MR.junaIDSAROWAR.strategic Management Accountin 3

Strategic Management Accounting

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Table of Contents 1.Introduction: ....................................................................................................................................... 2

2.Outcomes of the Questions: ................................................................................................................. 2

2.1Role of Management Accountant: ...................................................................................................... 2

2.1.1.Planning : ........................................................................................................................................ 4

2.1.2. Directing: ....................................................................................................................................... 5

2.1.3. Controlling: .................................................................................................................................... 6

2.1.4. Decision Making: ........................................................................................................................... 6

2.2.Relevant and Irrelevant Costs and Revenues: ..................................................................................... 7

2.2.1.Relevant Costs and Revenues: ........................................................................................................ 7

2.2.1.1. Opportunity Cost: ....................................................................................................................... 7

2.2.1.2.Make or Buy Decision: ................................................................................................................. 8

2.2.2.Irrelevant Costs and Revenue: ........................................................................................................ 8

2.2.2.1.Fixed Costs:.................................................................................................................................. 9

2.2.2.1.1. Traceable Fixed Cost: ............................................................................................................... 9

2.2.2.1.2. Common Fixed Cost: ................................................................................................................ 9

2.2.2.2.Sunk Cost: .................................................................................................................................... 9

Continue or Drop out: ........................................................................................................................... 11

2.3. Activity-based Costing: ................................................................................................................... 11

2.3.1.Benefits of Activity-based Costing: ................................................................................................ 12

2.3.2.Problems of Activity-based Costing: .............................................................................................. 12

3.Conclusion: ......................................................................................................................................... 13

4.References: ........................................................................................................................................ 15


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1.INTRODUCTION:

Management accountant means the person acting as both management and accountant. Middle to

large every organization should have a management accountant to accomplish its management,

accounting and to combine the both. Jessup Ltd. is a fast growing and will move through middle

to large in operations. It has two divisions, providing advertising and public relation services. It

has only four advertising expert who are also performing as director. Being a fast growing

organization and having two service items, in the global competitive market it must need to have

a management accountant. The management accountant by performing his role must assure its

growth consistency by taking a strategic decision and considering relevant items. This

management accountant will make differentiation between relevant or irrelevant costs or

revenues in decision making. He will determine which project to accept, or which project to

reject, which service item will continue to provide or which service item will discontinue which

optimal product mix will be used everything by considering the relevant and irrelevant costs and

revenues and the allocated costs. He will also fix up a cost allocation method to determine the

accurate cost of service provided per unit and which will be convenient with the nature of the

organization.

2.OUTCOMES OF THE QUESTIONS:

2.1ROLE OF MANAGEMENT ACCOUNTANT: Managerial accounting mainly works with providing information to the people working inside an

organization and who direct and control these information and operations are the management

accountant (Garrison, Noreen & Brewer, 2006).

So the managerial accounting is identifying, measuring, accumulating, analyzing, preparing,

interpreting and communicating financial information which should be used by the management

accountant of Jessup to plan, evaluate and control the organization and to assure appropriate use

of accountability for its resources. He will also assist in the preparation of financial reports for

non-management groups, external parties, such as shareholders, creditors, regulatory agencies

and tax authorities which will provide both qualitative and quantitative information (Institute of

Management Accountant, 1981)


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Figure 1: Model of the Role of the Management accountants (Wells, 2000)

Figure (1) which represents the model of the role of the management accountants is developed

by (Wells, 2000), and we also observe here that the management accountant of Jessup in

strategic management should go beyond the strategic planning to pre-planning processes.

Management accountant of Jessup Ltd. should deploy and implement the strategic plan in

compliance its goal, measure and evaluate the outcomes. Completing the plan and

communicating it to all staff is deployment. Resourcing the plan, putting it into action, and

managing those actions are the implementation. Measurement and evaluation includes tracking

implementation actions, assessing how the organization in outcomes of those actions based on

the outcomes changing and updating the plan.

But, he is not only information provider but also a decision maker as well as very important part

in the management team. Management accountant provides information and helps in decision

making to the owner of the Jessup. In this ways management accountant must help Jessup to run

the organization effectively and efficiently.


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The roles of management accountants are as follows :

Figure (2): Roles of Management Accountant in Jessup

2.1.1.PLANNING : The determination of goals, the selection of some courses of actions and the determination of the

ways to implement those actions to achieve the goals of an organization are done by a

management accountant (Garrison et al, 2006, and Bamber et al 2008). So the management

accountant of Jessup will perform these above activities.

Their goal must be specific and future long term oriented. To attain the goal selected actions

should be performed being long term oriented. The main goal of an organization is the

maximization of profit except for the non-profit organizations. In setting and attaining the goal

the management accountant should also be long term oriented. To profit maximization, the best

way is to minimize cost, maximize revenues as well as generate sales. To generate sales he

should create an exciting and attractive environment following a customer intimacy strategy.

Planning

Directing

Controlling

Decision

Making

Feedback


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Along with profitability he should also be concerned about the cash flow. If there is less profit

but more cash flow that means more liquidity. The more liquidity the more expansion is possible

but up to a level which can also help an organization to attain its goals (Horngren, C., Dtar, S.

and Foster, G. 2006). Besides this, he should also consider the global competitive market and

competitive advantage. So, for the goal attainment he should be concerned about the expansion

and quality of their services and to make a reputation and demand of its to the customers and to

boost its sales, launch promotional activities. So, they will be able to increase the profitability

which will ensure the goal attainment through improving its quality and the method of the supply

of the service and improved marketing (Charles T. horngren et al, 2008).

2.1.2. DIRECTING: Strategic management accountants in Jessup Ltd. should monitor the company’s day-to-day

routine operations and observe whether the employees are performing their activities as needed

(Bamber et al, 2008), observe the implementation of the plans to achieve the organizations long

and short term goals and try to keep the smooth functioning of the organization. After making

plan, the management accountant is required to guide its stuff towards achieving the

organization’s goals. He should assign employees their responsibilities, arbitrate disputes, give

solutions to their problems and make many small to large decisions which will affect customers,

employees as well as the whole organization (Garrison et al, 2006). The goals of individuals may

not be in accordance with the goal of the organization. During that time the management

accountant of Jessup should motivate the managers and other employees and direct their efforts

maintaining employee’s interests towards achieving the organization’s goals. So, the major role

of the management accountant is putting the business into action. For example, when a composer

writes a beautiful score of music to bring a life on it, there require all members of the orchestra

and a conductor to bring the orchestra into synchronization and harmony with the direction of the

composer. So the management accountant should have all available necessary information, such

as whether inventory is available when needed, whether productive resources are scheduled

appropriately, whether to deliver output transportation system will be available and so on. He

must also be concerned about whether Jessup is complying with contracts and regulations needed

to comply.


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2.1.3. CONTROLLING: Strategic management accountant in Jessup Ltd. should evaluate the outcomes of its operations

comparing with the made plans and make adjustments or modification to keep the company

pressing towards its goals (Bamber et al, 2008). In addition to this to ensure the work efficiency

and effectiveness planning and directing should be controlled based on the selected performance

measures. The main aim of controlling is determining the problems and efficiency in directing

actions to determine the success of the planning actions. Plan should be appropriately modified

as circumstances change (Garrison et al, 2006). As Jessup is a fast growing company, budgeting

is a very essential tool to control the results. So he should establish a realistic goal and control

sthe performance and profitability for the business to achieve the goal.

Controlling is the process where management accountant uses feedback to evaluate the results

with the attainment of the objectives. Performance report gives feedback which is compared with

plans and by highlighting variances which is achieved from the deviations from the budgeted

plans. The strategic management accountant of the Jessup evaluates the effectiveness of its

advertising and public relation division’s operations by comparing the increase in revenue and

profits with the increase in promotional activities. Based on their evaluation of the outcomes

from the operations he will make corrections and revisions to their plans (Horngren et al, 2008).

2.1.4. DECISION MAKING: The selection among a set of alternative courses of actions to achieve specified objectives is

decision making (Horngren et al, 2008). Management accountant of Jessup Ltd. is involved in

goal setting, directing, controlling which also means that directly or indirectly is involved in

decision making. To create business value, he should ensure correct execution of these activities.

On the other hand, if he fails to execute planning, directing and controlling activities properly he

may turn to failure. The main theme related with decision making are-

I. Business value results from good decision making.

II. Through a spectrum of planning, directing, and controlling activities decision will be

taken and

III. Only on the reliance of decision making quality decision making will be possible.


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Management accountant estimates the organization’s competitive position in the competitive

market and assesses how their organization stacks up and takes decision against competition and

improvement.

2.2.RELEVANT AND IRRELEVANT COSTS AND REVENUES:

2.2.1.RELEVANT COSTS AND REVENUES: Different revenues and costs in future as between the alternatives are the relevant costs and

revenues (R. H. Parker, 1969). In a particular decision making these costs and revenues are

relevant. A relevant cost or revenue changes if an alternative cost or revenue is taken. These are

also known as Differential Cost or Differential Revenue.

Future costs or revenues may be relevant or not based on the situations, based on their types.

Future costs or revenue whether are going to be incurred or not depend on the made decision, are

relevant (Dennis Caplan). Generally are relevant which costs have impact on the choice of

alternatives are relevant such as the variable costs, opportunity costs.

For Example, there is a advertisement contract at £10000. The general cost of resource for future

usage can not be decided whether to incur or not at £3000, because these will be demolished

whether used or not. Service can be provided for the contract at a cost of £8000. So the total cost

for providing the advertising service is £11000. But here the above shown cost of £3000 is

irrelevant whether the contract is accepted or not the cost is fixed. So this contract will add to the

profit margin (10000-8000) £2000. So the management accountant of Jessup Ltd. should accept

the contract.

2.2.1.1. OPPORTUNITY COST: The cost of our lost opportunity is called opportunity cost. When one alternative is selected over

another then the lost profit is opportunity cost. Sometimes it includes the lost profit from the next

best alternative, and sometimes it includes the difference between the profit from alternative

taken and the profit from the next best alternative. Negative difference indicates that better action

is taken than the all alternative. But, positive difference indicates that better action is taken than

the next best alternative.


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For Example, assuming Jessup Ltd. has a good relationship with a regular customer XYZ Ltd.

Jessup Ltd. has to give advertisement service to XYZ Ltd. at revenue £8000. On the other hand,

a new customer ABC Ltd. wants to get advertisement service at cost £10000. But, Jessup Ltd.

will be able to accept only one contract in its capacity. So to maintain its old customer and

continue their old relationship Jessup will accept the contract of XYZ Ltd. and will reject the

contract of ABC Ltd. So the opportunity cost of maintaining the old customer and continue their

old relationship is (10000-8000) £2000.

2.2.1.2.MAKE OR BUY DECISION: Assuming that Jessup Ltd. provides public relation service from it’s own agency. The costs are-

Cost Items £

Variable costs 7000

Fixed Cost (Traceable) 2000

Fixed Cost (Common) 1000

Total Costs £10000

But if Jessup provides this service by negotiating with others the only cost will be £8500. Here

the relevant cost of this make or buy decision for Jessup is £9000. So, if the Jessup provides this

public relation service by others it can save £500.

2.2.2.IRRELEVANT COSTS AND REVENUE: The costs that have already been incurred are unavoidable, can not affect in decision making

regarding selecting alternatives. Besides this some other costs or revenues are similar among the

alternatives or next best alternatives are irrelevant in decision making (Horngren et al, 2008).


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2.2.2.1.FIXED COSTS: Costs which remain constant irrespective of the number of units produced up to a level of

activity are fixed costs. It does not change with the changes in the level of service provided. So

in case of decision making incurred fixed costs are irrelevant but future fixed costs can be

relevant. Fixed costs can be of two types-

2.2.2.1.1. TRACEABLE FIXED COST: Costs which can be identified to a particular item and are incurred only for that item are traceable

costs. If we drop out that product item the fixed cost will need not to be incurred. So, in this case

this is relevant. This cost is irrelevant to make decision whether to make or outsource if the cost

has already been incurred.

In Jessup Ltd. the incurred or future fixed costs of the individual division is the Traceable Fixed

Cost. But, the salary of the expertise for each division’s service oriented is the traceable fixed

cost.

2.2.2.1.2. COMMON FIXED COST: Common costs are common to all product items which also mean the cost of the overall

organization. These costs are charged divisions of Jessup. These costs should not be considered

by management accountant in decision making which can also be called irrelevant in decision

making.

If a strategic management accountant has been appointed the salary of that management

accountant will be common fixed cost for all divisions.

2.2.2.2.SUNK COST: Already incurred in the past are sunk costs. Which costs are already been incurred as sunk costs

should not be considered in decision making. Sunk costs can also be termed as non-refundable

costs (Dennis Caplan). So, non-refundable costs are irrelevant in the decision making.


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Assuming that Jessup Ltd. has an office space was on lease. The leased amount is totally paid in

advance for the office space is sunk cost. It has already been paid to the owner, so in decision

making it is irrelevant.

For Example-

Cost Items £ £

Revenue (public relation service) 10000 10000

Variable costs ( as the name of the organization) 1000 1000

Fixed cost (Traceable) 4000 -

Fixed cost (Common) 1000 -

Variable costs (providing service by other) - 7000

Variable costs (providing service by itself) 2500 -

Total Costs 8500 8000

Cost Items Relevant/Irrelevant

Revenue (public relation service) Irrelevant

Variable costs ( as the name of the organization) Irrelevant

Fixed cost (Traceable) Relevant

Variable costs (providing service by other) Relevant

Variable costs (providing service by other) Relevant


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Variable costs (providing service by itself) Relevant

CONTINUE OR DROP OUT: Suppose advertising division has net operating income £20000 but the net operating loss of

public relation division is £5000. So if the management accountant of Jessup Ltd. wants to drop

out public relation division in that views it may be seemed logical. But the unavoidable common

cost of the two divisions the salary of the management accountant is in total £25000 which is

allocated on the basis of proportion 3:2. So applied common cost to public relation division is

£10000. So if the management accountant of Jessup Ltd. drops out the division it will loss

contribution margin (10000-5000) £5000. So he should not drop the public relation division.

2.3. ACTIVITY-BASED COSTING: The allocation of costs to the product items or divisions based on the amount of resources

consumed by the product items is called activity-based costing (Eileen Rojas). Management

accountant of Jessup Ltd. can also allocate their costs to the two divisions based on the amount

of resources consumed by each division by applying this costing method. Jessup will allocate its

costs for two purposes-

I. To determine the costs of each service item to provide service.

II. To encourage cross-departmental monitoring.

Activity-based costing works with the following steps-

Step-1: Resources are consumed for activities identify these activities and assign costs to

them.

Step-2: Determine cost drivers that cause these costs.

Step-3: Divide total cost by total activity to calculate cost per driver.

Step-4: Assign costs to the service items by multiplying activity rate to the number of

activity consumed by each division of services.


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2.3.1.BENEFITS OF ACTIVITY-BASED COSTING: Activity-based costing allocates all the costs based on the consumption of resources to the

product or service division and determines the accurate costs of the each unit of product or

service items. The benefits of ABC system are given below-

I. Activity-based costing is a detailed measure for costing. The more detailed the cost

allocation system, the more accurately costs are allocated. So, if the management

accountant of Jessup Ltd. applies activity-based costing for cost allocation, he will be

able to compute the service costs of each service item accurately.

II. Accurate information for service provided is needed for Jessup to determine the accurate

cost of each unit service provided to determine the profitability.

III. Accurate cost information of each unit service provided is needed by the management

accountant of Jessup to determine an optimal product mix.

IV. ABC system provides more information by providing a requirement of more record-

keeping which maintains clarity to the external parties about Jessup’s activities.

V. Introducing ABC system requires teamwork which is cross-departmental teamwork. This

teamwork brings co-ordination between the works of the different divisions within the

organization.

VI. As given, Jessup is a fast growing organization, so Jessup will initiate some new

techniques which increase the proportional amount of indirect costs. In today’s changing

automated world indirect costs are more important. ABC costing also mainly focuses on

the indirect costs which allocates the huge amounts of costs to each product item for

which this is more important.

2.3.2.PROBLEMS OF ACTIVITY-BASED COSTING: As well as having some benefits Activity-based costing has some problems also. The problems

arise in ABC system are given below-

I. Activity-based costing is difficult, so time consuming and expensive to perform. Greater

amount of human resource is needed to get greater amount of quantitative information.


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The more human resource engaged the more expensive and complicated the costing

system.

II. ABC system is so much complicated to perform. If Jessup use this system there will need

to provide training to the employees to perform the system. Efficient employees are

needed to perform this task. Besides this, during working time employees have more

information to perform the task technically, but if anyone of them leaves the organization

they will take their skill as well as their expertise information with them which is

irrecoverable.

III. Jessup Ltd. has only two divisions which do not indicate simplicity in operation. In

simple operating system ABC system has no use, because costs can be easily traceable

for each service item.

IV. ABC system allocates all costs to all divisions. But the absolute allocation of all costs is

not possible. Such as the salary of management accountant can not be absolutely

allocated to each division.

V. ABC system sometimes misrepresents data. Some irrelevant costs in ABC system is

considered in decision making, but considering that costs ABC system is showing

product margin.

VI. ABC system does not conform with accounting standards and GAAP. So this report can

not provide information for external reporting.

3.CONCLUSION: Jessup Ltd. is a fast growing organization having only two divisions which indicates simple

operating process. Although it has simple operating process it needs a management accountant to

attain its goal. The responsibility of a management accountant performed when he will plan,

direct, control and make decision for Jessup as a management and an accountant. In every

decision he will consider whether the organizations objectives, goals, mission and vision will be

attained or not. They will also make differentiation between the cost and revenue items which are

relevant or irrelevant in decision making and makes decision on the basis of the cost items. In

decision making we should not consider all the cost and revenue items, as every cost and revenue

items are not relevant in the decision making. So the management accountant by differentiating


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these cost and revenue items makes goal oriented decision. By adopting appropriate method

management accountant will also allocate costs to each service item which will also help to

determine the absolute profitability by each service item and to make decision about the optimal

mixing proportion of each item.


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4.REFERENCES: I. Dennis Caplan (Management Accounting : Concepts and Techniques, Oragon State

University)

II. Drury, C. (2008) Management and cost accounting. 7th edn. London: Patric Bond.

III. Garrison R, Noreen E, & Brewer P. (2006),Managerial Accounting. Eleventh edition.

IV. Horngren, Ch, T., Datar, M, S, & Foster, G. (2003).Cost accounting: A managerial

emphasis. Prentice Hall Publishing. Eleventh edition.

V. Bamber, L., Broun, K., & Harrison, T, W. (2008).Managerial accounting, First

edition. Prentice Hall.

VI. Wells, L, D. (2000). Strategic Management for Senior Leaders: A Handbook for

Implementation.TQLO Publication.

VII. Warren, S. & Parker, L. (2009). Bean counters or bright young things? Towards the

visual study of identity construction among professional accountants. Qualitative

Research in Accounting & Management.

VIII. Siegel, G., and Sorensen, J.E. (1999). Counting More, Counting Less -

Transformations in the Management Accounting Profession. Institute of Management

Accountants.

IX. Eileen Rojas(2013), The Advantages and Disadvantages of activity costing,Demand

Media

X. Artill,P. and McLaney,E.(2012) Management Accounting for Decision Makers.7th

edn. Essex: Pearson Academy Ltd.

XI. Artill,P. and McLaney,E. (2009) Management Accounting for Decision Makers.6th

edn. Essex: Pearson Academy Ltd

XII. Drury,C. (2009) Management Accounting for Business. 4th

edn. London: Patrick

Bond.

XIII. Drury, C. (2008) Management and cost accounting. 7th edn. London: Patric Bond

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MR.junaIDSAROWAR.strategic Management Accountin 3