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As mentioned above, one of the key roles of a strategic management accountant will be planning. In this process, the accountant together with the management needs to set up objectives of Jessup ltd. Besides, they also need to identify any problems that may arise during their project. Once the objectives or problems are clearly found or established, the presence of strategic management accountant enables the company to collect and analyse the financial information regarding their company and also their competitors more efficiently and effectively since the accountant is professional in accounting field. That information collected must be relevance, accurate and complete so that it will not influence the decision made by the management. Again, with the presence of strategic management accountant, the level of accuracy, relevancies and completeness of the financial information collected is increased as the accountant who is expert will be more curious and sensible in finding out whether there is any problem arising from the information. Besides, the analysis of the financial information by a certified strategic management accountant will also gain higher percentage of reliance. Then, the management needs to identify alternatives which may help them to achieve the objectives or solve the problems.
Next, the key role of a strategic management accountant includes making decision. Once the alternatives are identified by the management, the accountant needs to collect any relevant data about each alternative and analyse those data. The accountant needs to draft out which alternative will be the best choice for the company to achieve its objectives or solve the problems according to the data anlaysed and according to their professional knowledge in accounting and strategy management. After that, the management will make the decision on which alternative is the best for their company in achieving their objectives or solving the problems with the aid of professional explanation and analysis of each alternative by strategic management accountant.
Moreover, the key role of a strategic management accountant includes participate in management controlling. In this process, the accountant is meant to obtain data about the actual results of the decision implemented by the management after go through the planning and decision making process. The strategic management accountant needs to compare the actual results with the expected outcome and assess the achievements. If the actual results obtained is similar or quite similar with the expected outcome, the decision they have made is correct and it can continue be used. However, if the actual result is not same with the expected outcome or have a very large different with the expected outcome, corrective action has to be carried out in order to bring actual results into line with the expected outcome.
Besides that, a strategic management accounting includes a prospective element evaluating the potential outcomes of various strategies. Otherwise, sets information about the business entity in the context of other businesses in the sector. And also sets the results of one period into a longer term analysis. A directs attention towards sequences and patterns in decision making and also attention to the competition for the manufacturing or service activity. Then, it is also expected to look to prospective activity. In addition, alternatively information can be classified the planning information, control information and operating information. The planning information is information needed to choose between alternative courses of action and to create plans. It is essentially forward-looking, consisting of forecasts and estimates. Control information is this compares actual results with the targets. And the operating information is information needed to carry out the day-to-day operations. This is eventually summarized and incorporated into reports which then become control information.
Furthermore, the strategic management accountant also responsible in determining the company's risk profile. Every company must have several types of risk such as market risk and operational risk. Those risks cannot be fully eliminated from the company but can only be minimized to a safety level. High level of risk are related to strategically moving a company from its current position to a desired future position and it requires substantial investment to be put in place for long periods of time. Thus, since Jessup ltd is a fast growing company, the presence of strategic management accountant is essential as he or she is able to plan strategically long term pathway for the company's investment with his or her professional knowledge. Meanwhile, the accountant can also make analysis which is part of the strategic planning process including forward projections to encourage managers and directors to develop the company's risk profile so that the company will make the correct investment which then brings profit to the company itself. Thus, the presence of strategic management accountant is important and essential in order to ensure that Jessup ltd is able to stand in a preferable position in the market among its competitors.
In conclusion, no matter in which key roles, either planning, decision making, controlling or determining company's risk profile, the strategic management accountant must have close communication with the management of Jessup ltd to have a better understanding on the company's need and wants and have professional motivation skills so that his or her professional knowledge will bring an achievement to the company. And yet, the presence of strategic management accountant able to make the workers of Jessup ltd has more confidence with the accounting function of the company. Besides, other people will also gain confidence of the company if the company's financial state is stable and this also enables the company to attract more investors into their company.
The relevant costs and revenues to the decision making required to only those that will be affected by the decision. When choosing different alternatives choice, the managers should be focus only on the costs and revenues across to the different choice, these are the relevant revenues and costs. A cost that is relevant to a particular decision. Relevant means linked or concerned, if an event has nothing to do with the situation, then it's irrelevant. The cash flows to consider when making decisions are only those that are directly relevant to the decision under consideration. A relevant cost is a future cash flow arising as a consequence of a decision. It is any costs incurred before, and have any committed costs which will be incurred regardless of whether they will be or not an investment is undertaken. They are not relevant cost because they have occurred, regardless of the investment decision were adopted. Besides that, relevant costs are future costs that also differ of alternatives. Differential cost is the different cost between two alternatives. This is the difference in cost items under two or more decision alternatives specially two different situations or projects. Thus, where the same item with the same amount appears in all alternatives, then it is irrelevant. An incremental cost is the cost associated with increasing production by one unit. The cost figure can be used for a variety of economic calculations, most notably the point at which increasing production ceases to be efficient or profitable. And, the marginal cost is the change in costs caused by a one-unit change in the company's production. So the marginal cost not includes fixed costs which do not change as output changes. For example, if the company's total costs increase by $3 when it provides a service to one more customer, marginal cost is $3. The company's marginal cost of production may also be referred to as the cost of the last unit produced. In economic theory, the ideal level of an activity is often determined by focusing on benefits and costs at the margin. Frequently, the benefits and costs of preceding units of the activity are not relevant. If the benefits from an extra unit exceed the costs, the activity should be expanded; conversely, if the costs of the last unit do not cover the benefits, the activity should be reduced. This is the cost difference of producing an additional unit, these are relevant cost. Besides that, the irrelevant cost consists of sunk costs, allocated costs and past costs that do not differ of alternatives. The sunk cost consists of past costs that have been incurred and cannot be avoided regardless of the alternatives being considered. These cannot be changed with any future decision. In addition, allocated costs is general admin and property costs that are incurred to support organization, example the fixed costs. On the other hand, overhead costs should be dealt with carefully. It is only cash expenditure is relevant, and so overhead items such as depreciation and notional rent should be ignored. In a system of absorption costing, the fixed overhead absorption rate is always irrelevant, because it has nothing to do with cash flows. And, the variable overhead absorption rate is designed to match the rate of expenditure on variable overhead item as output increases. For example, a garage has an old car lying around which it bought several months ago for $3,000. The car needs a replacement engine before it can be sold. It is possible to buy a reconditioned engine for $300. This would take seven hours to fit by a mechanics who is paid $4 an hour. At present the garage is short of work, but the owners are reluctant to lay-off any mechanics or even to cut down their basic working week because skilled labour is difficult to find and an upturn in repair work is expected soon. Without the engine the car could be sold for an estimated $3,500. The minimum price is:
Opportunity cost of the car 3,500
Cost of the reconditioned engine 300
The original cost of the car is irrelevant. It is the opportunity cost that concerns us. The cost of the new engine is relevant because if the work is done, the garage will have to pay out the $300; if the job is not done, nothing will have to be paid. This is known as an "outlay cost". The labour cost is irrelevant because the same cost will be incurred whether the mechanic undertakes the work or not. This is because the mechanic is being paid to do nothing if the job is not undertaken, thus the additional cost arising from this job is zero. It should be emphasized that the garage will not seek to sell the car with its reconditioned engine for $3,800; it will seek to charge as much as possible for the car. On the other hand, any price above the $3,800 will make the garage better off financially than not undertaking the job. In conclusion, relevant cost is expected future costs and the replacement of the courses of action might be eliminated if some of economic activities were charged or delete. And, irrelevant costs are not being affected the management of action. Example of irrelevant costs is sunk costs. Sunk cost is irrevocable now, and sunk cost also is past cost, such as depreciation on machinery. When faced with a selection, they are not relevant and should not be considered in a policy analysis. Balanced scorecard also includes in the term of Strategic Management Accounting. Integrates both non-financial and financial performance measures with incorporates performance management within the strategic management process. Operational objectives and performance measures have four perspectives. There are customer perspective, financial perspective, learning or growth perspective, and internal business perspective. This is meant by the terms relevant and irrelevant costs and revenues in Strategic Management Accounting decision making. The term of strategic management is the accounting applies to the identification measurement and communication of cost data where the organization is being judged against the performance of its competitors.
Activity based costing (ABC) system is very appropriate where overhead is a relatively important element of expenditure costs, and there are various kinds of product lines and possibly markets. The total operating expenditure it requires assigned the overhead spend and allocating it out over activities. The benefits of ABC system are more accurate measurement of resources consumed by cost objects. Benefits of ABC system also associated with producing more accurate product costs. This is because ABC system measures the resources, cost of production and allocates the overheads consumed according to the product's consumption of the activities. This is not like the traditional costing system, it cost all the products that all work and their consumption than a measure, and all resources in proportion to their production volumes and this resulted in too great a proportion of overheads to high volume products and vice versa. It also identifies that many overhead costs take place from the diversity and complexity of operations. ABC system does not simply uses an irrelevant direct labour hour recovery rate or machine hour recovery rate which assumes that overhead costs are related to the activities only. Indeed, it uses multiple cost drivers to allocate overhead costs to activities and products. This increases the accuracy of the computation of product costs again.
Next, the benefit of ABC system includes it makes use of unit cost or marginal cost in the computation rather than using total cost. This enables Jessup ltd to have higher accuracy of their cost allocation as ABC system takes into consideration of all overheads cost unit by unit instead of apportion the total overhead costs of consumed to each of its product or project.
Besides that, ABC system is beneficial to Jessup ltd in identifying some of the problems in business activities which are a burden or stress on the business such as wasteful or non-adding services. Since Jessup ltd is involved in advertising business, there should be some other extra service to its client companies other than advertising service. For example, giving several discount or package promotion if the client is engaged the business with Jessup ltd for a couple of year, and this extra service maybe wasted sometime if Jessup ltd did not control its budget while giving such service to their clients. Thus, ABC system enables Jessup ltd to find out whether the add-on services they gave are useful or wasteful and this will benefit Jessup ltd.
Furthermore, the use of ABC system supports performance management system employed by human resource department in current businesses. A fast growing company just like Jessup ltd requires carrying out performance management in order to make sure that the actual performance of the company is monitored and measured against the plans according to their strategies. One of the ways to examine the company's performance management is through scorecards. ABC system can support this type of company performance management as the computation of this cost more detailed than the traditional system of the cost of the system.
In addition, ABC system is easier for users to understand, interpret whether it is accessible and use. In other words, it improves understanding of overhead allocation and more relevant to the current global economy. Thus, they easily identify areas for improvement. This is because the results shown by ABC system in computing the product costs is much more detail than results shown by traditional costing system since it is concerned with all overhead costs. Besides, ABC system is reasonable to implement across all model of business sets-up. Likewise, this system provides better understanding on the concept of overhead costs. For example, the average distribution of business resources used on commercial realities of a few product line, and their relationship certain cost drivers.
Although ABC system is a useful costing system and it brings a lot of benefits for the company, there still have some problems in employing the system. Firstly, the problem of ABC is time consuming. This is because ABC takes into consideration of all resources and pooling of overhead costs into the computation of product costs. Besides, this system needs to collect a bundle of data for its computation process and also will calculate each unit cost for each activity which is involved in carrying out the business of the company. Other than that, it is also very time consuming in checking for the higher accuracy for each unit cost.
Next, it is more costly to implement and maintain. The identifying correct cost drivers that can be assigned to products. ABC system requires specific software and hardware for it to run and this software and hardware maybe expensive enough for the company to employ this system. Moreover, the cost of implementing and maintaining the system is also costly as it needs professional technician or worker to perform this system. Thus, the company may need to hire new workers who are expert in this system if Jessup ltd does not have such worker now.
Besides that, the problem of ABC is more and more complex than the traditional cost system. The traditional costing systems have two-stage allocation process. In the first stage traditional costing system tends to allocate costs to departments whereas ABC systems allocate costs to activities (ABC systems tend to have more costs centre or cost drivers). In the second stage traditional costing systems rely on a small number of volume-based costs drives (typically direct labour or machine hours) whereas ABC systems use many second stage cost drivers. In addition, the ABC system analysis are item of high value are not normally many in quantity and therefore tight control is possible. Then, items of medium value are average in quantity. Control measures are selective and can be simple. And also items of low value tend to be many in number. Since they are cheap, control over them may not be important. The criticisms of ABC system are the concept of unused capacity within the resource consumption model is questionable for physical resources. The reported costs may not significantly differ from a less costly traditional system if indirect costs are a low proportion of total costs. The ABC system unit cost must be used with care; they can suggest an inappropriate degree of variability.
In conclusion, ABC system is a quite useful costing system as compared with the traditional costing system. ABC system will bring a lot of benefits to Jessup ltd if they are able to overcome those problems associated with this system.