8. Lect 8 Strattegic Management Accounting

8/12/2019 8. Lect 8 Strattegic Management Accounting

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Management Accounting

Lecture 8

Strategic Management Accounting


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Problems with Traditional

Management Accounting

Key literature:

Kaplan and Johnson: Relevance Lost

the Rise and Fall of Management

Accounting.

Bromwich and Bhimani: Management

AccountingEvolution not Revolution

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It took Johnson and Kaplans book RelevanceLostThe rise and fall of managementaccounting (1987) to make the majority ofaccountants face the inevitable.

The Chartered Institute of ManagementAccountants (CIMA) commissioned aninvestigation of the state of managementaccounting in the late 80s.

Findings published in Management AccountingEvolution not Revolution by Bromwich andBhimani

Evolvement of Management

Accounting

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(SMA)

Definition

A form of management accounting in whichemphasis is placed on information whichrelates to factors external to the firm, as wellas non-financial information and internallygenerated information.

CIMA Official Terminology

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SMAother definitions

The provision and analysis of financial information on the

firms product markets , competitors costs , cost structures

and the monitoring of the enterprises strategies and those of

its competitors in these markets over a number of periods.

(Bromwich 1990) The provision of information to support the strategic decisions

in organisations. (Innes 1998)

Strategic management accounting techniques are designed to

support the overall competitive strategy of the organisation,principally by the power of using information technology to

develop more refined product and service costs. (Cooper and

Kaplan 1988)

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(SMA)

Despite the publicity SMA has received there is

still no comprehensive conceptual framework of

what strategic management accounting is.

Coad (1996)states:Strategic Management Accounting is an

emerging field whose boundaries are lose and,

as yet, there is no unified view of what it is or

how it might develop.

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(SMA)

Lord (1996)identifies the following strands fromliterature that constitutes SMA:

The extension of traditional managementaccountings internal focus to include external

information about competitors The relationship between the strategic position

chosen by the company and the expected emphasison management accounting

Gaining competitive advantage by analysing ways todecrease costs and/ or enhance the differentiation ofa firms products, by exploiting linkages in the valuechain and optimising cost drivers.

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Summary - SMA

Provides relevant information to enableorganisations to make strategic plans anddecisions

Emphasis is on external information

Non-financial information plays animportant role in managing organisations

today.

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External Information

For an organisation to succeed it cannot rely on

internal information alone.

Internal information?

Simmonds (1981) argues management accountingshould be outward looking to evaluate its

position against the rest of the industry.

Why?What additional information is required and from

whom?

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Non Financial Information

For an organisation to operate efficiently its

performance should be constantly

monitored.

Traditional performance measures tended tobe financial.

Is this sufficient?

What are the critical success factors of anorganisation today?

How can these be monitored?

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Johnson and Kaplan were instrumental in thedevelopment of ABC, ABB and ABM.

Cooper and Kaplan introduced the Balancedscorecard.

Other SMA techniques include quality costing,lifecycle costing, target costing, kaizen costing

and customer account profitability analysis etc.

Some SMA Techniques

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Life Cycle Costing

Life cycle of a product spans the timefrom initial R & D to the time whensupport to customers is withdrawn.

Time span can vary from industry toindustry.

Life cycle costingtracks and

accumulates costs attributable to aproduct over the life of the product ratherthan periodically.

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90% of a products life cycle cost isdetermined by decisions made at the initialstage of the life cycle. A large fraction of thelife cycle costs consists of costs incurred on

product design, prototyping, process designand equipment acquisition.

Berliner and Brimmer

Information relating to the cost implications ofalternative product designs, target coststhroughout the product life cycle etc. Are usedto manage costs.

Life Cycle Costing

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Kaizen Costing

Kaizen (continuous improvement) costinga mechanism for reducing and managingcosts.

Focuses on the production process unliketarget costing which focuses on thedesign stage.

Relies on employee empowerment whohave a better knowledge of theprocesses.

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Quality

QualityFitness for purpose

Inferior quality can be overcome by

implementing quality improvements

initiatives.

This would involve additional costs but

will also result in cost savings and higher

revenue.

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Quality Costs

Costs can be managed by analysing quality

related costs as:

Prevention costs

Appraisal costs

Internal failure costs

External failure costs

Investing in prevention and appraisal will

reduce internal and external failure costs.

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Just in Time

Just-in-time (JIT) is a system whose objective isto produce or to procure products or

components as they are required by a customer

or for use, rather than for stock.

A just-in-time system is a pull system, which

responds to demand, in contrast to a push

system, in which stocks act as buffers between

the different elements of the system, such as

purchasing, production and sales.

(CIMA Official Terminology)

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Just in Time

JIT is not an inventory system to minimise

stocksthis is just an outcome of JIT.

JIT involves commitment to excellence in

all phases of manufacturing, systems

design and operations, and seeks to

eliminate waste.

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The two aspects of JIT

JIT Production is a production system that is

driven by demand for finished products

whereby each component on a production line

is produced only when needed for the nextstage.

JIT Purchasing is a purchasing system in which

material purchases are contracted so that the

receipt and usage of material, to the maximum

extent possible, coincide.

(CIMA Official Terminology)

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The aim of JIT is to:

Produce the required items

At the required quality

In the required quantity At the precise time it is require

and

Improve profits, return on investment etc.through:

Cost reductions Inventory reductions and

Quality improvements

Just in Time - Aims

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Attacks and eliminates waste

Zero inventory

Zero defects

Batch size of one

Zero breakdowns

Exposes production problems and

bottlenecks

100% on-time delivery

JIT manages costs through:

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Employee participation

Suitable factory layout

Continuous improvement

Total quality control

Small lot sizes

Co-ordination of supplier customer chain

Reliable suppliers Good transport system

A cultural change

Successful JIT requires

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Documents

8. Lect 8 Strattegic Management Accounting