Future of Management Accounting in Strategic Management Accounting

Cite this

Abstract

The management accounting profession has quickly evolved in recent years as managers seek ways of improving a company’s competitiveness. Traditional accounting methods may no longer serve in the same capacity in modern-day businesses. Companies have recognized the need for investing in product improvements, efficiency in operations, and competitive advantages. This article seeks to discuss the importance of the adoption of strategic accounting management over the traditional management accounting system. The discussion starts by offering a brief on the limitations of management accounting and then puts across the need for change into the modern-day strategic management accounting process.

On-Time Delivery!
Get your customized and 100% plagiarism-free paper done in as little as 3 hours
Let’s start
322 specialists online

Introduction

The business environment is gradually changing and becoming more dynamic, requiring companies to adopt market-driven factors. However, companies have been slow in the transition from management accounting function in the recent past, to more suitable systems that incorporate both financial and non-financial information. Managers previously based their decisions on historical data, as they strived to assign costs to operational processes.

In the past, management accounting used concepts such as break-even analysis, opportunity costs and sunk costs. This model of management accounting gradually evolved to include statistical data that would estimate cost behaviors and differentiate between financial information and cost accounting information. Management accounting information was consequently used as a reference point when making decisions about pricing objectives and evaluation of operational efficiency.

This discussion mentions the limitations of management accounting and focuses on the need for implementing strategic management accounting. Strategic management accounting came as a result of the inefficiencies of management accounting (Simons 1999, 24-43). The latter model failed to consider the role of knowledge, innovation and other critical activities, for instance marketing and quality assurance, in the derivation of strategy.

While strategic management accounting is not used by a significant proportion of businesses, managers are increasingly getting aware of the benefits that pose to be derived from the system. There is greater pressure from consumers and shareholders for a company to perform; consumers determine a company’s market share, while shareholders are quick to let go of managers who don’t meet their ambitious objectives (Kaplan R.S. 1983, 686-705). Therefore managers have to use external information in the formulation and implementation of the strategy to satisfy the requirements of all stakeholders.

Management Accounting (MA)

Management Accounting (MA) is a practice used by managers to derive accurate and timely financial and statistical information that will be used as a reference point in the making of operational decisions (Weetman 2006, 15). The results from the MA function typically involve cost estimates, sales figures, available resources and capacity utilization. Tools used include trend charts, variance analysis as well as other statistical tools. The key feature of MA is the variance analysis tool which assists management in the comparison of actual results and budgeted estimates, information of which will be used in decision making. MA serves to solve problems specific to the company’s operations, such as profitability in a production line. For this purpose, management accounting is mostly exercised by the concerned department.

Limitations of MA

MA relies heavily on historical financial and cost accounting data to determine future decisions and as such, the correctness or effectiveness of MA depends on the quality of such data. Incorrect information may cause the management accounting process to give unreliable analysis results. The primary focus of MA is to provide information that will be used in decision-making (Sheth & Mittal 2004, 58). Managers rely on such information to make intuitive decisions, thereby avoiding lengthy decision-making processes. In so doing, management may not develop creative new ideas that could be vital for the company’s objectives.

Yes, we can!
Our experts can deliver a custom Future of Management Accounting in Strategic Management Accounting paper for only $13.00 $11/page
Learn More
322 specialists online

Furthermore, MA does not reflect cost savings derived from quality improvements, a result of lack of quality measurement techniques. Management accounting results are not necessarily an indicator of desired performance. While transactions such as disposal of low book value assets and reduction of discretionary expenditures such as research and development, labor costs and marketing expenses may reflect well on the balance sheet, they do not indicate a company’s profitability potential.

The management accounting function only provides useful information for management, but such analysis does not offer any decision or implementation procedures. Therefore, MA is not a determinant of choice of the decision or the implementation process. Significantly, management accounting provides information specific to certain procedures. In the modern world, businesses are increasingly hiring managers who may be unfamiliar with the company’s field of enterprise. Consequently, these managers may not comprehend the management accounting information in the various operation processes, thus MA may not be as effective in the decision-making process.

Management Accounting is only a stage to go through in a decision-making process. The tools and procedures involved may give differing results, explaining why conclusions drawn from analysis are not always the same (Stickney 2006, 74-97). The interpretation of Management Accounting results is influenced by the personal judgment of managers. Therefore personal bias may affect the effectiveness and objectiveness of the MA process.

The management accounting process may encounter resistance in some departments since it requires changes in the organizational setup (Bennet et al. 61-89). The new rules and regulations that could be implemented may affect several positions, increasing the chances of lack of coordination in those offices which may result in undesired results. A management accounting system is quite costly to set up and implement, being the reason that it’s mostly used by big companies. Smaller entities are therefore limited in the use of the system, and cannot, therefore, experience its potential benefits.

Strategic management accounting (SMA)

SMA can be described as a business practice that improves a company’s competitiveness, financial strength, and profitability. The practice involves concepts of Management Accounting but goes on to include information external to the company which could be non-financial in detail. Simmonds (1981, 4-16), one of the pioneers in the field, points out that SMA uses a combination of management accounting and information about a company’s external environment in the development and implementation of a business strategy. External information could involve cost and price movements in the market, competitor activities, market share data and regulative information.

Bromwich & Bhimani (1994, 41-65) claims SMA adds a strategic point of view to traditional management accounting, thereby making a company more competitive. For SMA to be effective, the strategy should be based on cost analysis and competitor information, while management should monitor changes periodically. This could be done by first attributing costs to products, and determining the value derived by consumers of those products.

For strategic management accounting to be effective, a company should focus on four important areas. Competitor focus will enable the organization to strategize on its competitive position. Long-term focus will safeguard future profitability objectives rather than short-term goals. Process orientation will enable the organization to be more effective and efficient in its operational procedures while customer attention ensures that the company’s products and services remain attractive in the market.

Cut 15% OFF your first order
We’ll deliver a custom Accounting paper tailored to your requirements with a good discount
Use discount
322 specialists online

Benefits of Strategic Management Accounting

SMA could be used by management to provide cost leadership strategies and economic solutions that will improve a company’s market and overall financial position. Since SMA focuses on enhancing a company’s competitive advantage in its industry, the company stands to benefit from more revenues and profits. This advantage could be vital for the firm’s long-term missions and could be used for expansions purposes or help the company enter into new markets. Strategic management accounting can also assist the management team to decide on internal factors that may contribute to the profit margins. The function could suggest the dropping of a given business line that does not promise to add value to the company in the long term (Bennet, Rikhardsson & Schaltegger 2003, 135).

SMA, through the inclusion of external information, allows a company to acquire a favored market position by use of cost leadership, differentiation strategy or a blend of the two strategies. Differentiation will lead to greater customer satisfaction, which could increase revenues for the business. Differentiation may also enable the firm to target customer segments more effectively. Chosen strategies influence success factors, for example, superior products in the market, service delivery, efficiency in operations or in the achievement of economies of scale that determine the long-term profitability of the organization.

Development of SMA

Traditional management accounting could be viewed as inadequate because it provides limited information and provides data only relevant to concerned departments. MA focuses primarily on operational activities while ignoring other costs incurred while transforming the product into a consumer-available state. MA also fails to include factors prevailing in other company activities, such as marketing and labor costs. Managers using MA extensively fail to consider competitor positions; hence decisions made are usually from an accounting perspective.

Strategic Management Accounting, on the other hand, is long-term focused. While relying on management accounting information for example the company’s cost position, SMA provides alternatives that ensure potential advantages for the firm such as costs of differentiation. Differentiation costs are expenses incurred in making a company’s product more attractive in the market. Michael Porter, an authority in strategic management, explains five competitive factors that influence a company’s long-term profitability (Roger 1999, 17).

The threat of new entrants, as illustrated by Porter, is mostly influenced by ease of entry and exit in a company’s industry. Large companies are less likely to be affected by this threat if they continue making investments that cement their market leadership positions (Atkinson et al 2001, 113). Government regulation plays a major role in the market, as the government tries to enhance healthy competition that results in the most benefits for the end consumers. Enhanced competition may not necessarily expand the market, meaning that new entrants would only operate at the expense of rivals. Firms, therefore, have to strategize and ensure they compete successfully while complying with government regulations.

The world is evolving at a tremendous rate, where changes in technology may make or break a company. This is the threat of substitute products, which means that organizations that do not continually innovate face the possibility of being obsolete, or being overtaken by competitors. Companies could also benefit by changing into more efficient operating models. Japanese automakers, for example Nissan and Toyota, have adopted just-in-time systems that enable them to compete in the global market (Blocher, Chen & Lin 2001, 109).

The threat of existing competition has forced firms to be more efficient in their operations. Companies have realized that they can no longer afford the simplest and basic of products if they want to compete. Firms have to offer products and services that are consumer-focused; therefore investment in value is critical for their existence. SMA allows companies to focus on targeted competitors, and use approaches that ensure competitive advantages. Companies initially fought local companies in the market, but globalization has meant that they have to change strategies and compete with multinational companies.

Get a custom-written paper
For only $13.00 $11/page you can get a custom-written academic paper according to your instructions
Let us help you
322 specialists online

Companies are facing renewed bargaining powers of supplies and consumers. Supplies can negotiate higher prices that they charge for their products and services, which minimizes a firm’s profitability by adding on to the cost of operation. Consumers can negotiate lower prices in the market, which reduces the company’s revenue figures. Consumers’ bargaining power comes from their ability to choose alternative products in the market, while supplier power is derived from their ability to provide required products and services. A company’s positioning strategy determines whether the firm will experience profits at or above the industry average.

The above factors that determine a company’s competitiveness can be achieved by implementing strategic management accounting since the system is goal-oriented. Several strategies that would ensure include cost leadership, differentiation and focus. A cost leadership position means that the company has to operate at the lowest costs in the market so as to be in a better position to pass on the cost savings to its consumers. Cost minimization techniques would require waste reduction, minimal marketing activities, tighter cost controls and improved efficiency in operations. If a firm focuses extensively on cost reduction, then management may make decisions that would deny value to consumers. Profitability in this strategy will be achieved through economies of scale (Kaplan, R. S., 1983, 696; Wolk, Dodd & Tearney 2003, 56).

Through differentiation, companies seek ways of increasing value to customers, allowing them to charge premium prices for their products and services. Strategies that could be directed towards differentiation could aim at improving a company’s image, quality of service, and product design. Through strategic management accounting, managers can assess their company’s strengths and weaknesses in the effort of differentiating products and services, while opportunities and threats in the market could be analyzed in order to determine if the differentiation strategy is feasible. The focused approach includes variations of the last two strategies, whereby companies could choose to focus on cost leadership, differentiation focus, or a combination of the two in varying degrees.

Another approach in strategic management accounting is value chain management. Porter identifies value as what customers are willing to pay for a product or service, and this usually results from the image of the product. The value chain involves several elements; all influenced by related costs, some of which are within the control of the company, while others are determined by the market. These elements include the firms’ infrastructure, human resources, technologies employed, operations, services and marketing and sales activities.

Managers should strive in ascertaining that the costs of the various elements result in healthy margins. A key driver for a company’s competitiveness would be in ensuring that the total costs of the elements are lesser than those of competitors. If the costs of the elements are higher than those of competitors, then management should use SMA to develop strategies that guide the control of the key cost drivers. Decisions made could be aimed at creating cost savings, or improving the productivity of the concerned departments.

Companies can improve margins by reducing internal failure costs in case of operations or analyzing external failures. External failures come from ineffective marketing, sales or service procedures. The main threat of cost reduction is that it mainly serves to reduce operational costs in the short term, but such a strategy could damage the image of a company’s products and may resultantly lower consumer confidence. A late investment in the quality of the product would be ineffective as the damage has already been done and competitors have already reacted.

The cost strategy is mostly applied by cost accountants and is therefore a shortcoming of Management Accounting (Johnson & Kaplan 1991, 195). Managers that rely on MA focus almost exclusively on the reduction of production costs to the detriment of conversion costs that add to a company’s competitiveness. Managers could recruit cheap labor, use cheap standard parts all in the name of improving bottom lines. The end result of this would be products targeted to low-income groups who may not provide the required scale economics. The SMA function brings in the costs of marketing, promotions, and costs of product design in the equation. Managers of successful companies have realized that customer satisfaction is a key driver in a company’s competitive advantage.

Conclusion

Strategic Management Accounting is more long-term oriented than traditional management accounting. While management accounting focuses on managing operational costs, SMA goes a step further in including external information in the decision-making process. Management accounting only provides internal operational information, such as production output and costs. On the contrary, strategic management accounting provides industry information and provides a recommended strategy and implementation process. SMA provides projections that go beyond short-term target limits imposed on by MA (Kieso et al 2007, 26-76).

The greatest contribution of SMA could be the value-added function which emphasizes the need for companies to enhance value to consumers. The use of non-financial information, such as competitor and market data, could be used to arrive at strategies that improve a company’s competitive advantage.

As portrayed in the main discussion, a company should consider the threat of new entrants and substitute products, the intensity of rivalry in the industry and the bargaining power of suppliers and consumers. Management should pick a strategy that incorporates the profitability objective so at to satisfy shareholders, while the achievement of customer satisfaction ensures sustainable revenues in the future, as well as a reason for setting premium prices for quality products and services. A suitable model should build on relationships over time, and establish cause-effect relationships between strategy and results. Such measures will determine the performance of the firm across the whole value chain. Measures drawn in this case have to be theoretical and objective.

It should be noted that the implementation of SMA is quite difficult and expensive, especially for smaller firms. Most accountants are simply trained in the collection, preparation and analysis of financial reports; hence there is a common perception that accountants merely maintain rather than add value to corporations. SMA seeks to change this perception by involving accountants in the formulation of strategy, by expanding on the management accounting field.

Reference List

Atkinson, A. A., Banker, R. D., Kaplan, R. S. & Young, S. M., 2001. Management Accounting, 3rd edn. New York: Prentice Hall.

Bennet, M., Rikhardsson, P. M. & Schaltegger, S., 2003. Environmental management accounting: purpose and progress. Pennsylvania: Springer.

Blocher, E. J., Chen K. H. & Lin T. W., 2001. Cost Management: A Strategic Emphasis, 2nd edn. New York: Irwin McGraw-Hill.

Bromwich, M. & Bhimani, A., 1994. Management Accounting. London: Pathways to Progress.

Johnson, H. T. & Kaplan, R. S., 1991. Relevance lost: the rise and fall of management accounting. New York: Harvard Business Press.

Kaplan, R. S., 1983. “Measuring manufacturing performance: A new challenge for managerial accounting research.” The Accounting Review, pp. 686-705.

Kieso, D. E., Weygandt J. J. & Warfield, T. D., 2007. Intermediate Accounting, 12th edn. Melbourne: Wiley.

Roger, A., 1999. “Performance Indicators for Sustainable Development.” Accounting & Business, pp 16 – 19.

Sheth, J. N. & Mittal, B., 2004. Customer Behavior: A Managerial Perspective, 2edn. Dallas: South-Western Educational Publishing.

Simmonds, K., 1981. The Fundamentals of Strategic Management Accounting. London: The Chartered Institute of Management Accountants.

Simons, R., 1999. Performance Measurement and Control Systems for Implementing Strategy Text and Cases. New York: Prentice Hall.

Stickney, C. P., 2006. Financial Accounting: An Introduction to Concepts, Methods and Uses. Dallas: South-Western.

Weetman, P., 2006. Financial and management accounting: an introduction. New York: Financial Times Prentice Hall.

Wolk, H., Dodd, J. & Tearney, M., 2003. Accounting Theory: Conceptual Issues in a Political and Economic Environment. Dallas: South-Western.

Cite this paper

Select style

Reference

BusinessEssay. (2022, February 18). Future of Management Accounting in Strategic Management Accounting. Retrieved from https://business-essay.com/future-of-management-accounting-in-strategic-management-accounting/

Reference

BusinessEssay. (2022, February 18). Future of Management Accounting in Strategic Management Accounting. https://business-essay.com/future-of-management-accounting-in-strategic-management-accounting/

Work Cited

"Future of Management Accounting in Strategic Management Accounting." BusinessEssay, 18 Feb. 2022, business-essay.com/future-of-management-accounting-in-strategic-management-accounting/.

References

BusinessEssay. (2022) 'Future of Management Accounting in Strategic Management Accounting'. 18 February.

References

BusinessEssay. 2022. "Future of Management Accounting in Strategic Management Accounting." February 18, 2022. https://business-essay.com/future-of-management-accounting-in-strategic-management-accounting/.

1. BusinessEssay. "Future of Management Accounting in Strategic Management Accounting." February 18, 2022. https://business-essay.com/future-of-management-accounting-in-strategic-management-accounting/.


Bibliography


BusinessEssay. "Future of Management Accounting in Strategic Management Accounting." February 18, 2022. https://business-essay.com/future-of-management-accounting-in-strategic-management-accounting/.