per unit of advertising material, and the fixed cost inputs of resources are considered. Using this type of equation modelling provides an opportunity to understand all related costs of resources, tasks and pricing related to output to determine whether it is a value-added or valueless activity. The findings from this type of equation modelling provides better knowledge of whether current procurement or tasks require adjustment to achieve better strategic positioning. Activity-based costing can also eliminate unprofitable systems in the activities cycle, allowing for more productive allocation of budgeted resources to more effective systems to develop them further. The models of ABC expose where waste is being incurred and the per-person contributions within the activities cycle that can help determine appropriate staffing levels. Planning and future estimations of productivity are highlighted through the activity-based costing methods. The disadvantage of activities-based costing is that it does not recognise other variable costs in the process, such as changing consumer market characteristics that could increase certain overheads, overtime to a task, or faster time to market. Thus, it does not generally maintain characteristics that other costing models have with more predictive elements. Activity-based costing tends to look at the organisation as a stable and predictable unit that will continue to function as it has historically without taking certain variations into account. More disadvantages of activities-based costing is that it can impose significant costs on Jessup. The quantitative necessity of analyses requires technology and database storage for collection and analysis that can, potentially, be less value-added than other cost recognition models. Not all costs applied to consumers or services identified in ABC are necessarily relevant, but this model tends to incorporate even irrelevant costs into data calculations that can be difficult to deconstruct and also to interpret by the strategic management accountant. 4. Conclusion and Recommendation Based on the research evidence and the imperatives of the variety of business in which Jessup operates, it is recommended that the business would benefit most significantly from utilising a strategic management accountant. The external market conditions and pricing are considerable value components with much less emphasis on production activities. It is the quality and brand-related outputs of the business services that will determine the most effective market position against competition and with consumer attitudes. Though the business would benefit from a classical management accountant, the strategic imperatives imposed on this position are far more beneficial to Jessup in the long-term. References Banker, R.D., Datar, S.M. and Kekre, S. (1988), Relevant and irrelevant costs and revenues, Journal of Accounting and Economics, 10(3), pp.171-197. Banker, R.D., Chang, H. and Majumdar, S.K. (1993), Analysing the underlying dimensions of firm profitability, Managerial and Decision Economics, 14(1), pp.25-36. Cagwin, D. and Bouwman, M.J. (2002), The association between activity-based costing and improvement in financial performance, Management Accounting Research, 13(1), pp.1-39. Chapman, C.S. (2005), Controlling Strategy: Management, accounting and performance. Oxford: Oxford University Press. Cheong, S. (2009), Implementation of strategic management accounting, p.1. 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(2007), The cost drivers, revenue drivers and value chain analysis in strategic management accounting, International Journal of Knowledge, Culture, and Change Management, 9(2), pp.69-77. Zimmerman, J.L. (1997), Accounting for Decision-Making and Control, 2nd ed. McGraw-Hill. Read More