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Strategic Management Accountant And Managerial Decision Making Accounting Essay

Jessup Ltd an advertising hub being booming with its core competencies can turn up with the flying colors by adding one more head to their Key Management Personnel, so that they can efficiently and economically embark upon the cutting edge scenario in the market.

Strategic Management Accountant are well placed to contribute by playing pivotal roles in Managerial decisions however their characteristics make it desirable for non accountants to involve themselves as well.

Management Accountants through the aid of Activity-based costing as a tool, enables to move a complex, expensive financial systems implementation which provides meaningful and actionable data, quickly and inexpensively, to managers.

INTRODUCTION

Strategic management accountant is considered a key part of effective management, as it provides a structure for action and a source upon which to assess the organization’s performance, thus ensuring accountability for results. This movement towards results-based management forms part of a wider attempt to improve and achieve the economies of scale in order to cope more efficiently with local and international pressures.

This can be a comprehensive programme of change designed to enhance the delivery of advertising services. The overarching objectives are:

– Improved effectiveness;

– Improved service delivery;

– Improved accountability; and

– Greater cooperation.

ANALYSIS

An entrepreneur starts with a plan or a budget for resources for initiating operations. He has to compete on low cost, on-time delivery, volume and product flexibility, quality, proactive corporate structure, innovation and ultimate customer satisfaction.

Strategic Management accountants are natural participants in the benchmarking process. Not only does their background suit them to the task, but also benchmarking itself can play an increasingly important part in performing their roles as management accountants. Management accountants should:

• become part of their organization’s value-added team

• participate in the formulation and execution of strategy

• transform strategic intent and capabilities into operational and managerial

measures;

• Move away from being scorekeepers of the past to become the designers of

the organization’s critical management information systems

While management accountants may not have primary responsibility for providing the physical information, only they can provide the relevant, accurate, and timely financial information to employees. This financial information, however, is unlikely to be the standard costs and variance from the organization’s traditional accounting system. The new financial and cost information must be derived from intimate knowledge of the underlying technologies, capabilities, markets and strategy of the organization.

Key Roles that a Strategic Management Accountant would undertake in respect of an advertising concern like Jessup Ltd.:

Provide management accounting services and systems

Manage management accounting staff

Assure the quality of services and system

Plan and arrange finance

Utilize intelligence from external sources

Provide planning services

Guide management decisions

Analyse, report and interpret the organization’s performance to management

Present reports and accounts for investors.

A management accountant can execute their action plan in several ways. Some simple conducts to make the efficient effort are:

Accept the learning curve – living within a budget is an educational curve for any new entrepreneur.

Be prepared to miss your estimates.

Work flexibly.

Watch the cash flow

Always err on the side of being conservative

Nurture a cash cushion

Check the budget frequently and at least once in every month.

Strategic Management Accountant should apply their wisdom to know the difference while making the managerial decisions. There may be situations like –

There is a need but no market,

There is a market but no customer,

There is a customer but no salesman, all the above exist but there is no capacity to deliver the product or service to the customer. The entrepreneur has to be prepared for the pit consequences of the action to be taken.

Relevant and irrelevant costs:

Relevant costs are those estimated future costs which are essential to a decision. The two key aspects of these costs are as follows:

They must be expected future costs.

They must be different among the alternative courses of action.

For example, in a decision concerning to the replacement of an old machine, the written down value of the existing machine is not relevant but its sale price is relevant.

Relevant Costs helps in drawing the attention of managers to those elements of costs which are relevant for the decision. Two common pitfalls in relevant cost analysis are: First Pitfalls in relevant cost is that it assumes that all variable costs are relevant:

All variable costs are not relevant. Even among future costs, those variable costs which will not differ under various alternatives are irrelevant.

Second Pitfalls is to assume that all fixed costs are irrelevant:

All fixed costs are not irrelevant. If fixed expense remains unchanged under different alternatives such expenses are only irrelevant to the decision at hand but if they are expected to be altered they should be considered as relevant.

Irrelevant Costs are those costs which does not relate to situation requiring managerial decisions. Further, these costs may be irrelevant for some situations but relevant for others. Examples of irrelevant costs are fixed overheads, sunk costs and book values.

The management accounting in a business can be divided into two broad categories:

(1) basic features and (2) basic assumptions.

Basic Features

The business firm or enterprise is an organizational structure in which the basic activities are departmentalized as line and staff. There are three primary line functions: marketing, production, and finance. The organization is run or controlled by individuals collectively called management. The staff or advisory functions include accounting, personnel, and purchasing and receiving. The organization has a communication or reporting system (e.g. budgeting) to coordinate the interaction of the various staff and line departmental functions. The environment in which the organization operates includes investors, suppliers, governments (state and federal), bankers, accountants, lawyers, competitors, etc.) The basic purpose is to classify management into three levels: Top management, middle management, and lower level management. The significance of a hierarchy of management is that decision-making occurs at three levels.

Basic Assumptions in Management Accounting

The framework of management accounting is based on a number of implied assumptions. Although no single work has attempted to identify all of the assumptions, the major assumptions are listed as under:

1. Basic goals

2. Role of management

3. Nature of Decision‑making

4. Role of the accounting department

5. Nature of accounting information

Basic Goal Assumptions - The basic goals or objectives the business enterprise may be multiple. For example, the goal may be to maximize net income. Other goals could be to maximize sales, ROI, or earnings per share. Management accounting does not require a specific type of goal. However, whatever form the goal takes, management will at all times try to achieve a satisfactory level of profit. A less than satisfactory level of profit may signify a change in management.

Role of Management Assumptions - The success of the business depends primarily upon the skill and abilities of management– which skills can vary widely among different managers. The business is not completely at the mercy of market forces. Management can through its actions (decisions) influence and control events within limits. In order to achieve desired results, management makes use of specific planning and control concepts and techniques. Planning and control techniques which management may use include business budgeting, cost-volume-profit analysis, incremental analysis, flexible budgeting, inventory models, and capital budgeting models. Management, in order to improve decision-making and operating results, will evaluate performance through the use of flexible budgets and variance analysis.

Decision-making Assumptions - A critical managerial function is decision-making. Decisions which management must make may be classified as marketing, production, and financial. Decisions may also be classified as strategic and tactical and long run and short run. A primary objective of decision-making is to achieve optimum utilization of the business’s capital or resources. Effective decision-making requires relevant information and special analysis of data.

Accounting Department Assumptions - The accounting department is a primary source of information necessary in making decisions. The accounting department is expected to provide information to all levels of management. Management will consider the accounting department capable of providing data useful in making marketing, production, and financial decisions.

Nature of Accounting Information - The accounting department for making meaningful analysis of data, it is necessary to distinguish between fixed and variable costs and other types of costs that are not important in the recording of business transactions. Some but not all of the information needed by management can be provided from financial statements and historical accounting records. In addition to historical data, management will expect the management accountant to provide other types of data, such as estimates, forecasts, future data, and standards. The accounting department will be expected to provide the information required by a specific tool. The management accountant need not provide information beyond the relevant range of activity.

Implications of the Basic Assumptions

The assumption that there are three types of decisions, (marketing, production, and financial) requires that management identify the specific decisions under each category. The identification of specific decisions is critical because only then can the appropriate managerial accounting technique be properly used. In management accounting, decision-making may be simply defined as choosing a course of action from among alternatives. If there are no alternatives, then no decision is required. A basic assumption is that the best decision is the one that involves the most revenue or the least amount of cost. The task of management with the help of the management accountant is to find the best alternative. The process of making decisions is generally considered to involve the following steps:

1 Identify the various alternatives for a given type of decision.

2. Obtain the necessary data necessary to evaluate the various alternatives.

3. Analyze and determine the consequences of each alternative.

4. Select the alternative that appears to best achieve the desired goals or

objectives.

5. Implement the chosen alternative.

6. At an appropriate time, evaluate the results of the decisions against

standards or other desired results.

The concept of decision-making is a complex subject with a huge amount of organization literature behind it. In management accounting, it is useful to classify decisions as:

1. Strategic and tactical

2. Short-run and long-run

Strategic and Tactical Decisions

In management accounting, the objective is not necessarily to make the best decision but to make a good decision. Because of complex interacting relationships, it is very difficult, even if possible, to determine the best decision. Management decision -making is highly subjective.

Whether a decision is good or acceptable depends on the goals and objectives of management. Consequently, a prerequisite to decision-making is that management have set the organization’s goals and objectives. For example, management must decide strategic objectives such as the company’s product line, pricing strategy, quality of product, willingness to assume risk, and profit objective. In setting goals and objectives, it is useful to distinguish between strategic and tactical decisions. Strategic decisions are non quantitative in nature. Strategic decisions are based on the subjective thinking of management concerning goals and objectives. Tactical decisions are quantitative executable decisions which result directly from the strategic decisions. The distinction between strategic and tactical is important in management accounting because the techniques of management accounting pertain primarily to tactical decisions. Management accounting does not typically provide techniques for assisting in making strategic decisions.

The company should replace the old machine. The cost savings are far greater than the cost to purchase the new machine.

Activity-based costing systems can help companies make better decisions about pricing and product mix, and assist in decisions about product design, by providing more accurate information about how different products and services use resources. Activity-based costing systems identify activities as the cost objects. Inaccurate costing systems can provide misleading cost information and may result in product under costing and over costing. Three guidelines for refining a costing system are direct-cost tracing, indirect-cost pools, and cost-allocation bases.

A cost hierarchy segregates costs into different cost pools. ABC systems typically use a cost hierarchy with four levels — output unit-level costs, batch-level costs, product-sustaining costs, and facility-sustaining costs.

Benefits of ABC:

Activity Based Costing helps to induce following benefits in Corporate Strategy:

It helps to encourage the management to redesign the product.

ABC system reports on the Corporate Spending.

Performance based accurate feedback can be provided to cost centre managers.

Accurate information on product costs enables better decisions to be made on pricing, marketing, product design, and product mix.

It helps the management to compare the profits of various customers, product lines and to decide on the price strategy, etc.

Problems of ABC

Several problems, arise when companies attempt to scale up this seemingly straightforward approach to enterprise-wide models, and to maintain the model so that it reflects changes in activities, processes, products, and customers. First, the process to interview and survey employees to get their time allocations to multiple activities is time consuming and costly. The high time and cost to estimate an ABC model and to maintain it – through re-interviews and re-surveys − has been a major barrier to widespread ABC adoption. And, because of the high cost of continually updating the ABC model, many ABC systems are updated only infrequently, leading to out-of-date activity cost driver rates, and inaccurate estimates of process, product, and customer costs.

The problem of traditional ABC models is that - difficult to scale. Adding new activities to the model, such as to introduce heterogeneity within an activity requires re-estimating the amount of cost that should be assigned to the new activity.

As the activity dictionary expands – either to reflect more granularity and detail about activities performed or to expand the scope of the model to the entire enterprise − the demands on the computer model used to store and process the data escalate dramatically. To reduce the computational and storage burden of operating an enterprise-wide ABC model, companies often build separate ABC models for each of their sites. But then the models do not easily handle products that move between facilities for processing.

These implementation problems have become obvious to most ABC implementers. But a subtle and more serious problem arises from the interview and survey process itself. When people estimate how much time they spend on a list of activities handed to them, invariably they report percentages that add up to 100%. Few individuals report that a significant percentage of their time is idle or unused. Therefore, cost driver rates are calculated assuming that resources are working at full capacity. But, of course, operations at practical capacity are more the exception than the rule.

Conclusion

At the overall organizational level there remains the danger that the management accountant is (in part at least) responsible for measuring the indicators rather than managing the business. This would again point towards multidisciplinary teams within which the management accountant would make a significant contribution.

The main reason for refining a costing system is to develop the management decision-making process by providing enhanced product cost information. Department-costing systems improve on the early single-cost-allocation-base costing systems by developing separate cost-allocation bases for departments with different cost drivers. Activity-based costing systems can refine the costing system even further by segregating department costs with different cost drivers (activities) into a separate cost pool for each significant department activity. Refining a costing system only makes sense if the benefits of a refined costing system exceed the costs on implementing a refined costing system. Implementing an ABC system may provide “net” benefits if significant amounts of indirect costs are allocated using one or two cost pools, if most indirect costs are unit-level costs, if products use different resources because of product differences, if financial reports display questionable results, and if there is considerable disagreement between operations and accounting departments about product costs.

Strategic management will result in planning for the upcoming changes in the market, the operation, or climate which will make the company's "speed bump" to make it easier and more attainable.

Thus, an emerging image of relatively high levels of Strategic Management activity is being depicted. Furthermore, it would appear that a relatively high proportion of organizations are indeed looking beyond their immediate organizational boundaries for attaining organizational goals. However, most are adopting a relatively conservative approach with a focus on readily quantifiable activities and similar comparator organizations. Our work to date seems to suggest the existence of some form of maturity curve. Organizations that persist with Strategic Management would appear to move from simple comparisons of easily-measured discrete activities using internal workforce, to comparing more complex processes with external and/or dissimilar workforce.

Further there are several interesting areas under Strategic management which helps in effective decision making. In addition, it is envisaged that this work will begin to address the relationship between successful management accounting and other approaches to performance improvement, the degree to which the identified success factors are necessary but not sufficient for Strategic management success, and the extent to which Strategic management is proving to be a cost-effective model.

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