This essay will consider whether or not the future of management accounting lies in the form of strategic management accounting or not. In order to answer this question, the paper will firstly consider the concepts of both management accounting and strategic mismanagement accounting, before going on to consider the limitations of management accounting. The paper will then consider, to what extent strategic management accounting as a concept is able to off set the problems and limitations associated standard management accounting processes and practises.
In considering the relevance of such a question, Drury (2004) gives a good outline as to the issues which have brought about the need for a change in the way management accounting is viewed. Here Drury argues that, whilst management accounting is concerned with the provision of information to internal stakeholders within an organisation, the information provided is to be used for the purposes of decision making. Drury (2004) argues that increasing levels of globalisation, changes in customer and consumer demands and an increasing level of competition have all led to an increased need for firms to become more efficient. As such, one consideration is that, whilst management accounting information is designed to be used by internal by stakeholders, such information will be used to make decisions, which help a firm to react to a very changed external business environment.
2.0 Key Concepts
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In the first instance, one should define the concepts of management accounting and strategic management accounting. Accounting is traditionally split into two broad categories in the form of financial accounting and management accounting (Dyson 2007). On the one hand, financial accounting is concerned with the communication of information largely to external stakeholders such as shareholders, taxation authorities and Companies House (Brigham and Ehrhardt 2005). Financial accounting typically sees a focus on a business wide view of a company's financial position and is focused on the meeting of statutory requirements and compliance with regulations.
Management accounting on the other hand is focused on the provision of information to internal stakeholders, such as financial managers and operations staff. The point of management accounting is to provide information, which is useful to managers of all departments and levels, so as to enable better decision making (Drury 2004). Management accounting differs from financial accounting, in that there are no legal requirements for the provision of management accounting information and management accounting practises are likely to focus on specific segments of an organisation, rather than the reporting of business wide statistics.
However, recent years have seen the development of another form of management accounting in the form of strategic management accounting (SMA). Despite the popularity of strategic management accounting sources (Drury 2004, Coad 1996, Tomkins and Carr 1996) indicate that there is in fact no precise definition of what strategic management accounting is or a specific framework for its further development. Instead, common observations consider that strategic management accounting is the provision of accounting information to internal stakeholders, which enables an organisation to make better decisions with regard to achieving the overall business and corporate level strategy of the firm (Innes 1998). As such, like all strategic version of a given functional area (such as a strategic marketing), strategic management accounting may be seen as a link between a standard functional area of a business and the development of the function into a contributor to the organisations wider strategic objectives.
3.0 Management Accounting Limitations
One of the major limitations highlighted by academics on the subject of management accounting is that standard management accounting is often too focused on the internal environment of a business (Simmonds 1986). Whilst decision makers do make decisions constrained by the specific internal factors and resources of a company, one argument is that such decisions should always be taken, in the context of the external environment. As such, one concern is that such a level of internal focus on the behalf of management accountants in the standard sense of the concept can leave decision makers in a position of making decisions blinded to the issues and events arising in the external environment.
Another angle which outlines the limitations of management accounting is highlighted by Johnson and Kaplan (1986). In the first instance, Johnson and Kaplan indicate that management accounting developed in an era when there was a distinctive need for the development of the management accounting system. As such, the management accounting processes and practises are designed specifically for use in the large multilayered and hierarchical organisations of the day. As such, Johnson and Kaplan (1986) argue that one of the key limitations of the management accounting perspective is that it simply was never designed to fit into the much flatter organisations that were beginning to emerge during the nineteen eights when Johnson and Kaplan published their work. Additionally, Johnson and Kaplan go on to consider the role and development of financial accounting, here the authors give the opinion that developments within the field of financial accounting have led to a situation where management accounting can often merely duplicate the efforts of financial accountants thus begging the question as to whether or not management accounting has a role any more.
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Other limitations of management accounting consider the nature of placing such a high emphasis on financial and cost based systems in the first place (Kaplan 1984). One view is that the use of management accounting as a way of informing the decision making process ignores the true nature of the concept of value. From a management accounting view, value is always associated with the concept of cost controls and reductions. However, from a strategic perspective the concept of value is not necessarily associated with reductions in costs, nor may it always be associated with financial value. A range of sources from other strategic disciplines (Porter 2004, Kottler et al 2009) give a distinctly alternative view as to the value of an organisations offerings in the context of the external environment. As such, one conclusion is that one of the main limitations of management accounting, is that it places an over emphasis on the financial value or financial aspects of a decision. In reality a manager making a decision, purely on the basis of financial data may make a decision which is financially sound considering the constraints of the internal environment. However, in the context of the company's overall strategy, the decision may turn out to be misaligned with the wider needs of the company's strategy and those of the wider external environment.
Further limitations of the management accounting concept relate to the very nature of the concept, which often sees management accounting information and decisions relegated to the departmental or divisional level, rather than the organisational level (Drury 2004). As such, this can create a number of problems for the organisation. In the first instance there is an issue over co-ordination of activities, separate layers of management accounting practises are likely to lead to different decisions being taken in different departments or divisions of a business, as such the decision making process from the whole organisational perspective can become a fragmented one, with each individual department making optimal decision but overall a lack of consistency being achieved throughout the organisation as a whole.
The second issue is that such a departmental or divisional approach can lead to competition between departments, which results in wasted resources or duplication of work. Such a consideration is that this kind of management accounting may facilitate the negative elements of competition, rather than the building of synergies within the business.
4.0 Strategic Management Accounting
In the first instance the major difference between standard management accounting and strategic management accounting may be seen as one of focus. Where the concept of management accounting is specific to the operations and activities of the organisation, at the operations, departmental and divisional level, the concept of strategic management accounting is designed to take the same principals but to apply these to the organisation as a whole (Drury 2004, Dixon and Smith 1993). As such, the first major limitation within management accounting, and one the sources of further limitations is solved by the general approach of the whole concept of strategic management accounting.
One further issue identified in the context of standard management accounting was with the concept of the perception of value. Strategic management accounting takes a more varied approach to the concept of value and competitive advantage, broadly seeking to be a part of the process of allowing a company to create a competitive advantage based upon one of Porter's (2004) three generic strategies of cost leadership, differentiation or market focus (Drury 2004). A consideration in the analysis of standard management accounting is that such a concept would automatically lead to only the ability to deliver a cost leadership strategy.
Those in the literature (Porter 1980, Simons 1987, Langfield-Smith 1997) suggest that where firms choose to pursue differing generic strategies, then the role of strategic management accountants is to set up systems and processes which align the whole value chain of an organisation to the singular pursuit of a generic strategy. Thus Porter (2008) and Langfield-Smith (1997) argue that, where a cost leadership strategy is pursued, then the role of strategic management accountants will be to initiate a system of processes and practises which focus on cost controls and the maximisation of efficacies. On the other hand, companies seeking to create a differentiated strategy through innovation are more likely to place an emphasis on forecasting and accounting data which is related to expected future performance as opposed to the backwards looking data often considered in the concept of a cost control environment (Ittner et al 1997).
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The single biggest factor which may be seen as relevant in solving the limitations of the concept of management accounting through the application of strategic management accounting may be seen as the fact that, where management accounting is an inward looking concept. Strategic management accounting is largely one that is an outward looking concept. Duruy (2004) indicates that the following elements are of importance to the strategic management accountant, many of which appear to have a distinctly outward looking perspective in comparison to the activities of standard management accounting:
Competitive position monitoring
Competitor performance appraisal
Competitor cost assessment
Brand value monitoring
Brand value budgeting
When each of these elements are considered, there are a number of trends which seem to emerge. In the first case, there is a much greater emphasis on two key elements within the external environment, namely competitors and the consumer (considered in the form of brand). Secondly, where the concept of strategic management accounting is concerned with internal considerations, those considerations relate to the whole organisation, as opposed to singular departmental or divisional concerns.
Thus far, strategic management accounting has been presented in a relatively positive light with an indication as to the benefits of strategic management accounting over those of standard management accounting practises. However, another argument may be to consider that within an organisation it may be both necessary and desirable for both concepts to exist at the same time. Whilst strategic management accounting no doubt adds value for firms, by co-ordinating the overall strategic approach to finance. This does not necessarily mean that management accounting should be discouraged within an organisation, even where strategic management accounting is being implemented. Whist it is important for organisations to follow a clear strategy, the fact is that on a day to day basis, managers and employees work and make decisions within a departmental or divisional structure. As such, an approach which provides information at such a level is always likely to have a great deal of value for those working at this level of seniority.
A further concern is that management accounting so far has been considered in the context of firms who have taken what the literature refers to as a "planed approach" to corporate strategy (Johnson et al 2008). However, one concern is that for many organisations, a planed approach to corporate strategy is simply not adopted, instead many companies rely upon an emergent strategy which comes about as a product of tradition and repeated patterns of behaviour. In such circumstances, it is difficult to see how the concept of strategic management accounting could fit into such organisations, given that in order to implement strategic management accounting one must in the first instance have a planed approach to corporate level strategy.
Having considered the research one can see that strategic management accounting certainly has a future and is one way in which a development may be made upon standard management accounting practises, so as to enable an organisation to better achieve its desired strategic objectives. However, the lack of a clear definition of strategic management accounting and the consideration that there is no clear conceptual framework for further development means that in effect, strategic management may be seen as a future development of management accounting, rather than the whole sale replacement of management accounting per se.
A final conclusion may be to consider that the future of management accounting will see a clearer split between the concepts of management accounting and strategic management accounting and that over time, the two concepts will be seen as both having a place within the organisation, rather than strategic management accounting being a natural development and successor of the concept of management accounting.