Strategic Management Accounting - Essay Example

Running Head: Strategic Management Accounting Strategic Management Accounting Name Course Lecturer Date Introduction Strategic management accounting is a type of management accounting that lays emphasis on information that concerns aspects that are external to a business organization, in addition to non-financial data and internally produced information. It gives information concerning the financial insinuation of alternative corporate strategies. Modern business settings are increasingly aggressive and dynamic. Global competition through demand-oriented supply chain administration and e-commerce dominate business. As a result, it is vital for companies to set up coherent and reliable business policies and to make use of management accounting applications to support tactical planning, management as well as decision-making (Sani, 2011). This paper will talk about the cost of getting the wide collection of information that is needed in implementing strategic management accounting in relation to the advantages it presents to a business organization in maintaining a competitive advantage. Cost of strategic management accounting implementation Simons (2000) suggested that, in adopting strategic management accounting, a business will require an extensive array of different types of information. To incorporate business policies with different management accounting practices, firms need to first identify the kind of business they are undertaking. It is important to identify merchandise and services, categories of customers, geographical markets alongside delivery channels. In reaction to the contemporary sophisticated business setting, many novel management accounting approaches are being set up to emphasize the utilization of accounting information and related information concerning business policies and operations. The business policies are integrated with management accounting tools to form strategic management accounting, which is a framework for making tactical and financial decisions and for incorporating business performance that needs aggressive, operational and monetary analysis. In analyzing the cost of implementing strategic management accounting, the techniques used include balanced scorecard, strategic variance analysis and profit-linked systems for measuring performance. Balanced scorecard Financial as well as non-financial performance appraisals such as quality measures, customer contentment and service delivery measures have been on the increase. Additionally, it is time and again not apparent to managers the way the non-financial appraisals add to the entire picture of attaining organization goals. Kaplan & Norton (1996) proposed formulating a balanced scorecard to be used by individual organisations to make out the major performance measures and also to bond financial with non-financial performance measures. The balanced scorecard denotes a group of measures which presents senior management with a comprehensive but quick view of business operations. It sets up a vision and policy framework to integrate four business views of the company. The first one is the learning and development perspective which comprises of workforce measures like employee fulfilment, employee retention and expertise sets. Secondly, there is the financial view which entails financial measures like return on capital outlay, operating profit and economic worth added. The third view is the business procedure perspective which consists of financial appraisals like overheads, throughput and product or service quality. These appraisals are for business procedures like materials procurement, manufacturing, and order completion. The last one is customer perspective which includes measures like retention of customers, customer satisfaction as well as the firm’s market share in intended segments (Kaplan & Norton, 1996). According to Drury (2008), the four views are not sets of independent views. However, they all have a logical link among them which is, learning and development contribute to enhanced business procedures, which further lead to augmented customer satisfaction, which finally result in better financial performance. All the measures that are included in the four perspectives are vital in the adoption of strategic management accounting and need a wide collection of data for them to be successful. Getting all the necessary information and applying it may be a very costly process in terms of time as well as finances for a firm. Strategic variance analysis Strategy management accounting mainly relates to aspects that are external to a business. It evaluates the decision-making that is connected to the business undertakings and strategic matters of financial management. Strategic variance analysis is thus carried out in areas of operation that have deviations. The analysis entails decomposition of measures of budgeted against real net income into variances. Hence, managers are able relate the earnings’ variances to their firms’ or strategic business unit’s mission and corporate strategy, and afterward analyze the firm’s performance from a tactical view. In order to implement this, these variances are divided into diverse forms of second rank variances which get the separate effects of key causal factors. Profit variances can be categorized into effectiveness variances and efficiency variances. Effectiveness variances include market magnitude, selling prices, market share, and product quantity and product mix variances. On the other hand, efficiency variances include materials and wage rate and efficiency differences, activity-based cost and devoted cost variances (Gerdes, 2011). Drawing from Smith (2011), effectiveness variances are important to those strategic business units that are pursuing differentiation policies. They concentrate on sales and merchandise mix features. Efficiency variances are vital to units practicing low cost and elevated volume policies. They emphasize on cost along with efficiency factors. By examining the variances with precise reflection on a firm's or strategic business unit’s mission and corporate policy, management accountants are able to determine the degree to which variations between real and planned performance are either or not in harmony with the company’s mission and policy. Effectiveness variances deal with a firm’s market environment and require an extensive market research so as to collect adequate information on prices, market share and products. Efficiency variances are concerned with suppliers of raw materials and labour and competitors’ core competencies and thus information on these aspects is also necessary. Adequate information on both sets of aspects ensures correct and effective computation of variances which further lead to correct decision making. Profit-linked systems for measuring performance Grifell-Tatjé & Lovell (1999) argues that, measures of variations in profitability are ultimately sub-divided into measures of variations in certain components like price and output. These are methodically linked to a firm's mission and corporate policy and are assessed based on price and output. Profit-linked systems integrate measures of efficiency, price improvement, capacity exploitation, and other significant elements of performance. Experts initiate the improvement efforts, with structures which break down measures of productivity into those of price improvement and productivity. Philosophers refine and expand the structures from business strategy, management accounting and production fiscal perspectives. This shows how the profit-linked systems may be utilized to examine cross-sectional variations and time-series alterations in performance concerning changing competitive settings and strategies. However, for the systems to be used effectively, information on productivity and prices of a firm and data on varying competitive advantages and strategies of the concerned firms is crucial. Benefits of implementing strategic management accounting The adoption of strategic management accounting helps a firm enhance its competitive position, profit potential and financial strength in a number of ways. Sustainable cost benefit Strategic management accounting generates a sustainable cost benefit. Firms frequently utilize sustainable cost benefits to make sure that their merchandise is the top competitively charged in the fiscal marketplace. Business people also generate a sustainable price advantage so as to evade being beaten by substitute or second-rate goods. These are goods that benefit customers in a similar way as a firm’s products at lower consumer prices or with an inferior quality. Companies control costs through contracting straight with suppliers to buy a certain quantity of products at a flat price for a definite duration of time. Such contracts in addition, cart off suppliers’ bargaining influence. High supplier bargaining influence allows supply firms to state the price that a business ought to pay for fiscal resources which may increase a company's direct materials cost and decrease its sustainable cost benefit (Ryan, 2001). Relative cost position Riahi-Belkaoui (2002) defines relative cost standing as a comprehensive analysis which includes the output capacity and cost standings of all rival firms in the marketplace. This information is used by business owners to create a graph indicating the firms with the lowest and uppermost relative cost standing in the market. In addition, this summarizes the whole industry’s delivery of specific consumer products or services. Strategic management accounting can be used by a company to determine its economies of scale and to lessen individual unit overheads by raising the level of production output. Nevertheless, most companies typically reach a point where it does not benefit any more from economies of scale. A firm’s economy of scale forms the paramount relative cost standing for its products and services in the marketplace. Appropriate control monitoring Management accountants operate under the assistance of internal auditors, assessing controls and guidelines in cost accounting methods. They ensure that the controls are sufficient, effective and keep to top leadership's provisions and industry principles. Controls are groups of directives which a strategic management accountant institutes to prevent inaccuracies in financial information. Hence, an efficient control presents proper solutions to internal problems (Dixon & Smith, 2003). Variance analysis This is an essential income management tool. Variances are discrepancies between budget figures and real costs. A positive discrepancy shows that budget figures exceed real costs. Senior management focuses on negative variances since these signal insufficient cost control procedures in business activities. For instance, a department manager at a pharmaceutical business notices that monthly variations are negative, and they are resulting from insufficient commodity risk management. He may collaborate with business risk managers along with purchasing experts to prevent additional losses. The loss probability resulting from adverse raw materials’ cost fluctuations in the markets is known as commodity risk (Vitez, 2012). Differentiation According to Langfield-Smith (2008), this is the manner by which a firm differentiates its products from those of other firms in the market. Strategic management accounting functions in cycle with other departments of the organization to create worth for customer services and goods. Differentiation is frequently achieved through supply chain, customer service and product image and placement. Firms use strategic management accounting in reviewing the costs linked with these operations to ensure that the firm’s relative cost standing is not lost. Keeping up a sustainable cost benefit is obvious when companies distinguish their products from those of other companies in the market. Conclusion Strategic management accounting focuses on features that are prevalent in a company’s external business environment. The implementation of strategic management accounting requires a wide compilation of both financial and non-financial data. Balanced scorecard, strategic variance analysis and profit-linked mechanisms for evaluating performance are the main techniques that are used to get and analyse the necessary information for strategic management accounting. Though the cost of getting the needed information in adopting strategic management accounting is very high, its resultant benefits that help a firm in maintaining its competitive advantage are many. Such benefits include sustainable cost benefit, relative cost position, suitable control monitoring, variance analysis and differentiation. References Dixon, R., & Smith, D. (2003). 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