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The changing economic environment coupled with increased global competition and the emergence of new manufacturing technologies has challenged the usefulness of the traditional management information systems. The recent years have been characterized by a lot of criticism and re-examination of management accounting practices and methods. The managerial cost accounting techniques have been related to the losses that companies have been making in the past years. This has led to the push for the adoption of strategic cost management techniques by manufactures and businessmen alike.
Many recent studies have questioned the appropriateness of the traditional managerial cost analysis techniques. Tolerate (1983) contended that traditional cost analysis methods undermines production and is the number one enemy of productivity. Also, according to Cooper and Kaplan (1988), the traditional techniques may no longer be valid as the production process changes. They argue that these techniques have failed to offer relevant, useful and timely information about business activities that the management needs for planning and control activities. The managerial accounting approach has used direct labor as an allocation base for costs, which is usually inappropriate (Shark and Govindarajan, 1988).
The new strategic management model involves a lot of emphasis on activity based costing , cost management system , advanced manufacturing technology cost planning and control. Also strategic cost measurement forms part of it (Brinker, 1990).
Managerial cost analysis involves the provision of information to mangers and other people who are inside an organization and who are directly involved in every day control of the activities and operations of the company. Managerial cost analysis often employs old models of valuation and control which do not offer meaningful advice in the current world.
Managerial cost analysis provides management with some essential data to run the organization some of these reports provide timely and frequent updates of relevant information for decision making such as sales, capacity utilization and may move. Other reports provide information on business prospects or opportunities.
Strategic cost analysis involves the provision of high quality, timely and relevant information that is necessary for decision making. Some to the important information provided by strategic cost analysis models include basic technology, age of equipment, productivity levels, and economies of scale and experience curve effects, issues to do
Evaluation of the extent to which the transition from managerial cost analysis to strategic cost analysis has been achieved.
A shift from the short term managerial cost analysis to the very long term strategic cost analysis has been implemented by most firms. Most companies have worked hard to implement the conduct of drafting; implementation and evaluation of cross functional decisions which enable organization achieve their long term objectives. The mission, vision, policies and plans of the organization are structured to achieve the long term objectives which will not only guarantee profits but will propel the company forward in many years to come.
The shift from the traditional to the modern strategic but analysis has not been an easy causation. The radical changes in change the approach to their business running techniques.
Cost control is the major reference point between the traditional and the innovative approach (Muller, 2001). While cost control and profit maximization has been the goal of many firms many important areas of the firm are looked at these include but not limited to inbound and outbound shipping costs, changes in inflation and foreign exchange rates, wages and productivity levels and prices of raw materials, activity costing, life cycle cost analysis and many more.
This recognizes than in the modern world of manifest living, disruptive events such as quality control failures and machine breakdown can be very costly to the company. This will lead to increased labor idle time and reduced productivity. As a result the marginal profit per product goes down, hence reducing the fortunes of the company.
Unlike the strategic cost management method above, managerial cost analysis did not look much into the occurrence of such things as this made it impossible to maximize profits made by the companies.
Moving from the traditional method to the modern strategic cost management methods was not easy investment in modern machinery, adoption of high quality cost control measures, putting in place routine maintenance checks and many more have to be practiced. This needs additional money to finance all these. This has been a challenge but with the cooperation and willingness of financial institutions to offer financing, such worthwhile investment has been made possible and the operational efficiency of the firms has been enhanced.
Throughout, the activities of the firm are consistent with the expectations of management and these in turn are with the market and the content (Arieu, 2007).
Activity based costing (ABC). This is one technique that is applied in the modern strategic cost management this technique puts less emphasis on direct labor as a cost driver. However, it concentrates on those activities that actually drive costs such as the provision of a service or the manufacture of a product component that will form part of a finished product.
Activity based costing aims at adopting all those modern techniques that dive costs down. For example the adoption of just in time system which does not necessitate the purchase of excessive raw material s which will make it possible to save on storage and handling cost. Orders are made for those materials which are just enough to b e supplied to the market. No surplus of any kind is to be entertained.
In managerial cost accounting, direct labor formed the major cost driver. Other factors were less looked at and major spending was on labor. This was due to increased idle time, high labor rate variance and wastages as a result of have unqualified labor handle important production processes.
While moving from the managerial cost accounting to strategic cost analysis methods a lot of changes had to occur. The recognition of the fact that labor is not a cost driver was to be recognized. Then, other inefficient procedures, other than direct labor had to be placed every other time.
"Strategic cost management and evaluation is an ongoing process that evaluates and controls the business and the industries in which the company is involved; assesses its competition and sets goals and strategies to meet all existing and potential competitors; and then reassesses each strategy annually or quarterly to determine how it has been implemented and whether it has succeeded or needs replacement by a new strategy to meet changed circumstances, new technology, new competitions, a new economic environment or a new social financial or political environment" (Lamb, 1984).
A lot of continuous evaluations into the manufacturing processes had to be done. This involved costs. Another impediment was the cost together with the conservative policies of many business owners. Those who failed to implement changes were forced out of business while the few remaining ones had to act swiftly to avoid going under.
Majority of the firms have learned to appreciate this strategic cost management concept and have all appreciated it as a way of increasing efficiency and during costs down. A shift the way mangers think reason and act has been influenced a lot by the adoption of the activity based costing techniques. So it is possible to get the real cost of a product based on this method and also it is possible to face the competitors well through the adoption of this method.
Variance analysis. Managerial cost analysis techniques employ those methods that it easy for managers to compare the actual and easy for managers to compare the actual and the planned expenditure. This is usually on a term basis such as 4 months a year or so. The objectives are not usually on a very long term basis, unlike the current approach in strategic management which involves many other factors to ensure that the firm achieves its objective of reduced spending hence making it possible to work within the budget.
Since many expenses are as a result of inefficiency strategic management models aim at reduction of expenses in the long run. It seeks to reduce incidences of breakdowns idle labour time and many more. In the long run such inefficiencies are looked at; expenses will be kept at bay.
Strategic cost management also entails achieving higher production level at a lower cost. Through education in wastage, increased machinery capacity, reduced down time and many more, a lot can be achieved.
The paradigm shift from the managerial cost analysis techniques to the strategic cost analysis methods requires both human and financial resources, which is costly to majority of the firms concerned. However, due to the importance of these modern methods to business, a lot of effort has been made to adopt them. Up to now, some firms are fully compliant while others are at different levels of compliance.
Value chain management. This old and outdated model of managerial cost analysis did not focus much on the consumer product or even a distribution channels. This led to lower value for money for the consumer, increased pricing and inefficiencies.
" Value chain analysis basically focuses on value creation by identifying value activities such as, firm infrastructure, procurement, technology, human-resource management, in-bound logistics, operations, out-bound logistics, sales and services and seeks to establish linkages among these activities to achieve optimal efficiency in terms of cost and benefit. In a larger sense this approach can be extended beyond the firm so as to include the suppliers' value chain, channels value chain and customers' value chain."(Ramana, 2004)
However, strategic cost management technique has not only led to increased performance but also a complete transformation across the value chain. The strategic cost management models play a bigger role in the business processor that influences decisions on pricing and profitability across many dimensions.
The best industry standards is adopted by the strategic cost management models and modern cutting edge technique such as value chain costing, outsourcing and service costing have arisen, as a result.
In strategic cost accounting some other additional factors are looked at. For example, the economies of scale and experience curve effects are keenly considered by the management. This has not been the case with the management cost analysis which does not look at what happens when production is done at a level which is lower than the desired. Also issues that deals with the realities of the company making losses in case of unreliable and unpredictable exchange is also an important element in long term strategic management.
The adoption of cheaper methods of doing business such as supplier consolidation and electronic purchasing have been looked at as a shift from the traditional managerial cost accounting to an up to date method to the modern strategic method. This method comes with its own costs as consolidation of the supplies is encouraged as well as other cost cutting measures such as Kaizen.The use of cutting edge technology to ensure that the right raw materials are obtained from the right suppliers at the cheapest rates possible has been advantageous to many firms.However, the level of implementation of this policy by many firms is still wanting because not many firms have adopted them. Purchasing has been regarded as a most sensitive area that senior managers should look into with a lot of caution. It will decide many things in the value chain. For example, if low quality raw materials are obtained at high prices, the final products will be of low quality.Again, the customers will pay at a higher price and this will offer the competitors an advantage and the market can easily be lost.Furthermore, customer loyalty will be lost and this will have a negative impact on the company in the long term.
For a shift to occur from the traditional to the modern strategic cost analysis method, it will require that the firm invests in modern technology as well as invest in highly qualified personnel that can move forward the policies of the firm. This has not been easy especially for small firms, so many of them have decided to implement in phases. Full one off implementation is possible with huge amount of capital present, but will the easy access to financing; companies can take advantage of this and improve on their competitive advantage.
Lean accounting: When issues of mass production are mentioned, the term lean accounting is more used and it involves massive production at lower costs. While it was mainly used with the old management cost analysis, a shift has occurred and today, it is one of the strategic cost management tools. It has very many advantages when incorporated with other strategic management methods.
Resource consumption accounting: This is a very dynamic, integrated strategic cost accounting approach which provides managers with the information needed for decision making. This method pushes companies to adopt disciplined methods of running businesses and has been adopted by many firms because it plays a lot of role in cutting down costs.
Transfer pricing: This is a fundamental management accounting concept applied in assigning values and revenue attribution to the many existing units within a business. It is mainly used in banking and manufacturing businesses. In a bank, it is the very best way of assigning thee interest rate risk that the bank has to carry as a result of the various loans it receives and also those which it gives out. For example, a bank's corporate treasury department will assign funding charges to the business units for their use of the bank's resources when they make loans to clients. It will also assign funding credit to business units who bank their deposits in the bank. This method is proactive and has a wider application in many sectors of the economy. This method is also used to produce accounts for segment business units which can have many uses both internally and externally.
Generally, the shift from managerial to strategic cost analysis techniques has not been easier for many firms. While those who had the resources made a quick shift, others had to approach it in phases hence the level of implementation between different firms all over the world is different
A successful introduction of strategic cost management in the power sector
Unrealistic pricing policies in the power sector, together with lack of commercial orientation have led to many electricity boards making losses. Many in the companies in the United States made losses when applying managerial cost accounting techniques. The poor performance is as a result of widening gap between the cost and the tariff of the power, reduced plant load factoe, high transmission and distribution costs and the failure
By adopting the strategic cost management methods, it became possible to break the complex structure of the distribution companies into more manageable units, and some small zonal management units were put in place.
Again, a regulatory mechanism which determined the technical and financial parameters for performance, the guidelines for tariff setting, and also function as a moderator to balance the interests of all stakeholders in the sector.Furthermore, greater emphasis was put in place to encourage greater participation by the private sector in electricity generation and distribution. To achieve its objectives, the boards had to look into a critical component of strategic cost management: Value chain analysis. The value chain for any firm in any business is totally linked to the values of all the activities of the firm from the basic raw materials to the end product, which reaches the consumer.
"Value chain analysis (VCA) has been widely used as a means of describing the activities within and around an organisation, and relating them to an assessment of the competitive strength of an organisation. One of the key aspects of value chain analysis (VCA) is the recognition that organisations are much more than a random collection of machines, money, and people. Moreover, these resources are of no value unless deployed into activities and organised into routines and systems, which ensure that products/services are produced which are valued by the final consumer. In order to understand the inherent strengths of business one has to identify the value activities within and outside the position of the value chain and investing in cutting edge technology in the Organisation."(Ramana, 2003)
Value chain analysis puts more emphasis on the ability of the firm to adopt much emphasis to survive. Some of them are: Managing the cost drivers better than their competitors, changing the
When this technique was implemented, the result was improved earnings, reduced wastages, high consumer satisfaction and general improvement of the performance of the companies. Both the transmission and production of power were transferred to a private company which runs it profitably unlike when the government was operating it.
As a result, efficiency in distribution was obtained as more was added to the value chain than it was before when the traditional managerial cost accounting methods were being adopted.
The value chain perspective provides a lot of information which cannot be provided by other traditional methods. The older model provides inadequate information as shown below(Source: Ramana,2003)
Revenue and Cost
Total Revenue from the sale of Power
Less Purchase of power
Distribution and Admin Expenditure
Profit before tax (loss) (401)
As seen in the above table, the information may not provide a lot of meaning for managerial decisions. It does not even provide some additional explanations hence it is hard to be understood. It cannot show the position of the revenue, the percentage of distribution expenditure and even if it is possible or not to reduce the power cost.
Based on the above, it's not easy to tell which business is profitable, unless there is inter unit transfers of power from the transmission unit to the business unit. This price can be determined on the price determined by the regulator, or at a price which is determined by the prevailing market conditions.
Adoption of value chain perspective
When the value chain perspective is adopted, a lot of meaningful information for decision making is presenter as shown in the table below which offers more information for decision making. . (Source Ramana, 2003)