Management Accounting

Lecture 8 Strategic Management Accounting

Problems with Traditional Management Accounting

Key literature: Kaplan and Johnson: Relevance Lost the Rise and Fall of Management Accounting. Bromwich and Bhimani: Management Accounting Evolution not Revolution

Evolvement of Management Accounting

It took Johnson and Kaplans book Relevance Lost The rise and fall of management accounting (1987) to make the majority of accountants face the inevitable. The Chartered Institute of Management Accountants (CIMA) commissioned an investigation of the state of management accounting in the late 80s. Findings published in Management Accounting Evolution not Revolution by Bromwich and Bhimani
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Strategic Management Accounting (SMA)

Definition A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information. CIMA Official Terminology

SMA other 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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Strategic Management Accounting (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.

Strategic Management Accounting (SMA)

Lord (1996) identifies the following strands from literature that constitutes SMA:
The extension of traditional management accountings internal focus to include external information about competitors The relationship between the strategic position chosen by the company and the expected emphasis on management accounting Gaining competitive advantage by analysing ways to decrease costs and/ or enhance the differentiation of a firms products, by exploiting linkages in the value chain and optimising cost drivers.
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Summary - SMA
Provides relevant information to enable organisations to make strategic plans and decisions
Emphasis is on external information Non-financial information plays an important role in managing organisations today.

External Information
For an organisation to succeed it cannot rely on internal information alone. Internal information? Simmonds (1981) argues management accounting should 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 to be financial. Is this sufficient? What are the critical success factors of an organisation today? How can these be monitored?
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Some SMA Techniques

Johnson and Kaplan were instrumental in the development of ABC, ABB and ABM.
Cooper and Kaplan introduced the Balanced scorecard. Other SMA techniques include quality costing, lifecycle costing, target costing, kaizen costing and customer account profitability analysis etc.

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Life Cycle Costing

Life cycle of a product spans the time from initial R & D to the time when support to customers is withdrawn. Time span can vary from industry to industry.

Life cycle costing tracks and accumulates costs attributable to a product over the life of the product rather than periodically.
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Life Cycle Costing

90% of a products life cycle cost is determined by decisions made at the initial stage of the life cycle. A large fraction of the life cycle costs consists of costs incurred on product design, prototyping, process design and equipment acquisition. Berliner and Brimmer Information relating to the cost implications of alternative product designs, target costs throughout the product life cycle etc. Are used to manage costs.
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Kaizen Costing
Kaizen (continuous improvement) costing a mechanism for reducing and managing costs. Focuses on the production process unlike target costing which focuses on the design stage. Relies on employee empowerment who have a better knowledge of the processes.
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Quality
Quality Fitness 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 is to 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 stocks this 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 next stage.
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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Just in Time - Aims

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
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JIT manages costs through:

Attacks and eliminates waste Zero inventory Zero defects Batch size of one Zero breakdowns Exposes production problems and bottlenecks 100% on-time delivery
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Successful JIT requires

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
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