Examining Accounting For Management Decision Making

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Traditional management accounting deals with the preparation and use of accounting information by the managers to make day-to-day and short term decisions. Management accounting techniques consist of standard costing, absorption costing, ABC, cost-plus pricing and budgeting. There are some criticisms about these techniques showing a failure to provide tactically relevant information for decision-making.

In 1981 Simmonds released a paper in the UK Management accounting magazine, in which he introduced a case for the illustration of strategic management accounting. He defined SMA as "The provision and analysis of management accounting data about a business and its competitors for use in developing and monitoring the business strategy, particularly relative levels and trends in real costs and prices, volume, market share, cash flow and the proportion demanded of a firm's total resources" (Simmonds, 1981, p.26). Simmonds showed the way accountants collect management accounting information of a particular company and its competitors and the need to analyse the impact of future decisions, for use in developing and observing the business strategy. Over the years there have been several releases, with the most influential paper made by Bromwich (1990). Bromwich defines strategic management accounting as "The provision and analysis of financial information on the firm's product market and competitors' cost structures and the monitoring of the enterprise's strategies and those of its competitors in these markets over a number of periods" (Bromwich, 1990, p.28). Bromwich released these articles because he believed that there is a need for firms to continuously monitor their value added in relation to its competitors. A more recent definition of SMA was published by CIMA "A form of management accounting in which emphasis is placed on information which relates to factors external to the entity, as well as non-financial information and internally generated information" (CIMA, 2000, p.50).

The common aspect of this explanations is that "SMA entails taking a strategic orientation to the generation, interpretation and analysis of management accounting information, and competitors' activities provides the key dimension for comparison" (Langfield-Smith, 2007, p.206). Tomkins and Carr (1996) observed that there was not an agreement on the definition of SMA. This observation remains the same fifteen years later, since the literature definition of strategic management accounting is still changing resulting in a more summarised version. Because there is not an agreed conceptual framework to define SMA, many organisations use it but do not define it as SMA.

Simmonds (1981) analyse SMA techniques strictly as competitor-focused. This includes the 'competitor cost assessment' and 'competitive position monitoring'. On the other hand Bromwich and Bhimani took Simmonds techniques a step further, to include the collection of customers' information, products and markets in order to sustain competitive advantage. Roslender and Hart (2010) identified "target costing and life-cycle costing as examples of SMA, together with strategic cost management" (Roslender and Hart, 2010).

Strategic management accounting consists of various techniques. This include target costing, the balance scorecard and value chain analysis. Target costing derives the full cost of producing a product through selling price and the target profit. Under this technique, the selling price of a product is given by the analysis of an entity's value. The product is developed on the market price and not on what it has cost to produce it, in order to satisfy a consumer's need. Its main target is to minimise the cost of production through changes in design, sourcing of raw material, development of assembly line and production locations.

Target costing mergers different departments of an entity, and gives a proactive approach to cost management. It also minimise the non value-added activities and reduces the time needed for products to reach the market. Target costing approach has a number of limitations. It requires time consuming meetings, and the willingness of the employees to cooperate and develop new ideas. Furthermore the use of cheaper materials may reduce the quality of the products. Today there is a small number of companies who fully adapted this technique in North America. However in Japan manufacturers believe that reducing the cost of production is the most critical measure. As a result a large number of automobile manufacturing, machine tooling and electronic companies are using this technique. Examples include Toyota Motor Corporation, Isuzu Motors, Sony, Nissan, NEC and Toshiba.

Few years ago George Clothing brand of Asda had a target to become the largest schoolware retailer of the UK. Through the extensive use of target costing they have rationalise the sourcing of raw materials, product design, manufacturing locations and logistics, and achieved to sell schoolware at lower prices in the UK. This has led to rationalising their suppliers base by choosing to produce only in the Far East and especially in Bangladesh were labour cost is low and productivity levels are high. As a result after targeting their prices to be lower than their competitors they became the biggest schoolware retailer in the UK.

The Balanced Scorecard (BSC) is another SMA technique, which was introduced by Kaplan and Norton, (1992). This technique "enables companies to track financial results while simultaneously monitoring progress in building the capabilities and acquiring the intangible assets they need for future growth" (Kaplan and Norton, 1996). It is used by firms, governments and nonprofit organizations globally, to report quantitative and qualitative measures of performance. It also considers both financial and non-financial objectives to evaluate the performance measures in a single report, and improve internal and external communications to monitor organisation performance against strategic goals. The BSC should link learning and growth, business and production efficiencies, as well as customer value and financial performance. Kaplan and Norton introduced four different groupings to measure both the current and future financial performance of the entity. They were introduced to support the goals of management accounting techniques. They are also known as 'perspectives' and consist of the financial, customer, internal business process and learning and growth perspectives. Each of them is considered by four parameters: objectives, measures, targets and initiatives, in order to achieve the overall strategic 'themes' or 'goals'. It is important for a company to understand these perspectives.

The financial perspective focus on the way a company treats its shareholders and takes into accounting its financial objectives. Kaplan and Norton believed that in order to succeed in efficiency and profitability, the business could sacrifice the people who perform certain tasks and who have contributed this success. To solve this problem the services and employees of an entity must work at the highest level of capacity but at the same time while at deal with downsizing. It includes profit increase from activity gains, return on investment, revenue growth and changes from price recovery. The customer perspective measures the value a company provides to its customers, as well as the customer's view on the company. In other words when consumers are not satisfied with an entity's product or service, they will change to another company that satisfies their needs. Kaplan and Norton recommend that, "companies also attempt to identify and measure their company's core competencies, the critical technologies needed to ensure continued market leadership" (Kaplan and Norton, 1992). This assumption is related to internal business perspective which provides a view in what areas a firm can be competitive. Finally the learning and growth perspective involves employee training and corporate cultural attitudes in the direction of both individual and corporate self-improvement. In order for the company to compete in a changing business environment it must focus in the development of new or the improvement of existing products and processes.

Tesco has adapted the balance scorecard technique, in order to guide their measurement and analytics activities. Above all, Tesco aims to continuously improve performance by actively engage its employees, and make sure they have the analytical skills to test ideas and satisfy their customers' needs. Sir Terry Leahy, Tesco's Chief Executive Officer, said: 'never stop listening to your customers and giving them what they want'. As a result Tesco has become number three company in the world.

Another SMA technique is the strategic cost and value chain analysis which is outlined by Porter (1985). It is a chain of different value added activities were products pass through and gain value at each stage. It is a model were an organization brakes down its business cycle into strategic activities, in order to add value to a product or service. By using this technique, the entity can recognize in which areas its costs are high or low, and also compare and differentiate them to its competitors. Porter (1985) suggested that the activities of a business could be grouped as primary and support activities. Primary activities are directly related with the production and delivery of a product. Examples include inbound logistics, outbound logistics, and sales and marketing. On the other hand support activities are not directly involved in the production, but may lead to an increase in effectiveness or efficiency of the product. An example is the human resource management.

Apple Inc is a company that uses the value chain analysis. It start from creating new product design ideas, then uses its own resources and funding to design and independently manufacture it, and finally puts it in the market and sells it through its online store and 135 stores over the world. Apple then uses 5% to 9% of its sales in the research and development of new products, as well as distinctive marketing campaigns to attract customers. Finally Apple uses its customer service to create customer loyalty.

Every organization in the business world is different, and therefore must adopt different techniques to meet its standards and succeed. Therefore, the strategic management accounting involves a range of other techniques, including 'accounting for strategic positioning', 'costing of product attributes', 'competitor cost analysis', 'greater use of non-financial information' and 'activity based management' for the manufacturing firms to choose from.

Lord (1996) disagrees with Simmonds' case on SMA. She believes that although management accountants have highly developed skills, they cannot take advantage of the opportunities for cost reduction. In her case 'The Emperor's new clothes' she provides evidence to suggest that there is nothing new. The information provided is already used by non-accountants "Cost saving opportunities may be found by those at the operational level, not by managers or accountants, nor as a result of formal analysis" (Lord, 1996, p. 364).

To conclude, thirty years after SMA was first introduced, there is still no conceptual framework. There are arguments that SMA has made an impact on practice, scholarship and accounting, but not in the way that it was first introduced. The term SMA is still not understood in practice by some organizations and researchers. Sometimes its techniques are used by non-accountants in large organizations, which can result in the misconception of the term. Otley (2001) argue that SMA 'provides heat but no light'. SMA could be 'a figment of academic imagination', but moving beyond the terminology, we can see that the tools and techniques are widely used in many levels of organisations outside the traditional Accounting function, helping managers in decision making (Anderson 2007).