Strategic Management Accounting - Essay Example

Strategic Management Accounting Table of Contents Strategic Management Accounting Table of Contents 2 3 Introduction 3 Strategic Management Accounting 5 Limitations of Management Accounting 6 Emergence of Strategic Management Accounting 10 Conclusion 12 Reference 14 Bibliography 16 Abstract Accounting is an old field of study. However, the world has seen enough evolution in this field; the recent one being strategic management accounting. This report looks into the strategic management in enhancing the performance of today’s business organisations. A comparative analysis of management accounting and strategic management accounting has been done for the better understanding of the concepts. At the end, a conclusion has been inferred from the entire report. Introduction An organisation is successful to the extent it successfully implements its strategies. With change in time, the importance of strategies has increased in the sense that managers have no leeway in case a strategy is wrongly formulated. The primary objective of management accounting system is to help the organisation to achieve its strategic objectives. “Strategy is the way a firm positions itself from its competitors” (Ansari, et. al, n.d., p.6). With the rapid and unpredicted changes in the business environment, competition has also been intensified. It is high time for the organisation to align all its efforts to beat the competition and enhance its performance. In such a competitive environment, even the decision making process seems to be very difficult. With the spread of companies across geographical borders, it has become imperative for managers and business leaders to get access to critical business data which, when analysed properly, can lead to a better and clearer picture of the organisation. This is the area where strategic management accounting has been assuming greater importance consistently. Strategic management accounting can be seen as an enhanced tool to reduce the issues with decision making process. This recent arena of the accounting field has emerged as a significant tool to help the companies in achieving competitive advantage in the market. Management Accounting Management Accounting is a system which collects, classifies, summarises, analyses and reports information assisting the managers in the decision making and control activities. Management accounting demands both the collection, analysis and interpretation of financial or cost data, other data such as sales, price, product demands and measures of physical quantities and capacities (Controller General of Accounts, n.d.). Management accounting also considers preparing financial reports for non management groups like shareholders, regulatory agencies, creditors and tax authorities. In this accounting system, the operational results have been reported using financial and non- financial measures. All financial and cost accounting techniques including marginal costing, standard costing and budgetary control are utilised in this process. So, the management accounting system can be seen as the new horizon of cost accounting towards the arena of management. The management accounting system offers economic information, which is required to achieve the organisational goals, to the managers. The information flow system, hence, is important for an appropriate management accounting system. At each stage, the managers would need a clear understanding of the goals assigned and a flow of relevant information. It is significant to note than superfluity of irrelevant information is not intended. Strategic Management Accounting The term ‘Strategic Management Accounting’ was introduced by Simmonds in the year 1981. He defined this term as a provision and analysis of management accounting data of a business and its competitors which is necessary to develop and monitor the company’s strategic management framework. With the rapid changes in the business environment, it has become more and more dynamic and competitive. The changing environment demands the corporate managers to develop coherent, internally and logically consistent business strategies to beat the competition. Adding to the same, they need to have tools and models, providing enough useful information which would be required in strategic decision making, planning and control (Banker & Johnston, n.d.). According to Simmonds, accounting is required to be more outward looking and must assist the firm to evaluate its competitive position against its competitors by collecting and analysing data on several components including cost, price, market share, resources of the competitors and sales volume etc. In the year 1990, Bromwich argued that ‘Strategic Management Accounting’ must consider the benefits of the intended products and the prices customers are willing to pay for the same. After six years, in the year 1996, Lord articulated the strategic management accounting as a process to explore and exploit the cost reduction opportunities, continual enhancement of the non financial performance measures (Collier & Ampomah, 2009). In all, strategic management accounting must align all the accounting emphasis with the organisation’s strategic position. This is up to the organisations to place more emphasis on specific accounting techniques to complement their strategic position. Strategic management accounting has crossed the boundaries of management accounting by looking beyond the accounting period of 12 months. It has extends the traditional system by considering the whole supply chain to include suppliers and customers of the organisation. This new management accounting system has enabled the companies to benchmark themselves against the competitors and the industry. Limitations of Management Accounting Despite of the fact that management accounting is a useful tool intended for the managers to assist them in performing managerial functions, this measure suffers from certain limitations. Focus on Accounting Data- The management accounting techniques are based on the fundamental data mainly gathered from record maintained by financial and Cost Accounting. So, it would not be wrong to say the base of management accounting is data delivered by the other branches of accounting. In case, the data provided is not appropriate and correct, the entire management accounting efforts are expected to become ineffective. This is one of the significant limitations of this management accounting system. Use of Historical Data – Undoubtedly, management accounting is intended to assist the managers in the process of decision making for the future activities. However, it does so based on the available historical data provided by financial accounting and cost accounting departments. Usage of historical data may not anticipate the trend in the future. There is a high probability that relying on this data can result in wrong decision making in the future. Broad Scope – Management accounting system covers a very large area. It includes a number of related field s such as Financial Accounting, Cost Accounting, Operational Research, Statistics, Law and Economics. The wide scope of management accounting is intended to make the management more effective in its decision making. However, it is quite difficult to establish such a management accounting system where the associated people are not quite equipped with the required knowledge of all these segments. At the same time, it has been quite difficult to incorporate all these components in one management technique. There is always a high possibility to lack in the required integration of the processes to make them effective enough to encourage the management to be more efficient. High Cost – The establishment of a sound Management Accounting System demands a capital investment in the same. The organisation has to incur a higher cost as the installation of this system demands a broaden network of management information system. Adding to it, the operational cost of Management Accounting Department is quite high. To incorporate the accounting system with a company demands a number of manuals. This, in turn, escalates the establishment charges. As a consequence, the small firms cannot afford to establish the same. Even the larger ones feel sceptical as this would incur a higher cost for their companies. Complex Application – The arena of Management Accounting system is wide enough to incorporate a huge number of application tools and techniques. It also demands to have knowledge of a number of accounting and non accounting subjects to analyse and interpret the available data. So, naturally the application of management accounting system is quite different and difficult when compared to other branches of accounting. A management account may not like to take on such complex applications and may try to avoid the same in his or her decision making process. Moreover, management accounting removes the intuitive decision making process and incorporates a scientific process to taken on the decisions. However, despite of this, many management are quite prone to take the easy and simple way of intuitive decision making rather than complex but reliable scientific solutions in the day to day operation. Lack of Objectivity - Management accounting system incorporates both qualitative and quantitative data for analysis and interpretation of relevant data. It also prepares reports based on this data analysis and interpretation. However, there is a considerable possibility that the interpretation of information as offered by the management accounting in the form of reports may get influenced by the individual preference of the interpreter. In such a case, the utility of management accounting would be reduced may not be absolutely appropriate in the decision making process. Unable to become a substitute of Management – Management accounting is a system providing necessary and relevant information to the management. These information are intended to assist the managers in functions like planning, controlling and decision making in a more effective and efficient manner. However, it could not emerge as the substitute of management but only a decision making tool to help the management. It cannot take the final decision on its own (Bhattacharyya, 2010). Developing Stage – The management accounting technique is a relatively recent area in the arena of accounting measures. As a matter of fact, this field is still under continual developments. It follows certain concepts and conventions which are yet to be generally accepted. Many experiments are still going on in this regard. Psychological Resistance – The management accounting system has brought up a radical change in the managerial approach to solve the day to day problems confronted by the organisation. This demands a reorganisation of the associated personnel and reorientation of their activities. There is a high possibility that the labour force may misinterpret the same as a toll meant for their exploitation. The labour force is required to be made knowledgeable about the advantages of the system to allay their fear about the same. Management Accounting is expected to encounter a psychological resistance, at least in the initial stages of its incorporation (Kulkarni & Mahajan, 2008). Persistent Efforts – The interpretation and analysis, drawn by the management accountant may not be readily and willingly implemented in an organisation. In such a case, the management accountant has to put a considerable amount of effort to convince the concerned members of the organisation. Undoubtedly, management accounting system is suffering from a considerable number of limitations. However, a good deal of limitations can be overcome if the management is convinced about the significance and the necessity of management accounting. Emergence of Strategic Management Accounting Historically management accounting has a tendency to neglect the incorporation of information to support the strategic decisions of an organisation. It has led to the emergence of a new term, ‘Strategic Management System’. This relatively new term of strategic management accounting can be thought of an approach to support such strategic decisions of the organisations. Capital investment appraisal has been one area where the management accountants have contributed considerably in strategic planning of the organisations. However, the focus of management accounting has always been at the management control and operational level with techniques such as cash budgeting and standard costing (Smith, 2007). The corporate managers often complain that they have a huge amount of data; however, most of them are not relevant and useful for their functions. In a survey KPMG found that the information provided to the management is biased to financial indicators and they are mostly concentrated on internal, self determined comparisons. Strategic Management Accounting puts its efforts to rectify such weakness by considering both the financial and non-financial indicators, comparing both internal and external information. Now- a-days the business environment has evolved as more competitive than earlier. This has encouraged the companies to be involved in intensive competition to secure the profitability and considerable market share in the industry. Organisations are now finding new ways to become cost effective to beat the competition and enhance their profitability. The desire to reduce waste has raised several questions on the traditional accounting controls. Standard costing and variance analysis have been criticised as they are tended to reduce the production volume at the level of market demand, as the inventory is assumed to be wasteful. As a consequence, the organisation has to suffer higher expenses and higher per unit overhead allocations. This, in turn, is expected to result in higher prices for the consumers and lower profitability for the organisations if the prices are kept constant. However, these issues have been addressed by strategic management approaches using life cycle and target costing approach. Apart from these, broader supply chain and competitor analyses are also expected to influence the value of traditional accounting tools and encourage the organisations to take different approaches. Traditionally management accounting has focused on the period after the design and development of the product, at the phase where the product is in production for the customers. However, the product may have already incurred a huge amount of cost at its design phase which would not be considered while calculating the product cost. Similarly when a product or service is discontinued, management accounting system does not consider its discontinuance cost. The emergence of strategic management accounting has resolved this issue by incorporating life cycle costing measures. Life cycle costing estimates and accumulates the cost incurred by a product or service in its entire life cycle. This helps to evaluate if the generated profits have considered all the costs starting from the inception till the abandonment. Target costing is used to manage the entire cost in its design phase. It is aimed to build a product at a cost which could be recovered over the life cycle of the product through a price which customers would be willing to pay for the respective product. Undoubtedly cost has always been an issue for the organisations. Strategic management system has incorporate variance analysis to compare the actual budget against the estimated one. Strategic management accounting has helped the management to report accurate and relevant accounting and non accounting data. Apart from that, using strategic management system has enhanced the control and monitoring over the accounting decisions to align them with the strategic framework of the company. Strategic management accounting has introduced activity based costing replacing the traditional ones. There are a number of advantages of this costing system. One of the significant advantages of this costing approach is it uses unit level drivers or marginal cost which measures the increase in every unit that has been produced. Apart from this it also takes batch level drivers to evaluate the inputs at the batch level production. Production level approach is also considered to support the product of different types of products. So, as each of costs is taken into account, the profitability measurement can be assumed to be almost accurate. Another significant technique of strategic management accounting is ‘Balanced Score Card’. It assists the managers in decision making by providing them a complete picture of the performance of both the employees and the organisation. The analysis enables the management to identify the critical success factors and performance indicators. The balanced score card approach has enabled the organisation to integrate and direct the performance and efforts from the lowest level of the organisation to attain to enhancement of the overall performance of the organisation. Conclusion Undoubtedly, strategic management has enhanced the overall decision making process of the organisation. It has become one of the major navigator in assisting business managers deciding the how, why and what of business administration. Managers need to have access to the different data regarding revenues and expenses. Strategic management accounting helps in having data from different points of access and as such goes a long way in providing the business managers a clear and in depth picture of the organisation. It has introduced techniques to align the accounting strategies with the strategic framework of cost effectiveness and performance appraisal measurements. However, as this strategic management system would continue to evolve, some areas of it may become outmoded and some new and unfamiliar processes may eventually become adapted by the organisations. However, whatever the management techniques are, the proper functioning of them is always at the discretion of the concerned management. Reference Ansari, S., Bell, J., Klammer, T. & Lawrence, C. No Date. Strategy and Management Accounting. [Pdf]. Available at: http://college.cengage.com/accounting/ansari/management/1e/students/modules/mod11.pdf [Accessed on November 24, 2010]. Banker, D, R. & Johnston, H. H. No Date. Strategic Management Accounting and Control. [Pdf]. Available at: http://astro.temple.edu/~banker/Accounting/StrategicManagementAccountingHandbookChapter.pdf [Accessed on November 24, 2010]. Bhattacharyya, D. 2010. Management Accounting. Pearson Education. Collier, M. P. & Ampomah, A. S. 2009. CIMA Official Learning System Performance Strategy. Butterworth-Heinemann. Controller General of Accountants. No Date. Management Accounting. [Pdf]. Available at: http://www.cga.nic.in/pdf/management_accounting.pdf [Accessed on November 24, 2010]. Kulkarni, M. & Mahajan, S. 2008. Management Accounting. Nirali Prakashan. Smith, A. J. 2007. Handbook of Management Accounting. Elsevier. Bibliography Calhoun, D. B. October, 2004. Using the Balanced Scorecard to determine Corporate Information Needs. [Pdf]. Available at: http://www.designbydi.com/documents/BalScrCrd.pdf. Chadwick, L. 1993. Management Accounting. Routledge. Coombs, H., Hobbs, D. & Jenkins, E. 2005. Management accounting: principles and applications. Sage. Maher, W. M., Stickney, P. C. & Weil, L. R. 2007. Managerial Accounting: An Introduction to Concepts, Methods and Uses. Cengage Learning. Read More