Strategic Management Accounting

Assignment

1. How would you define the term “strategic management accounting”? How does it differ from
conventional “management accounting”? Explain and give examples!

Strategic management accounting is about having an accounting system that checks,

accommodates, supports and controls your strategic management goals.

Accounting is, of course, managing and analyzing your company’s finances. Strategic management
accounting has about as many definitions as there are letters in the term. But the bottom line is that
strategic management accounting implements an accounting system to examine, accommodate and
command your strategic management goals.

But that is not all it does. Strategic management accounting can also help develop your goals.
Accounting’s role would be to supply all of the financial data to management to ensure that the plan
for “getting there” is doable.

Having a good plan, savvy management and a solid management accounting strategy are not static.
They must be able to adapt to changes, such as new regulations that affect your business, as well as
new strategies that competitors are carrying out. Factors such as these may affect the way you spend
or stash your cash. Consequently, accounting will play a critical role.

2. What is the role of strategic management accounting?

Today’s businesses operate in a dynamic, complex environment. They are affected by STEP
(Sociological, Technological, Economic and Political) factors, internal competition, and increasingly
bargaining power of suppliers and customers. These forces have radically altered the business
environment. Businesses are turning to strategic management accounting in order to survive in this
changing business environment. The role of strategic management accounting therefore is to align
the organisational strategies and goals with these factors. This requires the organisation to monitor
and evaluate their operations with those of their competitors and to pay much greater attention to
satisfying customer needs. To do this, strategic management accounting provides a range of internal
and external information for decision making.

3. How do financial accounting, cost accounting, cost management, and strategic cost
management relate to each other? Explain!

Financial accounting measures and records business transactions and provides financial statements
that are based on generally accepted accounting principles, as well as, relevant accounting standards.
It mainly concentrates on external reporting. Financial accounting prepares such reports as income
statements (or profit and loss account), balanced sheets (or statements of assets and liabilities), cash
flow statements and changes in equity.

Cost accounting is a hybrid of financial and management accounting. It provides information on a

company"s costs and may be used for both external and internal purposes. When cost accounting is
used for financial accounting, it measures the cost of production and sales in accordance with
accounting principles. When used for internal purposes, cost accounting information provides the
basis
 for planning, controlling, & decision- making. Cost accounting includes such topics as cost-
volume profit (or CVP) analysis, budgeting, relevant costing, job costing, process costing,
activity-based costing (or ABC), activity based management (or ABM) and cost allocation
processes.

Cost management requires a deeper understanding of the cost structure of the firm; it
combines elements from three older fields: management accounting; production; and strategic
planning. Cost management refers to those management activities used for short-run and long-
run planning and control of costs. Cost management not only focuses cost reduction, but also
on cost control and management. Thus, it has a broad focus.

Strategic cost management provides costing information for strategic decisions. It helps
formulate and communicate strategies. It has a long-run focus. It carries out tactics that
implement those strategies. It develops and implements controls that monitor success at achieving
strategic objectives.
Example: In a manufacturing company, financial accounting records all the transactions
including the production cost in general ledger; cost accounting records and calculates the
production cost; cost management compares the actual production cost with the budget and
analysis the differences. Strategic cost management combines the result of the analysis above
with other non- financial factor to make decision for the future.

4. What are the two different MAS information discussed in this chapter?
Discuss each of them in terms of their importance to managerial decision-making.

The two different MAS information discussed in the Chapter are referred to as the
traditional MAS and the broad scope MAS. The traditional MAS relies on financial
information to make business decisions. Because of this the information used by the system
tends to be historical and short term in nature. The broad scope MAS on the other hand,
uses a range of financial and non-financial information to make business decisions. The
information is useful for both long term and short-term decision-making. Importantly, the
broad scope MAS is future oriented. Through the provision of broad scope information,
organisations can more readily adapt to the changing business environment.

5. Describe the purpose for which management uses cost information.

Management uses cost information for the following purposes: planning (i.e. budget and
target), controlling, evaluation, and decision-making. Besides this cost information is also
useful for mapping the future direction; it provides managers with information that is useful
for setting strategies and also provides the ability to ensure that inputs, processes, and
outputs are aligned to achieve organisational goals. In a public sector context, there is one
important additional use of this information - for external communication to users (who have
a vested interest in the direction and success of the entity). These users fall into three
groups: resource providers (employees, lenders, creditors, suppliers), recipient of goods and
services (ratepayers, taxpayers and members of professional associations), and parties
performing a review of oversight function (parliaments, governments, regulatory agencies,
analysts, labour unions, employer groups, media and special interest community groups.
6. What are the major differences between Management Accounting and Financial Accounting?

Financial Accounting measures and records business transactions and provides financial statements
that are based on generally accepted accounting principles as well as relevant accounting standards.
It mainly concentrates on external reporting. Financial accounting prepares such reports as
income statements (or profit and loss account), balanced sheets (or statements of assets and
liabilities), cash flow statements, and changes in equity. These statements are auditable and they
are also objective and reliable.

Management accounting identifies, collects, measures, and reports information that is useful to
managers in planning, controlling, and decision-making. It is important to recognise that
individuals within the organisation use management accounting information. Management
accounting information can contribute to the following management areas: policy formulation,
planning and controlling the activities of the firm, decision taking on alternative courses of
action, and so on. Management Accounting has traditionally taken a short- term focus. It focuses on
the technical orientation and ignores human-relation aspects and the business context. Examples of
management accounting include costing systems, budgeting systems, and performance measurement
systems. There are no accounting standards or rules that management must adhere to.

7. What is meant by the term “technical rational choice models” of organizations?

The Technical rational choice model" refers to the use of management techniques and
procedures such as accounting to help the organisation to make rational types of decisions that
maximise the goals of the organisation. In particular the technical-rational approach has the
following key features. First, it assumes a pre-set goal or consistent goal sets. There is the
view that rationality emphasises consistency among goals and objectives concerning a
particular action, and consistency in the application of principles to select the optimal
alternative. Technical-rational perspective also assumes that alternatives are mutually exclusive,
separate and easily identified. Thus, this approach deals with unitary goals, identification of the
range of possible options, their likely consequences and the selection of an alternative that
maximises the goal of the organisation. Most management accounting textbooks are built on these
assumptions. To be clear, management accounting systems provide the computational decision
making tools used to help the organisation to achieve their goals.

8. What are the main issues discussed in “Contingency Theory” of organisations?

According to the “Contingency theory” the type of accounting and control system varies
according to the specific circumstances or situations in which the organisation operates. There
is the view that “there is no universally "best" design for a management control system, but
that "it all depends" upon situational or contextual factors.” So far, researchers have identified
a range of variables implicated in the design and use of accounting and control processes in
organisations. These include the influence of the organisation's culture, technology and market
on budgetary control systems; the size of an organisation, its technology and structure;
decision-making styles; organisational values and motivation; management aspiration for profit
growth. Notwithstanding, contingency theories have been criticised because they are based on
a highly technical view of organisational choice. To further explain, the conceptualisation,
definition and measurement of key variables within contingency theory have not been
adequately elucidated - they require greater theoretical and empirical attention. In addition to
this, correlations reported in most contingency studies are small and not always consistent;
and, finally, contingency theory fails to incorporate the wider context of the organisation, that
is the social, political, economic and institutional aspects.
9. How contingency theory differs from institutional theory?

“Contingency theory” assumes the type of accounting and control system varies according to the
specific circumstances or situations in which the organisation operates. There is the view that "there
is no universally "best” design for a management control system, but that "it all depends" upon
situational or contextual factors.” So far, researchers have identified a range of variable s implicated
in the design and use of accounting and control processes in organisations. These include the
influence of the organisation's culture, techno logy and market on budgetary control systems; the
size of an organisation, its technology and structure; decision-making styles; organisational
values and motivation; management aspiration for profit growth.

"Political economy theory”, on the other hand, helps understand the mutual relationships
between polity, state, economy and organisational processes such as the design and use of
management accounting systems. Issues of power, conflict, historical, social, economic,
political, cultural, and institutionalised rules and regulations are key variants of the PE
approach. The PE approach explains how these affect or dictate the operation of management
processes in organisations. There is the view that be adhering to policy, state, and economic
pressures, organisations will be viewed as legitimate. Accounting research suggests that a PE
approach can better capture these phenomena by tracing the socio-political underpinning of
economic phenomenon to patterns of state involvement and the interaction between legal and
economic processes upon and within the organisation. Several themes have emerged from
accounting studies using a PE approach including: how accounting systems are shaped by the
interrelationships between political and economic forces in organisations and society; and,
how the meanings, culture, ideology, and the organisational contexts dictate the operation of
accounting and control systems in the organisation.

Thus the difference between these two theories lies in their focus. Contingency theory is interested in
the factors that shape the Management Control System; PE is interested in the mutual
relationships between the MCS and polity, state, and economy. Also, PE assumes the
organisation changes for legitimacy purposes; contingency theory does not discuss the „why" of
change it only looks at the factors that have shaped the change.

10. Describe some of the changes that have altered the business environment.

The business environment has been altered by a number of factors such as sociological,
technological, economic and political (STEP). Socio-cultural changes are those changes in a
society"s beliefs, attitudes, opinions and lifestyles. Examples of these are demographic trends and
skill availability. Political and legal change s on the other hand are usually the result of a change in
government when new regulations are imposed that reflects the new government preferences and
priorities. Economic conditions include competitors, suppliers, employment rates or changes from
public to private ownership. Finally, the introduction of new production processes or the
computerisation of processes has changed the business environment.