AFM 31130 Strategic Management Accounting By Isuru Manawadu

AFM 31130 Strategic Management Accounting By Isuru Manawadu B. Sc in Accounting Sp. (USJP), ACA

Content ØIntroduction to Management Accounting and Strategic Management Accounting ØA brief historical review of Management Accounting ØFinancial Accounting Vs. Management Accounting ØDecision Making process ØStrategic Management Accounting pracices ØImpact of Information Technology

What is Management Accounting ? Management accounting is concerned with the provision and use of accounting information to managers within organizations, to facilitate the managers in their decision making and management control functions. Unlike financial accountancy information (which, for the most part, is made publicly available), management accounting information is used within an organization and is usually confidential. 3 3

Management Accounting is "the process of identification, measurement, accumulation, analysis, preparation, interpretation and communication of information used by management to plan, evaluate and control within an entity and to assure appropriate use of and accountability for its resources”. - The Chartered Institute of Management Accountants (CIMA) 4 4

Financial Accounting focuses on preparing information for the use of internal and external decision makers. Management Accounting focuses on the requirements of Managers within the organization & the information they require making decisions. 5 5

Financial Accounting Vs. Management Accounting Financial Accounting Management Accounting Stewardship or business for the benefit of shareholders Seek to improve economy, efficiency and effectiveness of operations Time horizon Past Not only look at the past, but the present and the future which affects the operation of the company Report recipients External/ Outsiders namely Shareholders and Government(tax) Internal parties like Directors and Managers Principal Objectives 6 6

Financial Accounting Vs. M. A. Contd… Outputs Regulating framework 7 Summary (usually annual) comprehensive income statement , financial position statement and cash flow statement Accounting standards, Accounting concepts plus statutory requirement by the companies Act Detailed monthly and annual management accounts showing results by product and function ad hoc reports None prescribed 7

Cost Accounting Vs. Management Accounting ‘Cost Accounting is a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs’ 8 8

Decision Making Process Planning process 1. Identify objectives 2. Search for alternative courses for action 3. Gather data about alternatives 4. Select alternative courses of action 5. Implement the decisions Control Process 6. Compare actual and planned outcomes 7. Respond to divergences from plan

STRATEGIC MANAGEMENT “The fundamental idea of strategic planning is quite simple: Continuously re-assess what customers want, what competitors are doing, and other relevant environmental elements (such as emerging technology and trends in government legislation); size up these environmental changes; and use, or develop, available resources to turn these changes into advantages. Obviously, carrying out strategic planning successfully is a lot more difficult than understanding what it is. ” Atkinson, Anthony A. , Rajiv D. Banker, Robert S. Kaplan, and S. Mark Young, Management Accounting, Prentice Hall, Inc. , 1995, p. 471.

Strategic Management Accounting “The provision and analysis of financial information on the firm’s product markets and competitors’ costs and 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: 28)

STRATEGIC MANAGEMENT ACCOUNTING “Accounting exists within an business primarily to facilitate the development and implementation of business strategy. . . Three important generalizations emerge from this way of viewing management accounting: v. Accounting is not an end in itself, but only a means to help achieve business success v. Specific accounting techniques or systems must be considered in terms of the role they are intended to play v. In evaluating the overall accounting system. . . the key question is whether the overall fit with strategy is appropriate. ” Shank, John K. and Vijay Govindarajan, Strategic Cost Management, The Free Press, Macmillan, Inc. , 1993, pp. 6 -7.

Surveys of Strategic Management Accounting Practices. v Competitive position monitoring v Strategic pricing v. Competitor performance appraisal v. Competitor cost assessment v. Strategic costing v. Value chain costing v. Brand value monitoring v. Brand value budgeting v. Quality costing v. Life cycle costing v. Target costing Bromwich, 1990

STRATEGIC MANAGEMENT AND ACCOUNTING Strategic Management v. Stakeholder analysis v. Corporate objectives v. Sustainable competitive advantages Strategic Management Accounting v. Appropriate analysis v. Long-term considerations v. Nonfinancial data

STRATEGIC MANAGEMENT AND ANALYSIS Strategic considerations v. Strategic Marketing Analysis v. Total Value-Chain Analysis v. Target Costing v. Life-Cycle Management and Costing Operational considerations v. Activity Based Analysis v. JIT Operations: A Management Philosophy v. Total-Quality Management and Costing

Strategic Cost Management Strategic position analysis-an organization’s basic way of competing to sell products or Value chain analysis--the study services. of value-producing activities, stretching from basic raw materials to the final consumer of a product or service. Cost driver analysis--the study of factors that cause or influence costs.

Porter’s Strategic Positions üCost leadership üProduct or service differentiation üFocus on market niche

DEVELOPING COMPETITIVE ADVANTAGE Superior Differentiation Advantage Differentiation with Cost Advantage Stuck-in-the Middle Low Cost Advantage Relative Differentiation Position Inferior Superior Relative Cost Position

VALUE CHAIN ANALYSIS Focus of the analysis v. External vs. Internal (traditional) v. Highlights profit improvement areas üLinkages with suppliers üLinkages with customers üProcess linkages within a business unit üLinkages across business units Steps in the analysis v. Identify an industry’s value chain v. Assign costs, revenues, and assets to value activities v. Diagnose cost drivers v. Develop sustainable competitive advantages

VALUE-CHAIN & STRATEGIC MANAGEMENT Service Research and Development Product And Service Process Design Customer Focus Production Distribution Marketing

ESTABLISHMENT OF TARGET COSTS Estimated Market Price Market Research Define Product/ Customer Niche Competitor Analysis Understand Customer Requirements Target Cost Define Product Features Required Profit

Group Activity Instructions - Each group should have 5 students - At least two members should present about the findings Topic -Explain the impact to the Strategic Management Accountingon Information Technology

Explain the impact to the Strategic Management Accounting on Information Technology v. E- Commerce v. ERPS

& Questions 24 Lecturer - Isuru Manawadu Answers