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Strategic Management Accounting

Introduction

A strategy is a plan of action by an organization on how it intends to achieve its goals with the aim of profit maximization. It could happen due to the events or the happenings in the market. The emergence of a strategy might be as a result of interaction among employees, managers, the surrounding factors and trials that work best on spot decisions.

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With competition becoming stiff in the modern business world, many companies have felt threatened and have realized that they have to adopt certain practices to survive and continue with production or service delivery, as they keep their aim of profit maximization (Voelper & Davenport 2006, p. 47). These practices are often referred to as strategies.

Strategic Management Accounting (SMA)

This refers to a general approach to bookkeeping for tactical positioning, which is identified by an effort to incorporate ideas from administration accounting and advertising administration within a tactical management scaffold. Examples of SMA techniques include target-costing, Life cycle costing and Strategic cost analysis.

Consequently, as an explanation to conservative administration bookkeeping problems, SMA would produce exterior market information, bear strategic expenditure examination, such as merchandise quality assessment, activity-based appraisal, and opponent expenditure investigation. It would also release management accounting from the factory floor so that it can effectively deal with more strategic concerns such as customers and competitors.

Moreover, it informs top managers of the potential and actual market and environmental consequences of their strategic decisions. Finally, it links performance measurement systems with corporate vision, mission and strategies. SMA can also be understood as the intersection of management accounting with other functional disciplines, especially marketing management, operations management and strategic management

Once a strategy has been selected, a company will always take an initiative to take it to the next level for example use of Management accounting tools to have proper financial record, budgeting and costing for cost control and activity based costing for efficiency.

By utilizing methods such as administration accounting apparatus, conventional MA systems such as valuation and financial planning, activity-based systems such as ABC, reasonable performance instruments such as BSC, worker based methods such as scholarly resources, benchmarking such as ranking against opponents, makes it possible to support an approach selected by a corporation.

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Cost Control

Cost is also of vital importance to differentiation strategies because a differentiator must maintain cost proximity to competitors. Unless the resulting price premium exceeds the cost of differentiating, a differentiator will fail to achieve superior performance. The behaviour of cost also exerts a strong influence on overall industry structure (Cadez & Guilding 2008, p. 836).

Financial Reporting

While accounting systems contain useful data for cost analysis, they are often treated in the same way as strategic cost analysis. Cost systems categorize costs in line items, such as direct labour, indirect labour, and burden, which may obscure the underlying activities that a firm performs. This leads to aggregation of the costs of activities, with very different economics, and to the artificial separation of labour, material, as well as overhead costs related to the same activity (Porter 1980, p. 45).

Variance Analysis

The preliminary stage for expenditure examination is to classify a firm’s value chain and to allocate operational overheads, as well as possessions to value performances. Each activity in the value chain involves both operating costs and assets in the form of fixed and working capital. Purchased inputs make up part of the cost of every value activity and can contribute to both operating costs (purchased operating inputs) and assets (purchased assets).

The need to assign assets to value activities reflects the fact that the amount of assets in an activity and the efficiency of asset utilization are frequently important to the activity’s cost (Drury 2008, p. 45).

Performance management system has always been used by companies in the day to day activities. However, it has had several draw backs such as being financially-biased and ignoring non-financial measures. Alternatively, they mostly generate result measures and intrinsically lack the potential of creating driver instruments.

Moreover, they do not have the required flexibility to suit changing environment over time and across different departments. Again, they are short-term-oriented and for that reason, discourage long-term vision and improvements. They are simply based on dominating the courses of action and performances in separation rather than as an entire structure and therefore encourage sub-optimisation. Because of the foregoing weaknesses, a balance score card was designed (Bromwich 1990, p. 27).

Balanced Scorecard

This is a performance evaluation tool which consists of a variety of indicators both financial and non-financial. (Kaplan & Norton 2004, p. 21) The balanced scorecard focuses on 4 different perspectives:

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Customer Perspective

What do existing and new customers value from us? This perspective gives rise to some targets, which matter to customers such as the cost, quality, delivery, inspection of the goods, and handling of goods or customers.

Financial Perspective

This perspective covers traditional measures, e.g. growth, liability, shareholder value. But these are set once the key areas for improvement have been identified and the balanced score card is the main monthly report. The score card is balanced in the sense that managers are required to think in terms of all perspective to prevent improvement being made in one area at the expense of another. Important features of this approach are:

  • It looks at both internal and external matters concerning the organisation
  • It is related to the key elements of the company strategy
  • Financial and non-financial measures are linked together.

BSC is said to be more than an informal compilation of fiscal and non-financial performance instruments. It is supposed to systematize performance instruments in a cause-and-effect sequence in from of four important proportions, including education and development, interior trade progression, client contentment and monetary measures.

The thought causality is that education and development cause competent, domestic trade processes, which in turn leads to quality execution of services to customers leading to their pleasure, through which the high-quality monetary outcomes can be realized. The BSC has realized a high measure of status in practice, as one of the extensively used originalities in administration accounting. The begging point for the improvement of a BSC is the company undertaking and vision reports.

The expansion of the services of the company starts with classification of upcoming vision of the business in terms of task report, visualization report, and the description of Strategic Business Units (SBUs). Strategic intention is interpreted to mean to monetary, client, domestic and modernization perceptions to spell out significant accomplishment factors in each of them. Ultimately, important dimensions are generated to replicate those significant factors.

The BSC is based on a well-organized, sensible outlook of directorial policy and its function is to transform that policy into quantifiable result, with a realistic implication for the administration. Differentiating monetary instruments from domestic trade processes, the client standpoint and education and development can be analyzed, at least to some degree, as a stakeholder scaffold (Wickramasinghe & Alawattage 2007, p. 32)

Critique of Balanced Score Card

Even though the scorecard is popular in the field of accounting, it has been accused because of its inability to address some important issues. Some scholars argue that the idea is not original meaning that it utilizes the ideas of other systems. Furthermore, it is accused of being politically insensitive since it only employs promotional rhetoric.

Others argue that the assumptions of the instrument are flawed meaning that it does not measure what it claims to measure in reality. Through analysis, it is established that the instrument is leadership centred meaning that it emphasizes on top-down model instead of the modern models that focus on democracy (Langfield-Smith 2008, p. 204).

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The balanced scorecard mostly concentrates on customers and the owners of the company but fails to take into account the external environment, such as suppliers and the competitors. In as much as it balances the financial and non-financial parameters, it loses its value if it does not incorporate them. However, it does not give a suitable balance between the two parameters.

Because the key drivers keep on changing as per the industry, which the company belongs, the balanced scorecard requires constant updating to incorporate these changes (Kaplan & Norton 2004, p. 59). This may be disadvantageous to small companies as this may require a lot of time and resources. Implementation of the balanced scorecard may be resisted by employees of a company as it may be considered an additional task.

List of References

Bromwich, M 1990, “The case for strategic management accounting: The role of accounting information for strategy in competitive markets”, Accounting, Organizations and Society, Vol. 15, no. 2, pp 27-46.

Cadez, S & Guilding, C 2008, “An exploratory investigation of an integrated contingency model of strategic management accounting”, Accounting, Organizations and Society, Vol. 33, no. 1, pp 836-863.

Drury, C 2008, Management and Cost Accounting, Thomson Learning, London.

Kaplan, RS & Norton, DP 2004, “Measuring the strategic readiness of intangible assets”, Harvard Business Review, Vol. 82, no. 2, pp 52-63.

Langfield-Smith, K 2008, “Strategic management accounting: how far have we come in 25 years?” Accounting, Auditing and Accountability Journal, Vol. 21, no. 2, pp 204-228.

Porter, ME 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, The Free Press, New York.

Voelper, S & Davenport, T 2006, “The tyranny of the Balanced Scorecard in the innovation economy”, Journal of Intellectual Capital, Vol. 7, no. 1, pp 43–60.

Wickramasinghe, D & Alawattage, C 2007, Management Accounting Change, Routledge, London.

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