The Basic Function Of Strategic Management Accounting - Essay Example

The Basic Function Of Strategic Management Accounting Introduction Strategic management accounting is an emerging field whose boundaries are loose Coad and, as yet, there is no united view of what it is or how it might develop. The existing literature in the field is both unrelated and put out of place (Coad, 1996:392). The research focuses on the advantages of strategic management accounting. Strategic management involves the longer-term have a significant effect on Tesco, a company listed in the United Kingdom Stock Exchange. The research focuses on the priceless use of the strategic management accounting process to help managers successfully make profitable decisions. Strategic management accounting is essential to the enhancement of management’s drive to make more effective and more efficient business decisions. ANALYSIS The basic function of strategic management function is to offer professional advice on topics related to finance and accounting. The strategic management accounting provides information that is useful to decision makers within the enterprise in making decisions related to the deployment of resources and exploitation of enterprise opportunities. The strategic management accountant’s realm is manifold. Managerial accounting has in common with financial accounting a focus on the enterprise and its activities. It differs in the sense that it serves a class of decision makers whose decision interests are generally different from those of the decision makers served by financial accounting (Gray, 1975). The strategic management accountant can focus on other activities within the Tesco environment. In terms of activity based costing, Tesco can use inventory turnover ratio as a basis for determining how fast inventory is converted to revenues. In terms of relevant costing for decision making, Tesco Plc should focus on variable costs as major factors in choosing the best alternative in the decision making process. Tesco Plc should indicate the variable costs include the cost of the materials sold in each Tesco Plc outlet. In terms of capital investment decisions, Tesco Plc should set up more grocery outlets in other communities. Based on prior feasibility studies done on a prospective new location, Tesco will use both investor funds (retained earnings reserved for branch expansions), and long term borrowings to finance another big Tesco grocery outlet. In terms of the evaluation of multi divisional companies, Tesco Plc should conduct classify each multi divisional company as cost and revenue centers. Each company will generate its own financial statements. Thus, the financial statements will indicate the number of multi divisional company under Tesco Plc that generates profits. Likewise, the same financial statements will vividly indicate the number of multi divisional companies generating net losses (Garrison, 2003). Strategic management accounting system of Tesco Plc focuses on ascertaining if the company’s final reports conform to international accounting standards. The strategic management accountant of Tesco is a driving force to develop a global accounting system is the desire to underwrite securities in any, or all, of the world's capital markets using a single set of financial statements. Currently, the Tesco Stocks are listed in the stock exchanges. A positive incentive for a capital market to support a global accounting system is the enhancement of its volume of business by being able to participate in underwritings in other capital markets. Reinforcing the positive incentive is the realization that a capital market, which ignores the development of a global accounting system, may find itself with a unique set of accounting standards while the rest of the world relies on a common set of accounting standards. This would lead to an irretrievable loss of business (Brigham & Houston, 2002). Heely (1993;25) emphasized “the globalization of corporate activity, coupled with economic and political integration of large groupings of nations, are engines of change in accounting practices. Indeed, one might say that change is being pushed on the accounting profession by commercial interests, which find it difficult to accept the necessity of adopting a different set of accounting standards as business activities cross national borders. Two complementary approaches are being taken to tear down the Tower of Babel of Accounting Practices”. The Inflation strategic Management Accounting In terms of accounting for inflation, strategic management accounting should also focus on the inflation currency exchange rate. As the prices of grocery inventory items bought go up. The Tesco management will be forced to increase the grocery’s shelf display to accommodate the increase in the inflation rate. All currencies are heading down the road to worthlessness, some more rapidly than others. Many businessmen, including the managers of Tesco Plc, have been commercially successful in highly inflationary environments (Byars, 1991). A special financial acumen is necessary to stay ahead of inflation surging at several hundred percent per year. A company that decides to avoid the pitfalls of operating in highly inflationary economies restricts its activities to those areas where business is conducted in relatively stable currencies. There is a much larger market, in terms of population, called the third world. It is obvious by the size of third world economies that many businessmen and companies have earned to cope, and apparently to thrive, in less than desirable monetary environments (Chapman, 2007). Risk Management Heely (1993), emphasised management accounting entails analyzing risk management process. In a world of stable currency exchange rates, there is no need for risk management. In a Tesco Plc’s world of limited volatility and infrequent changes in a system of fixed exchange rates, there may be some interest in risks. The constant ups and downs in the world currency would entail losses known as exchange rate losses. For example, the Tesco UK Branch sells stocks to the United States Tesco Branch. The Tesco branch will stand to loss if the exchange rate of the U.S. dollar to the U.K. pound will decline. On the other hand, the increase in the exchange rate will cause the Tesco U.K. branch generates a currency exchange rate gain. The Tesco U.K. manager’s role is to moderate the huge world of wide swings in the exchange rate, managers must constantly prepare to respond to each currency change in a world of wide swings in currency exchange rates, risk management becomes a necessity. The currency exchange rate risk is volatile (Chapman, 2007). For example, the strategic management accounting can focus on the sales aspect of Tesco Plc. A fundamental objective of management accounting is to facilitate and support all the aspects of an organization's decision making. To accomplish this objective, management accountants should be aware of the kinds and levels of problems and decisions involved in order to identify those particular areas where management accounting techniques and information would be most relevant and useful. For this purpose, different conceptual frameworks for viewing problems, decisions, and decision systems have been proposed in the management, accounting, and information systems literature. They provide a good basis for viewing the types of problems, decisions and decision systems, the types of information needed, and the useful role of management accounting (Czinkota, 2008). Problem Foundations It is a fact that executives spend a great proportion of their time defining, formulating, classifying, and solving problems. The concept of a problem in business, management accounting, or any other context lends itself to three major phases--problem definition, problem formulation, and problem classification-which precede the problem solving. The way executives approach each of these phases can substantially affect information processing, decision making, and behavior. A moderating influence on this impact is management accounting playing a crucial role of facilitator by providing the right information needed for the execution of each of the three stages (Belkaoui, 1992). Bhimani (2003;49) emphasized “Firm boundaries no longer define the relevant entity for performance management for many firms. Competitive forces, deregulated economies and technological advances have reduced the costs of transacting with external parties and diminished the value of vertical integration”. The potential returns of the collaboration of each Tesco branch with other Tesco Branches increase the worldwide profits of Tesco. The collaboration is has been enhanced, as each branch combines the different cultures in each branch strategically located in different parts of the world into the Tesco brand. The unique capabilities of the Tesco store personnel in increase client patronage in different Tesco locations combine to create more customer – centred innovative products and services. Collaboration can all be arranged under the form of franchises, licensing arrangements, joint ventures, or minority equity shares—arrangements that align the interests of participating parties through a shared gain opportunity and formal profit-sharing rules (Bhimani, 2003). Details Strategic management means going beyond the details. This means management accounting focuses on using the financial statement reports as a jump off point in the preparation of recommendations. The main goal of strategic management accounting is to help management in its drive to harness scarce resources of Tesco Grocery Chain of stores to achieve its goal of being one of the top Grocery stores in the United Kingdom. The information era is characterized by the emergence of new organizational forms that go beyond industry boundaries, national borders, and markets, and that seem to defy central control. This 'third wave' economy is dominated by service organizations including those in the trade sector and the financial sector. Here information is the key competitive factor (Bhimani, 2003). Planning and Control In terms of planning and control, strategic management accounting includes short-run management decisions differ in a number of respects from long-run decisions. In addition, strategic management accounting includes long-run decisions generally involving a selection of courses of action that extend over perhaps many years, such as introducing a new product line. For example, if the management decides to set up a Tesco Branch in Japan, the plan should be implemented. The latter constitutes management's concern in the short run. Short-run management objectives are therefore typically derived from the implementation requirements of long-run programs, projects, and product lines that management has selected. The strategic management accountant must short-run management decisions that would complement the organization’s long term plans. For example, current production volume is dependent on the amount of incoming raw materials. Management must ensure that there is a steady and continuous supply of materials entering the Tesco Grocery outlets. The company can use economic order quantity for resolving the issue. As discussed, the management must decide to buy raw materials from reliable suppliers. In addition, strategic management accounting management must focus on the labor aspect of the Tesco business equation. Each store must have the optimum number of employees serve each Tesco outlet. It would be very discouraging to see clients waiting in long lines to pay to the cashier. The hiring of Tesco Plc Store personnel should focus on the two distinct features. The two features are they are usually oriented toward a period of activity, and a distinct pattern of decisions is usually repeated each period (along with decisions necessitated by previously unanticipated developments). Management must implement periodic short-run decisions. The periodicity of short-run decisions is a result of their relationship to long-run courses of action that have been decided upon. Since the long-run programs and product lines of Tesco Plc may be quite divergent in nature, time of origination, and life expectancy, there is a need for some unifying scheme to coordinate their implementation and execution. One way of achieving this is to manage all projects and programs on a one-period-at-a-time basis repetitively over the same calendar interval, such as a month, a quarter, or a year (Gray, 1975). In addition, Tesco Plc’s management must focus on the supply chain management process. The process includes searching for the diverse resources have to be coordinated so that specified tasks of supply each Tesco grocery outlet with enough grocery supplies can be achieved (Finch, 2004). Financial Statement Analysis Looking at the Tesco Company financial statements which are attached, manage can focus on financials statement ratios The financial statement ratios will indicate that the company generated net profits of £2166 million for the year 2009 alone. The income statement will also show that the company generated a net profit of £2130 million for the year 2008. Next strategic management accounting should focus on the whether the current year financial performance, in terms of net income, was better than the prior year’s net income performance. After this, the management accounting determines if the current year’s net income can be improved. The management accounting practitioner can compare the financial performance of the company with the performance of another company (Garrison, 2003). The gross profit ratio shows the relationship between gross profit and the company’s net revenues. Based on the above computation, the gross profit ratio of Tesco is shown to be 8 percent for the two years described above. In addition, Likewise, the above computation shows Morrison’s generated gross profit ratios of 6 percent for the same two years. The above computation shows that Tesco did financially better than Morrison’s. Gross Profit Ratio           2009   2008     Gross Profit Ratio = Gross Profit = 4218 3630   Revenues 54327 47298           =   0.08   0.08 The gross profit ratio measures the relationship between gross profit and the net revenues. Based on the above computation, the gross profit ratio of Tesco remained fixed at 8 percent for the years 2008 and 2009. Strategic management accounting can recommend management to increase its revenues. Strategic management accounting can also instruct management to reduce its cost of goods sold amounts (Drury, 2007). Operating Margin Ratio           2009   2008     Operating Margin   Net Profit Ratio = Net Profit = 2954 2803   Revenues 54327 47298           =   0.054374 = 0.059263 The Operating profit ratio measures the relationship between net profit and the net revenues. Based on the above computation, the net profit ratio of Tesco declined from its 6 percent figure to only 5 percent in 2009. Strategic management accounting can recommend that the company increase its operating profit margin. The increase in the operating profit margin, the company has t increase the Tesco revenues. Another way to increase its revenues, Strategic management accounting can recommend that the company reduce its cost of sales, marketing expenses, and operating expenses. Capital Turnover         2009   2008     Capital Turnover Net Sales = 54327 47298   Capital Employed 20360 16933           =   2.67 = 2.79 The fixed assets turnover ratio measures how much sales was generated by the use of capital investments. Based on the above computation, the capital turnover ratio of Tesco declined from its 2008 figure of 2.79 to only 2.67 in 2009. Strategic Management Accounting can recommend management two alternatives to improve the capital turnover ratio. One alternative is to increase the company’s net sales. To increase net sales, the company has to produce more products. To increase production, the company has to buy more raw materials. To buy raw materials, the company has to generate cash inflows. On the other hand, the capital employed can be reduced to increase the capital turnover ratio. Management           2009   2008     Inventory Turnover Cost of Sales = 50109 = 43668   Closing Inventory 2669 2430           =   18.77 = 17.97 The Inventory turnover ratio measures how much inventory was turnover over to generate the revenues. Based on the above computation, inventory turnover ratio of Tesco increased from its 17.97 figure to the higher 18.77 in 2009. Strategic management accounting can recommend management to increase its cost of cost sales in order to generate a favourable inventory turnover ratio. To increase the cost of sales, the company has to increase its revenues. Strategic management accounting can recommend management to reduce its closing inventory. To reduce its closing inventory, management may either increase its revenues or reduce its purchases. Debt to Equity Ratio       2009   2008     Debt to Equity Ratio Long Term Debt = 12391 5872   Shareholders' Funds 12995 11902           = 0.95 = 0.49 The debt to equity ratio measures the relationship of percentage of lenders and investors in the company. The above computation shows that Tesco generated a debt to equity ratio of .95 for 2009. This is higher than the prior year’s .49 debt to equity ratio. The best Debt to Equity Ratio is 100 percent. The company must have cash inflows coming from creditors and investors. Comparison Tesco and Morrison’s Strategic management accounting can choose to compare its financial ratios with the ratios of the competitors as follows. Gross Profit Ratio       Tesc0   Tesc0   Morrison’s Morrison’s       2009 2008 2009 2008       Gross Profit = 4218 3630 913 818   Revenues 54327 47298 14528 12969           0.08   0.08   0.06   0.06 The above computation shows Morrison’s generated gross profit ratios of 6 percent for the same two years. The above computation shows that Tesco did financially better than Morrison’s. Operating Margin Ratio       Tesc0   Tesc0   Morrison’s Morrison’s       2009 2008 2009 2008         Net Profit = 2954 2803 655 612     Revenues 54327 47298 14528 12969           = 0.05 = 0.06 = 0.05 = 0.05   The above computation shows Morrison’s generated net profit ratios of 5 percent for the same two years. The above computation shows that Tesco did financially better than Morrison’s (Feldman, 2006). Colin Drury (2007) emphasized Coad is correct in stating strategic management accounting is an emerging field whose boundaries are loose and, as yet, there is no united view of what it is or how it might develop. The existing literature in the field is both unrelated and put out of place. Coad emphasized that different managers use different strategic management tools to help managers make decisions. This can be seen in the Tesco Analysis above. The use of the financial statement ratios is one of activities that creating confusion because the strategic management accountants are not bound by strict management or accounting standards or principles. Analytical Responsibilities of the Strategic Management Accounting The above discussion proves that Coad’s statements are correct. Strategic management accounting is an emerging field whose boundaries are loose and, as yet, there is no united view of what it is or how it might develop. Indeed, the existing literature in the field is both unrelated and put out of place (Coad, 1996:392). The strategic management accountant can easily ease one’s way through any business type to help all types and temperaments of managers enhance their decision making activities, especially on the Tesco Plc environment (Helfert, 2001). The strategic management accountant can easily give its powerful and professional advice to the managers of Tesco Plc in terms of increasing revenues (Helfert, 2001). In the same light, the strategic management accountant can easily give one’s powerful and professional advice to managers in terms of increasing profits. The strategic management accountant is very comfortable in any of the above business types. The is the very essence of the statement “strategic management accounting is an emerging field whose boundaries are loose and, as yet, there is no united view of what it is or how it might develop”. The strategic management accountant can be easily reach outside boundaries and bravely venture into uncharted territories (business types) and still have the expertise to offer one’s expert financial advice to any manager needing investment and other financial advice. Coad proposes the strategic management accountant’s advice is not for the consumption or use of the external readers of the advice. The advice is not meant for the use of the suppliers, investors, creditors, community, customers, environmental protection agencies and the like. This is the very essence of the statement “the existing literature in the field is both unrelated and put out of place” (Coad, 1996:392). The output generated by the strategic management accounting department is seen only by Tesco Plc’s management. The reason is privacy. Management accounting focuses on the needs of management to make strategic decisions during some of the most opportune or most uncomfortable situations. Further, Coad opines the strategic management accountant can use quantitative math tools to resolve management decisions (Hilton, 2007). The critical path method is used to determine which path in the supply chain process (for example path A to B to E or path A to C to E is the critical path). The critical path is a management analytical tool in used in the quantitative math portion of management accounting. The strategic management accountant can use the economic order quantity (EOQ) to determine the optimum number of orders and which order size. The optimum size would generate the least possible order cost and carrying (warehouse or storage) cost of an item that is held for sale by management in the sale of products. The critical path method is used to determine the longest path, the shortest path, the dependent paths, and the slack. The Tesco Plc branches strive to ensure that each product arrives on its Tesco destinations before the store stocks run out. Coad is correct in stating the strategic management accountant can use the budget formula to determine estimated cash inflows needed to pay for the needed cash outflows of the Tesco organisation (Helfert, 2001). The budget formula is very useful in allocating funds to ensure there are available funds available on the day money is needed to pay for the scheduled liabilities or payment allocations. The strategic management accountant can use the budget to help management decide whether to accept obligations to pay on a given date or not. Strategic management accounting must help Tesco in the preparation of its departmental, regional, or world projected financial reports. Coad is correct in stating the strategic management accountant can help the Tesco Management in their decision making process by using variable costing techniques. The variable costing analysis focuses on classifying fixed costs as irrelevant to the decision making process. The variable costing analysis uses only the variable cost or “avoidable costs” in helping management make seasoned decisions. The fixed cost is not used in the decision making process because the fixed cost does not change whether management will implement any of the available choices. One good example is the Tesco building depreciation expense which does not change as the product sales increases or decreases. The strategic management accountant does not include the fixed costs in making recommendations to the decision making process because the inclusion would cause delay in the work of the strategic management accountant. The strategic management accountant can use the standard costing procedure to help management make better decisions (Hilton, 2007). The strategic management accountant can use the standard costing to determine whether the increase or decrease in the prices of Tesco grocery supplies bought from the company’s suppliers and other manufacturers will be favourable to management’s preferred alternative choices. Likewise, the strategic management accountant can use the standard costing to determine whether the increase or decrease in the labour rate of direct labor of its Tesco store employees will be favourable to management’s preferred alternative production choices. In terms of Tesco Plc’s financial statement analysis, Coad is correct in stating the strategic management accountant uses the current ratio to determine if there are enough current assets available to pay the current liabilities upon their maturity dates. The strategic management accountant uses the return in investment ratio to determine how long the company will recover their capital investments. The strategic management accountant will use the debt to equity ratio to determine if the company complies with the optimum cash inflow strategy. The strategic management accountant uses the earnings per share ratio to determine how much each stockholder or investor will receive for each share of stock investment. The strategic management accountant uses the dividend yield ratio to determine the relationship between the common dividends per share and the market price per share of stock (Hilton, 2007). Based on the above Tesco Plc., discussion, strategic management accounting, with emphasis on Tesco Plc, is essential to the enhancement of management’s drive to make more effective and more efficient business decisions. There are several advantages in implementing the strategic management accounting process. The priceless use of the strategic management accounting process helps managers successfully make profitable decisions in diverse business types, specifically on the Tesco Plc situation. Indeed, Coad is correct in stating strategic management accounting is an emerging field whose boundaries are loose and, as yet, there is no united view of what it is or how it might develop and the existing literature in the field is both unrelated and put out of place, as vividly proven in the Tesco Plc strategic management accounting situation. REFERENCES Belkaoui, A. (1992). The New Foundations of Management Accounting. London: Quorum Books. Bhimani, A. (2003). Management Accounting . London: University Press. Brigham, E. and Houston, J. (2002). Fundamentals of Financial Management. New York: Thomson South-Western. Byars, L. (1991). Strategic Management. Formulation and Implementation – Concepts and Cases. London: HarperCollins. Chapman, C. (2007) Handbook of Management Accounting Research. 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