Strategic Management Accounting - Essay Example

Budgets are an integral part of every individual. It has been practiced since ages. Each and every individual budgets his time, his expenditure, his future income and so on. So, does every organization. Budgets help to peep into the future and help to plan accordingly. Every organization plans before hand what they will do in the near future. They work towards the accomplishment of those goals and in the process of doing so certain things go wary. It becomes important to find out the deviations. While devising the strategy next time it is important to keep those deviations in mind and see that such mistakes don’t occur again. The importance of budgeting increases when real money is involved. A slight increase in the actual expenditure would result in huge losses especially for a production unit as the cost to produce increases. It becomes important to find the deviation so that steps could be implemented at the right time. A business organization which has a good plan for the future and a sound process to control things becomes successful in the long run. Budgetary control measures helps to achieve this by increasing the efficiency with which a task is performed. It helps to increase the bottom line i.e. profits. (Budgetary Control System Tool, 2009) It is important that this is done regularly at certain time intervals so that the management knows what to do. This method had been in use for a long time but is slowly loosing relevance as it doesn’t involve the non financial part. In today’s ever evolving world even small information can lead to huge changes. Small information like leakage of information to the competitors though non financial in nature can impact the financial decisions. Even a slightest of information brings huge changes in the financial structure. The management needs to ensure that it has all the information with it while devising a strategy for future so that it reaps maximum results. There has been a gradual move from the contemporary system used to a different system where it tries to cover the non financial aspect also. Companies are working hard to gather all relevant information possible from all sources while planning. This would ensure that the strategic planning process becomes sound and it covers a wide array of things that affect the business environment at the same time keeping the finance aspect intact. Every organisation follows a particular strategy to differentiate itself from its competitors. It is imperative that business decisions are made on the basis of both the internal and external factors. A business organisation comprises of different departments like purchasing, manufacturing, finance and selling. Organisation should have different strategies for each department so that they can work towards the betterment of the organisation. These departments strategies should be compiled in such a way that it reflects in the overall strategy of the organisation. It is not always necessary that all the plans will deliver so organisations need to evaluate the outcome on a continuous basis. They need to control the outcomes and also modify things if required so that the overall strategy of the organisation is achieved. While drawing these strategies it is important that the non financial aspect is also accounted for leading in better strategic management. (Paul C. Collier 2009 Accounting for Managers “Interpreting Accounting Information for decision making” 3rd Edition) Thus, under the strategic management accounting the accounting data is compiled in such a manner that it helps in better decision making. Since, they also consider the non financial aspect along with the financial one the decisions made is sounder. Strategic management accounting is been used by organisations for quite some time now. This has been used to make decision but the information has not been quantified. People in the organisation knowingly or unknowingly have been using all the information they can gather from any sources in taking decisions but had never been quantified before. With the growth and advancement of technology better tools have been developed which helps to quantify this and thus affects the accounting system for managers. (Beverly R Lord 1996, Management Accounting Research “Strategic Management Accounting-the emperor’s new cloth” Volume 7, Issue 3) Slowly with the passage of time the traditional process of accounting is losing relevance. The reason being that now organisation considers cost accounting a vital part of their accounting while taking decisions. Strategic management accounting lays emphasis on the cost of producing a certain item. It also tries to find a way so as to get a cost advantage at the same time being able to differentiate its product from the competitor. Cost Accountancy is gaining prominence and companies are trying to get cost advantage by using new tools like activity based costing. (Paul C. Collier 2009 Accounting for Managers “Interpreting Accounting Information for decision making” 3rd Edition) With cost accounting becoming a vital part of the accounting system it is important that organisation design their strategy by taking all relevant information into consideration. Strategies are developed to gain profits and to be competitive. While doing so it is important that organisation focus on Cost Leadership Differentiation of their product in comparison to their competitors Focus To achieve cost leadership and being able to differentiate their products companies should use different tools like TQM, activity based costing and arrives at decision which can be quantified. The reason being, managers find it easy to take decisions when things are presented in number form. This helps them realise how much they can achieve in the future and they devise their strategy keeping this data in mind. It is also important for organisation to keep in mind that lower cost of production might help them do well in the short run but might hamper the image in the long run. So, companies need to be extra cautious while using such management accounting strategies as it could be fatal in the long run. Literature Strategic management accounting has tried to integrate the different framework of accounting into one. It has considered all the aspect like marketing, costing, financial and so on. Of all this concepts that they have tried to integrate the most promising has been the cost management accounting. This is also being used extensively by organisation all around the world. This has led to better decision and as a result of this accountants and marketers are better able to access the value and performance of a brand. (Robin & Susan, 2003, social science Research Network “In search of Strategic Management Accounting” Volume 14, Number 3) In many organisations the performance management system has been designed in such a way that makes strategy the core issues. This has further gained importance which is proven by the fact that Balance Score Card is used extensively. It helps to gauge the performance of each employee and their contribution in the strategy formation. This has encouraged all functional departments to come up with advice and this has increased the role of management accountants. (Kalpan & Norton, 2001 “Transforming the balance scorecard from performance measurement to strategic management”, Volume 15, Number 2) It is also been seen recently that management accountants spend more time on strategy related activities. This has set two important things to watch out for. Firstly, “strategic management accounting consists of strategically planned accounting techniques”. Secondly, “management accountant spend a considerable amount of time in the decision making process”. (Cadez & Guilding, 2008 “An exploratory investigation of an integrated contingency model of strategic management accounting”) “Strategic management accounting is more outward looking in its approach”. As management accountants quantify the data to be presented in such a way that decisions taken are sound and helps to gain competitive advantage. This calls to bring in all relevant details which are important for the formulation and implementation of strategies. (Roslender, 1995 “Accounting for strategic positioning: Responding to the crisis in management accounting” Volume 6) There is a relationship between the strategy implemented and the performance achieved. According to a research strategic management accounting helps to achieve performance to a certain level only. Companies with average performance achieve better results by applying strategic management principles then with companies above average. (Gunther & Thomas 1991) Strategic management accounting is being widely used. “The usage differs slightly from countries to country like UK and USA”. Most countries analyse their competitors’ strategy but the usage of other techniques differ between countries. (Guilding, Cravens & Taylor, 2000 “An International comparison of strategic management accounting practices” Volume 11) Still, there is some controversy in the scope of strategic management. Organisations are still not clear which all concepts and tools would work best for the organisation. Issues There are many issues concerning strategic management accounting. Firstly, the most important issue surrounding strategy management accounting is that does the involvement of management accountant in the process increases its effectiveness. It raises question regarding the decisions as there is hardly any study or research which can substantiate this learning. There are still questions raised on whether the role has actually increased or management accountants’ role still is to collect and record data on cost and revenues. (Guilding, Cravens and Tayles, 2000) Secondly, is of concern is the knowledge management accountants’ processes in the field of production, marketing and operations. It is important that they gain the require knowledge of all the fields so that the data from the entire field can be quantified. They also need to have knowledge regarding the competitors cost and the strategy followed by them. So accountants need to have knowledge more than that was prevalent in traditional times and should be able to design the management information system so that they can play a major role in formulation of strategies. Thirdly, there are doubts regarding the involvement of all functional positions while deciding the strategy. Traditionally a few managers took decisions and strategy were implemented. With strategic management accounting gaining importance there are still doubts whether everyone at the different hierarchical level are able to contribute. (Collier, Fishwick and Floyd, 2004) Fourthly, another concern area in strategic management accounting is that does the decision making depend on the creativity of the management accountants or the data provided. Still research needs to be done to find a relationship between the two so that organisations realise the importance of both and how they could benefit in the long run. Fifthly, there are still doubts whether the benefits achieved are more than the cost involved. Organisations have to spend a huge sum of money in gathering information relating to costs and then they have to interpret those. Many a times decisions based on this are not accurate and it creates doubts in the mind of the organisation. (Wilson, 1995, Strategic Management Accounting, “Issues in Management Accounting”, 2nd edition) Sixthly, strategic management accounting focuses on long term strategies. The information which has been gathered needs to be presented in such a manner that it is fully refined and takes into account competitors as well as customers. Since, decisions taken on the basis of this tends to give results after a certain time period its effectiveness in the shorter interval of time is still doubtful and raises concerns. Seventhly, there is no globally recommended framework on strategic management accounting it covers nearly all the concepts and theories which are very closely related to one another and sometimes overlapping thus increasing the burden on management accountants. Various approaches to strategic management accounting Strategic management accounting uses the cost concepts, performance concepts and competitive environment concepts. All this concepts have been fully integrated in such a manner that it makes strategic management accounting useful. It consist the value chain, the just in time technology, environmental costing gap analysis and many other relevant technology so that decisions based on them are more productive. We hereby discuss some of the most extensively used techniques. Now, here we try to see the different techniques organisations adopt under the cost oriented approach. Different organisation use different approach and a combination of this helps to come up with a better strategy for the future. Attribute based Costing: it covers activity based costing. Here the accountant uses the cost benefit analysis to identify the products attribute that the organisation would like to keep in its product so that the goods provided are according to what the customer desires. In this technique we try to integrate activity based costing with the research made about the product. Here the organisation tries to find certain features which the customer desires in his product and then they work towards providing those. (Paul C. Collier 2009 Accounting for Managers “Interpreting Accounting Information for decision making” 3rd Edition) Activity based costing: this approach helps to ascertain the cost in a better way. Here the cost drivers are determined beforehand. It helps to determine the cost in the basis of what is actually consumed while producing a particular product. Here it helps the organisation that in the process of producing a good where value is added to the product and where it is not added. It helps to find out where the companies need to work on to be more competitive as compared to their competitors. (Paul C. Collier 2009 Accounting for Managers “Interpreting Accounting Information for decision making” 3rd Edition) Supplier costing: Organisations need to find out the best supplier who can supply those products at the most competitive price. While doing soothe quality should not be detoriated as this would tarnish the image in the long run. Management accountants need to evaluate the suppliers list and find one. There is also a need to have more than one supplier so that goods are supplied at regular intervals and the process doesn’t get disrupted. Just in time costing: This approach helps to reduce waste. These approaches help the management accountant to keep minimum of inventory. The management accountant based on past data ascertain the requirement of inventory in a particular period and by identifying the supplier he orders the minimum required quantity so that the investment is as per the requirement and capital is not blocked in it. This method of costing has gained prominence and is widely used. It plays a major role in strategic management accountant to decide the long term strategies. Accountants have made use of this technique very efficiently and this has reduced the inventories making the organisation look more efficient. (Wilson, 1995, Strategic Management Accounting, “Issues in Management Accounting”, 2nd edition) Target costing: With increasing competition organisations have to be see that they produce the product at the minimum cost so that they can charge their customers led compared to their competitors’ but at the same time see that they provide good product. Management Accountants see that the cost of producing goods is reduced to the extent possible by working on areas like research, design and production. Here after analysing the market and the price consumers are willing to pay the accountant works on backward integration. He reduces a certain profit and then tries to ascertain the cost and bring changes in the production process to achieve that product at the desired cost. This method is gaining prominence and is widely used nowadays. (Paul C. Collier 2009 Accounting for Managers “Interpreting Accounting Information for decision making” 3rd Edition) Customer costing: this technique is not prevalent but is slowly gaining pace. Here management accountants have stressed on the fact that they need to focus on customers and satisfy his needs. This technique is being used along with activity based costing and accountants are trying to inculcate this in the strategy of the organisation. Performance oriented concepts are also being used widely. It covers the following stated points. This approach to strategic management accounting is gaining prominence and is used by management accountants to see that the strategies devised are worked upon and it helps the organisations to achieve good results. Some of the topics relevant to this approach are given henceforth. Gap analysis: Today every strategic decision taken by management accountants involve all functional areas it is important that each contributes fully. This technique is widely used for marketing the product. The management accountants along with the sales manager or the marketing department decided where they want to be in the future. This is based on some parameters like profits, sales, and market share and so on. They also find out where they are. The difference between the two is worked on. Strategies are drawn to fill up this gap. Strategic management accountants need to quantify the data and design the path that can help them achieve this. This practise is widely followed and companies are working to gather more information to make strategic management accounting decisions more worthwhile. Benchmarking: This approach to strategic management accounting is also widely accepted. Companies set benchmark for themselves and work towards achieving those. This helps the marketing team to put in better efforts. Normally, companies find the best company in the line of work and set it as their bench work. Then they draw strategies to match those companies. This also helps the companies to find out where they are according to the standards set by others and then if required they mould their previous strategy to meet those standards. This has increased the burden on strategic management accountants, as they continuously need to review it. Competitive environment concepts are yet another approach being used in strategic management accounting. It is imperative for organisation to know the environment they are working and how their competitors are faring. They also need to have a good idea of the competitors strategy and also about the strengths and weakness they posses. This is widely used with trade being globally done so it one of the most important approach that strategic management accountancy looks into. SWOT: this technique is gathering prominence in strategic management accounting. In this competitive world with companies getting global it is important that companies realise their strengths and weakness. This had increased the role of management accountants as they are to analyse both the external and internal factors while designing a strategy. They also need to understand the competitors’ strengths and weakness and need to work on improving their efficiency. They also need to find out the opportunities and threats prevalent. This had put management accountants under more pressure as they need to evaluate their strategy time and again making strategy management accounting an integral part of the organisation. Brand Valuation: a brand helps to assign tangible and emotional value to products. Organisation needs to understand the brand value of their product and work towards improving those. Brand helps the product to earn in the future merely for the fact that the product is desired by the customer. Quantifying the brand value in the decision making process is a tedious process for management accountants. But, by doing so it helps them access how long the product will e liked and customer would like to buy so they can design their strategies keeping this factor in mind. This is gaining importance with the variety of options the consumer has for a particular product. This has made management accountants work hard to calculate the brand value and strategy management accountancy has made it more prevalent then otherwise. Competitor cost assessment: It is important that cost accountants work in tandem with he management accountant. They need to ascertain the cost of the competitors’ product and also try to find out their suppliers. This will help them price their product better. It is tough to gather information relating to the cost of the competitors but management accountant needs to come up with this so that strategy made on the basis of this are better and it helps the organisation to achieve its long term goal. This had made strategy management accounting an integral part for the success of the organisation. Using this approaches of strategy management accounting has prove beneficial to the organisation. It had helped them formulate strategies which are sounder. For a strategy to be effective it needs to make use of both the external and internal information available. Strategy made should include all information both about the competitor and also itself. Recently with the advancement in technology and strategic management accounting being widely used it is important tat strategic management accountant uses all this together in a manner that helps to give maximum results. Management accountants should make use of the competitive environment approach to gain all information related to the competitor and find out which areas they can work upon to gain advantage. This approach would also help them identify their potential area of strengths and areas which they can work on so that they achieve better results. Management accountants also need to use the cost approach very well. This would help them design their product in such a manner that it will give them competitive advantage. They need to be cost competitive and try to include things which could affect their strategy. With the movement from traditional form of accounting to newer methods it is important that management accountants include all the relevant information available in the decision making process. Strategic management accounting tries to include all the major factors that could affect the way in which the company perform. Management accountants’ role has intensified and their horizon has increased. They have more responsibility and play a very important in the strategy made by the organisation. This has increased the dependence on management accountants and has made their role very critical for the success of the organisation. We can conclude by saying that a management accountant plays a very important role in strategy making. Its importance increases as it is able to find out the strategic positioning of the organisation along with the threats and opportunities which are prevalent there. Having management accountants helps to come up with different options and management can evaluate each options and choose the one which benefits the most. Read More