© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 1

© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 1

CHAPTER 16

Strategic

Management

Accounting


Learning Objectives What is strategic management accounting and how does it differ from

traditional management accounting? When developing strategies for a company, why is it important to

identify external factors (such as Porter’s five forces: threat of new entrants, power of buyers, power of suppliers, threat of substitutes, and competitive rivalry)?

How can value chain analysis be used to identify areas of strategic opportunity for a company?

How can a company assess which customers are the most profitable? In what ways is activity-based management (ABM) a strategic

management accounting approach? Why does life-cycle costing provide a more accurate picture of a

product’s profitability than traditional costing techniques? How can cost-reduction tools such as target costing and Kaizen costing

be used to create cost advantages for a company?


Strategic Management Accounting Defined

Linked with business strategy and maintaining or increasing competitive advantage

Defined by the Chartered Institute of Management Accountants as a . . . form of management accounting in which emphasis

is placed on information which relates to factors external to the entity, as well as non-financial information and internally generated information. (2005, p 54.)


Strategic Management Accounting


Strategic Management Accounting


Key areas of analysis Collection and assessment of competitor

and supplier information on pricing, costs, volumes, and market share

Collection and analysis of customer information, including the costs involved in serving customers, customer buying patterns, and customer value

Identification of cost-reduction opportunities and a focus on continuous improvement and on non-financial measures of performance

Accounting Techniques to Support SMA Five forces analysis Value chain analysis Customer profitability analysis Activity based management Life-cycle costing Target costing Kaizen costing (kaizen is Japanese for

continuous improvement)


Five Forces Analysis

Threat of new entrants Barriers to entry

Power of buyers Power of suppliers, Threat of substitutes

Power of substitution Competitive rivalry


Value Chain Analysis1. Identify the firm’s value creating processes

2. Determine the portion of the total cost of the product or service attributable to each value creating process

3. Identify the cost drivers for each process

4. Identify the links between processes

5. Evaluate the opportunities for achieving relative cost advantage


Customer Profitability Analysis

Enables an organization to make decisions on how to handle unprofitable customers1. Reduce the costs of servicing unprofitable customers.

2. Increase prices to unprofitable customers to cover those costs.

3. No longer do business with unprofitable customers.



Customer Profitability Whale Curve for a Large Multiproduct Company


Profitability by Customer

Activity-Based Management (ABM) Focuses on controlling activities that

consume resources Controlling costs at their source Operational ABM

Increasing efficiency, lowering costs, and enhancing asset utilization

Strategic ABM Attempting to alter the demand for activities to

increase profitability


Activity-Based Management (ABM)


Life-cycle Costing Estimates and accumulates the costs of a

product/service over its entire life cycle, from inception to abandonment

Considers all costs of researching, designing, manufacturing, selling, and discontinuing a product


Life-cycle Costing


Target Costing Concerned with managing whole-of-life costs during the design

phase Most often used when designing products and their related

production processes

1. Determining the target price that customers will be prepared to pay for the product/service

2. Deducting a target profit margin to determine the target cost, which becomes the cost to which the product/service should be

engineered

3. Estimating the actual cost of the product/service based on the current design

4. Investigating ways of reducing the estimated cost to the target cost

Target cost = Target price - Target profit margin© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 17

Target Costing


Kaizen Costing Involves making continuous, incremental

improvements to the production process Applied during the production phase of the

life cycle Focuses on the production process,

seeking efficiencies in production, purchasing, and distribution


Target Costing versusKaizen Costing


Conclusion Strategic Management Accounting (SMA) defined Accounting Techniques to Support SMA

Five forces analysis Value chain analysis Customer profitability analysis Activity based management Life-cycle costing Target costing Kaizen costing


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© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 1