1. Strategic Management Accounting
Chapter 18
Strategic Management Accounting
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,
© 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition, 978XXXXXXXXXX, Chapter X

2. Accounting for Managers, 4th edition,
Overview
From management accounting to strategic management accounting (SMA)
Techniques to support SMA
Value chain & supply chain management, human resource accounting, activity-based cost management, lifecycle costing, target costing, kaizen costing, Just in Time, backflush costing, lean accounting
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

3. Accounting for Managers, 4th edition,
From MA to strategic MA
The definition of management control systems has evolved from a focus on formal, financially quantifiable information and now includes external information relating to markets, customers and competitors; non-financial information about production processes; predictive information; and a broad array of decision support mechanisms and informal personal and social controls (Chenhall, 2003).
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

4. What is strategic management accounting?
‘The provision and analysis of management accounting data about a business and its competitors which is of use in the development and monitoring of the strategy of that business’
Simmonds (1981)
‘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)
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

5. What is strategic management accounting?
The collection of competitor information on pricing, costs, volume, market share;
The exploitation of cost reduction opportunities through a focus on continuous improvement and on non-financial performance measures;
Matching the accounting emphasis with the firm’s strategic position.
Lord (1996)
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

6. What is strategic management accounting?
Non-financial performance measurement and a focus on business processes have extended the ambit of accounting beyond purely financial numbers.
Beyond the accounting period to a lifecycle view.
Beyond the organizational boundary to the supply chain.
Benchmarking with competitors
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

7. Accounting for Managers, 4th edition,
SMA and accountants
Is strategic management accounting the responsibility of accounting, operations or marketing?
The results of SMA are the natural outcomes of effective operational management processes … firms successfully collect and use competitor information without any input from the management accountant
Lord (1996)
“The costs of capturing, collating, interpreting and analysing the appropriate data out-weighs the benefits”
Dixon (1998)
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

8. Accounting for Managers, 4th edition,
The dimensions of SMA
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

9. Accounting for Managers, 4th edition,
SMA & ERP
Enterprise resource planning (ERP) systems are being developed in three directions:
supplier facing to meet the needs of supply chain management (SCM);
customer facing with a customer relationship management (CRM) function;
management facing to support the information and decision-making needs of managers.
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

10. Techniques to support SMA
Value chain & supply chain management
Human resource accounting
Activity-based cost management
Lifecycle costing
Target costing
Kaizen costing
Just in Time
Backflush costing
Lean accounting
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

11. Value chain & supply chain management
To understand the costs and profits of suppliers and distributors. This information can be used during the negotiation process and can lead to collaboration to improve efficiencies in the supply chain
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

12. Human resource accounting
Employees can be a major source of organizational profits, because it is the knowledge that is held by labour that is crucial to maintaining a competitive advantage and satisfying customers. Taking a longer term perspective on the investment in, and cost of replacing labour
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

13. Activity based management
Controlling activities that consume resources, i.e. controlling costs at their source:
The entire set of actions that can be taken, on a better informed basis, with activity-based cost information
Kaplan & Cooper (1998)
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

14. Activity-based cost management
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

15. Activity-based cost management
The horizontal ‘process view’ reflects the cost drivers of activities and traces these to performance measures to suggest areas for improvement
The vertical view is used for product costing and decisions about pricing and profitability
The horizontal view takes a more strategic approach than the financially dominated and typically short-term orientation of the vertical focus on cost objects
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

16. Accounting for Managers, 4th edition,
Life cycle costing
Life cycle costing estimates and accumulates the costs of a product/ service over its entire life cycle, from inception to abandonment.
This helps to determine whether the profits generated during the production phase cover all the life-cycle costs.
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

17. Accounting for Managers, 4th edition,
Life cycle costing
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

18. Accounting for Managers, 4th edition,
Life cycle costing
Management accounting has traditionally focused on the period after product design and development, when the product/service is in production for sale to customers.
However, the product design phase involves substantial costs that may not be taken into account in product/ service costing.
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

19. Accounting for Managers, 4th edition,
Target costing
Target costing is concerned with managing whole of life costs during the design phase
Target price – Target profit margin = Target cost
Determine the target price which customers will be prepared to pay for the product/service;
Deduct a target profit margin to determine the target cost. This is the cost to which the product/service should be engineered;
Estimate the actual cost of the product/service based on the current design;
Investigate ways of reducing the estimated cost to meet the target cost.
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

20. Example of target costing
Target price $1,000
Target margin 20%
= $200
Target cost $800
But, design suggests cost is $900
Action taken before going into production
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

21. Accounting for Managers, 4th edition,
Kaizen costing
Literally ‘improvement’ - making continuous, incremental improvements to the production process.
Target costing is applied during the design phase, kaizen costing is applied during the production phase of the life cycle when large innovations may not be possible.
Target costing focuses on the product/service. Kaizen focuses on the production process, seeking efficiencies in production, purchasing and distribution
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

22. Accounting for Managers, 4th edition,
Just in Time (JIT)
JIT aims to improve productivity and eliminate waste by obtaining components for production in the right quality, at the right time and place to meet the demands of the manufacturing cycle.
It requires close cooperation within the supply chain and is based on low inventory which is considered to be waste
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

23. Accounting for Managers, 4th edition,
Backflush costing
Eliminates detailed transaction processing of raw material issues and labour times.
Finished goods output from the production process determines the amount of materials to be transferred from raw materials to finished goods (based on the expected usage and cost of materials) at a ‘trigger point’.
There is no separate accounting for work in progress
There is no variance analysis
Focus on ‘total cost of ownership’: quality, on-time delivery, reliability, inventory holding and the cost of transaction processing
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

24. Accounting for Managers, 4th edition,
Lean production
Lean production focuses on production processes as a continuous flow or “value stream”, rather than on the hierarchical organization structures
‘Pull’ rather than ‘push’ production
Benefits are lower costs, reduced waste, higher product quality and shorter production lead times
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

25. Accounting for Managers, 4th edition,
Lean accounting
Lean accounting does not require standard costing, activity-based costing, variance reporting, cost-plus pricing, etc.
Value-stream accounting assigns employees and assets to a value stream, rather than allocate costs to cost centres.
Performance measures are developed for each value stream and overhead costs are directed to specific value streams, resulting in less arbitrary overhead allocations.
Each value stream has its own financial statements, which provide the information to enable value-stream managers to make decisions to improve the profitability and growth of the value stream, because the focus is on more direct costs.
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

26. Accounting for Managers, 4th edition,
Lean costing & pricing
Value-stream costing measures how much value is added in each step of the process, by costing the various value streams backwards from the customer to their source
Value-based pricing is based on value to the customer, under which the prices of products/services are set according to the value created for customers.
The proponents of value-stream pricing argue that the price of a product is unrelated to the cost of supplying that product. The price is entirely determined by the amount of value created by the product in the eyes of the customer
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,

27. Accounting for Managers, 4th edition,
Key points
Management accounting v. strategic management accounting
Linking MA techniques with strategy,
beyond accounting numbers to incorporate the non-financial;
Beyond the accounting period to the life cycle; and
beyond the organization to the supply chain and benchmarking with competitors
Techniques to support SMA
Value chain/supply chain management, human resource accounting, activity-based cost management, lifecycle and target costing, kaizen, JIT, backflush & lean approaches.
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,