Re-Marketing of Current Management Accounting Techniques - Assignment Example

Re-Marketing of Current Management Accounting Techniques Strategic Management Accounting May Simply be a Re-Marketing of Current Established Management Accounting Techniques or Indeed a Concept with no Real Substance Introduction The titles of articles by Lord (1996) and Shank (1989) suggest that Strategic Management Accounting may simply be a re-marketing of current established management accounting techniques or indeed a concept with no real substance. Strategic management accounting is a widely used term that has been derived from combining business strategy and management accounting. There has been an attempt by management accountants to put their various businesses on a levelled competitive ground with their various competitors[CITATION Lor \l 1033 ]. In their endeavours, these managers have tried to apply their management accounting techniques to collect data about the competitive position of their competitors. The information about the position of the competitor is, then, used to position the business in the best way to beat its competitors in the industry. Although Managers try to use strategic management accounting to advise their businesses on the competitive issues, there have been claims that the strategic management techniques that they are using, might already be in use in management accounting. This puts no use to the strategic management elements and techniques that the Strategic Management Accountants are busy applying in as far as competitive aspect of the business is concerned since these elements can as well be applied by the management accountants. Some of the authors and researchers who have questioned the use of strategic management accounting on advising businesses on issues of gaining competitive advantage include Beverly R. Lord (1996) and John K. Shank (1989) among others. This essay will majorly be based upon the claims of these two authors: Lord (1996) and Shank (1989), to unravel the clear position of the situation. The main born of contention here is to unravel the truth in their claims and either qualify or disqualify them. To be able to handle this issue, we will evaluate some of the strategic management accounting issues that the management accountants apply in their practice. The research will encompass the background information on the development of Management Accounting from traditional to modern practice. With these, we will then evaluate, using the existing literature, whether these elements and techniques applied by strategic management accountants for competitive advantage reasons already exist in the business operation through management accounting or not, and their relevance in decision making both in the short-term and long term basis. We will then conclude by giving support to a well-established stance that will either be in support of the claims by the two authors mentioned, or the practice of the management accountants. Background Information on Management Accounting As we can look back to the early days during the industrial revolution period of 1800s, here was a great potential for business growth as things were just starting up. People were faced with a lot of unexploited opportunities to produce and supply different materials that were particularly required in various sectors in the industrialization process. This led to mass production due to high demand for the particular materials. The managements of various processing plants were, therefore, faced with many challenges on how they could manage their costs, carry out cost allocations, standard costs and manage the variances between the standard costs and the actual costs, especially when producing for a prospectus market. At this point, the management also required a system that they could use in managing production, distribution chains as well as supplies. A centralized unitary structure, was then developed for use during this period. This structure basically applied the use of ratios and budgetary controls to manage some of these issues. However, with the growth of businesses and organizations, the managerially performed tasks also increased with complexities and diversities. There was, then a need for the managers to decentralize the structure that was used to manage its cost and production related activities. As the organizations grew, they were starting up various divisions that required transfer of prices between them it was difficult and complex to transfer such managerial functions through the use of a centralized structure[ CITATION Lan08 \l 1033 ]. There was a lot of inconveniences especially when the capital was to be raised in a central place is when it could be its various divisions. As a result, the development of management accounting systems were called for to rescue the situation. In the current practice, managers have adopted management through the use of numbers as financial reporting dominates the practice. In this case, managers link have linked business performance with numerical results achieved in during the operation process of the business. As a result, the longer times that managers used to take when performing their duties have adversely decreased. Management has been reduced to remuneration, thus, decision making has become very easy. This new management system has resulted in reduced performance in the Western manufacturing, which has, therefore, created enough space for Japanese and Chinese manufacturing to set in. as a result of the changes that were experienced in technology, competition strategies as well as product life cycles, traditional management accounting system was greatly undermined. Various reasons for undermining the traditional management accounting system include the fact that, it majorly focused on the internal decision making. It also focused on periodic meetings such as quarterly or yearly to set and assess the various short-term targets of the business. This way, only short period targets were focused on, which could only make the business to strategize for a shorter period, neglecting the broader, wider and longer view of it. There was, therefore, a need for the development of management accounting techniques that would help in long-term decision making as well as external systems of the business. As a result, the modern management accounting has come up with various modern techniques to solve this issue. The modern management accounting techniques have therefore been developed to address some of the failures of the traditional management accounting system. Some of the failures that these techniques tend to address include accounting for direct labour, measures of performance, problems allocating overhead and the fact that traditional system was focused in short-term. Apart from these, the traditional management accounting system could also not be used to provide timely information for decision, it was technical, and there was the use of single allocation base for overhead as well as the fact that it focused so much on the internal performance of a business with neglect of the external. From Basic Costing and Budgeting Tool to Strategic Management Accounting and the Balanced Scorecard With the adverse changes that occurred in the business environment such as increased competition, emphasis on equity, technological advancement, digitization and automation among others, the basic costing and budgeting tools were considered irrelevant. There was a need for a management accounting system that could deal with the changes that were being experienced in the business environment. As a result, there has been a lot of development of techniques in the field that can take consideration of today’s competitive business environment. Strategic management accounting has been seen to provide a management system where such conditions can be met in the business environment. Here is where new techniques such as balanced scoreboards were developed to help in long-term decision making. Balanced Scoreboard This is a management accounting tool that is multi-dimensional in nature and is able to transform the mission and strategies of an organization into a set of comprehensive performance measures that gives a platform for strategic measurement and management systems. This system is not only focus on financial achievements of an organization, therefore, it is considered holistic in its application[ CITATION Che07 \l 1033 ]. This technique considers the non-financial objectives that an organization is required to meet in order to achieve its financial objectives, as equally important. As this technique tries to balance both its financial and non-financial objectives to meet its short-term and long-term objectives, its name suggests just that[ CITATION Nor03 \l 1033 ]. As a result, this technique is widely used to communicate as well as manage strategy implementation. To achieve this, management is required to translate the strategies into measures of performance in a way that can well be understood by the employees. Management accounting from a Short-Term Tool to a more Long-term Tool Management accounting can be used as a tool a short-term decision making tool in an organization. For instance, the management may need to make decisions concerning purchasing some equipment, cost allocation as well as the behaviour of costs and volume profits[ CITATION Dem94 \l 1033 ]. Management accounting techniques such as cost driver analysis, capital budgeting as well as ratio analysis will be applied. These are techniques that are not present in the operation of a firm. There must be a special group of individuals assigned to do such decision making. These are management accountant. Traditional management accounting did not have any specialized way of dealing with such issues. Instead, it generalized so many of these decisions or did not have a special way of dealing with them. Management accounting has been, for a long time, used basically with focus to short-term decision making. This is the decision making that is mainly focusing on issue that need implementation within shorter periods. Such decisions may require management to hold meetings that may be periodical, to discuss on the issues and provided decisions to the[ CITATION Dem95 \l 1033 ]. Such decisions, usually, are those that affect the internal system of a business or organization. Such included, performance of the business, purchasing decisions, costing decisions and even profit volume decisions. There has been, on the other hand, the lack of management accounting techniques that could help the business make long-term decisions which are mainly external oriented. These decisions touch on issues such as, how the business can grow, going global, handling competition, diversifying, handling customers and even social corporate responsibility. As a result, various techniques such as balanced scoreboards were developed that can deal with the organization as a whole both in the internal and external systems. For instance, a business will apply various appraisal methods such as NPV, ARR, Payback period and IRR among others to make decisions on acquiring other businesses or projects. An appraisal method such as NPV uses the project’s cash flow for over several years, therefore, it is used for long-term decision making[ CITATION Dem951 \l 1033 ]. Strategic Management Accounting Strategic management in any business operation engages three main elements. These include value chain, strategic positioning as well as cost driver analysis[ CITATION Sha89 \l 1033 ]. When the three elements are augured well in a business, the main aims of strategic management in that business are said to be achieved. From the arguments of Shank and Ford, there are various explanation and demonstrations of these techniques. Value Chain Analysis Value chain is a widely used term that refers to tracing all the activities that contributes to the value of a product all the way from its raw materials to the end consumer level (Shank, 1989). It, therefore, forms an external part of a firm, while a firm takes part in the overall chain of all the activities that lead to the value creation until the product reaches the consumer. Shank contrasts this idea with the idea that is brought about in the management accounting today, that, value chain adopts a more internal focus on the firm. Management accounting, therefore, takes a value added perspective in the chain which encompasses payments to suppliers as well as charges to consumers[ CITATION Cug12 \l 1033 ]. Through this chain, therefore, using the Porter’s strategic positioning, there is an importance of cost reduction. In order to maximize profits, firms that deals in product differentiation must reduce their prices. Those businesses employing cost leader strategy, also must lower their prices in order to make more sales than their competitors. In order for businesses to be able to reduce costs effectively, they will affect the costs that cause costs without necessarily increasing the value. Firms can as well reduce costs through reducing the costs incurred within the value chain of a product. For instance, when a product has several intermediaries, these can be reduced as few as possible to help reduce its final cost to the consumer. According to Porter, value chain is one way of gaining competitive advantage over other businesses. It is therefore, a strategic tool used in strategic management accounting to advise management against competitors. This strategy has its strength in helping to decide about the activities that create profits. As such, it complies with management accounting methods of business appraisal to choose on the profitability basis such as ARR. Strategic Positioning Analysis Businesses must position themselves strategically in order to get ready for competition in the industry. Those businesses that would like to be on the lead must always invest more of technological efficiency. Due to their markets being more stable, they will, then, concentrate on reducing their costs as well as quality improvement. Those businesses that are continually searching for business opportunities are better when they apply flexibility more than efficiency[ CITATION Por85 \l 1033 ]. They really need not to look for high profitability. The other group is the analysers which combines the two groups. According to Porters, for managers position their businesses strategically and gain competitive advantage, they need to apply cost leadership or product differentiation strategies. Differentiating its products means, it must have better quality feature that that its competitor’s products doesn’t have[ CITATION Mod05 \l 1033 ]. Here, competitive advantage is achieve through selling these products at higher prices due to the value added during differentiation. Cost leadership on the other hand, attains competitive advantage through having lower costs than competitors. It is established, however, that for firms to apply these strategies, they will have to use various management accounting methods. For example, when applying cost leadership strategy, management will have to use standard costing methods for pricing decisions as well as flexible budgeting method when applying manufacturing costs. Businesses that would consider applying product differentiation as a way of achieving competitive analysis would have to apply management accounting tools such as marketing cost analysis. They would also use flexible budgeting and meeting budgets moderately. Least of all, they would consider the importance of standard costing, product costing as well as competitor cost analysis. According to Govindarajan and Shank (1992), there was more emphasis created when a firm’s mission was linked to its strategic position. Their conclusion indicated a similarity under the management accounting implications for strategic planning, incentive compensation and budgeting under both cost leadership as well as harvest mission positions. Again, they suggested that, accounting emphasis that would be suggested for differentiation, would also be used to fit a build mission. Cost Driver Analysis Cost drivers are those activities that cause costs. According to Shank (1989), these cost drivers can be put under structural and executional categories. Complexity, experience, technology, scope and scale make up structural category. It is not automatic that when such drivers are increased, there will be a decrease in cost. On the other hand, capacity utilization, total equity management, workforce involvement, product configuration effectiveness, plant layout efficiency and linkages exploitation make up executional drivers. Increasing such drivers will automatically decrease costs[ CITATION Cao12 \l 1033 ]. For instance, when there is an increase in plant layout efficiency, the efficiency of production will increase, meaning, cost of production will reduce. As a result, there will be a reduction in the cost of the products without necessarily interfering with the value. According to some writers, cost drivers are expected to be dynamic. This is because, when there is a continuous improvement of the cost drivers, they will be reduced to very insignificant levels. As a result, they may have to be replaced with new drivers. Due to such a shortage, there was a need for a performance measurement tool that would guide in putting strategies into action as well as evaluating the implemented action. These writers suggested the use of both financial and non-financial methods. Conclusion From the discussions above, Lord (1996) and Shank (1989) have claimed that strategic management accounting could only be re-marketing the techniques that are the current management accounting uses. I tend to be in agreement with these claims to some extent. To begin with, there are various management accounting techniques that are not necessarily applied by the strategic management accountants[ CITATION Sim90 \l 1033 ]. For instance, the appraisal methods such as the Net Present Value, Internal Rates of Return and even the Accounting Rate of return are not necessarily used in strategic management accounting. As it is, strategic management accounting is aimed at helping a business in gaining a competitive position, some of these appraisal methods that management accounting applies are used when evaluating projects that would or would not be acquired by the investors. As such, these techniques have no relationship at all with the strategic positioning of a business. Secondly, I may not agree with the claims of these two authors due to the fact that, management accounting focusses both upon the short-term and long-term decision making. It entails application of techniques that will both ensure that decisions on targets within the business and even beyond are discussed. For instance, when a business would like to acquire another business, it will, in most cases, use appraisal techniques, which are majorly used in management accounting, to make such a decision. However, I also agree with the claims to a larger extent. It is true that strategic management accounting may only be re-marketing the techniques which are currently being employed by management accounting. When we look at the elements of strategic management accounting, such as value chain analysis, we realize that this strategy is supposed to be applied by a business in an effort to reduce costs of the products without reducing its value. However, for one to do so, there is need to apply management accounting techniques such as standard costing and budgeting techniques to determine the production costs and allocate the selling price. In this case, strategic management accounting has only used a techniques that is already being used in management accounting. Secondly, looking at the strategic positioning analysis, businesses are expected to achieve competitive advantage through applying either product differentiation or cost leadership strategies. However, management accounting techniques such as standard costing, flexible budgeting as well as marketing cost analysis must be applied. Thirdly, there is also the need, when using cost driver analysis, to consider both financial and non-financial objectives when putting the strategy into action. There is also a need for performance measurement tools that can only be found in management accounting. Here, balanced scoreboard, as discussed above, turns the missions and strategies into a set of comprehensive measures of performance as required when implementing the strategic positioning analysis. Again, when implementing cost driver analysis, where both financial and non-financial objectives are required, it is advisable to apply the balanced scoreboard as it considers both sets of objectives. Bibliography CITATION Lor \l 1033 : , (Lord, 1996), CITATION Lan08 \l 1033 : , (Langfield-Smith, 2008), CITATION Che07 \l 1033 : , (Chenhall & Langfield-Smith, 2007), CITATION Nor03 \l 1033 : , (Noreklit, 2003), CITATION Dem94 \l 1033 : , (Demirag, et al., 1994), CITATION Dem95 \l 1033 : , (Demirag, 1995), CITATION Dem951 \l 1033 : , (Demirag, 1995), CITATION Sha89 \l 1033 : , (Shank, 1989), CITATION Cug12 \l 1033 : , (Cuganesan, et al., 2012), CITATION Por85 \l 1033 : , (Porters, 1985), CITATION Mod05 \l 1033 : , (Modarress, et al., 2005), CITATION Cao12 \l 1033 : , (Cao & Folan, 2012), CITATION Sim90 \l 1033 : , (Simons, 1990), Read More