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Strategic Management Accounting

Paper type: Essay
Pages: 12 (2985 words)
Categories: Accounting, Management
Downloads: 3
Views: 5

Firms are now should face a lot of competition because a lot of changes in contemporary business, such as globalization of world trade, changing product life cycle, changing customers tastes that demand to improve levels of service in cost, quality, reliability, delivery and the choice of new products; and the emergence of e-business and so on. As a result of the defects of traditional accounting have been unable to meet these changes new management themes have evolved which in turn has resulted in the development of strategic management accounting.

Strategic management accounting aims to provide relevant information to an organization’s management to enable them to make strategic plans and strategic decisions. The emphasis is on external information on competitors, customers, markets, and environment and so on. Organizations cannot rely on financial information alone – non-financial information also plays an important part of the organizations’ decision making.

It can be argued that strategic management accounting has a positive role of supporting the financial needs of management in their task of directing and controlling the business in the best interest of its owners and other stake holders.

Types of management accountants Management accountants are responsible for the accounting system within organizations. An accounting system should be designed to assist financial and tax reporting for planning and decision-making. In small organizations, to manage the accounting function is usually by a bookkeeper who records the transaction.

An external accountant often assists the preparation of financial statements and tax returns. Focus on financial reporting tools, managers may not have relevant information more easily for planning purposes. Control decisions cannot be regarded as important because the manager to make these decisions is likely to be owner. In large organizations, like Jessup, controller is typically assigned responsibility for management accounting. The controller helps to assist decision-making and reports to the President or Chief Executive Officer (CEO) Manager.

The controller was commissioned communication and organization’s accounting policies, procedures and implementation of behavior, both consultants and assessment of other departments of the organization’s responsibility. The controller may also have assistant controllers who carry out specialized accounting and reporting duties. These controllers’ function is from the finance director, who based, such as investment, financing, banking and credit policy and finance-related transactions are different.

Controller is more than just collect information, they often as a strategic planning group and advisory services as a translator and a member of the behavior. Controller is expected to value-added management process. Jessup is a medium to large company, which is involved in advertising and public relations. In this organization, accountants act the role of controller, who often reports to the four advertising professional directors. Large organizations usually have an internal audit department and the organization’s control system work-related.

The responsibilities of this department are to achieve appropriate financial and organizational goals to ensure the effective use of business assets. Internal audit staffs keep an eye on the various divisions and departments of the company, and to determine whether the business arrangements are often directly to the Director of Audit Department. Jessup is a fast growing company that running very well and has reached a stage, but the directors need better management accounting function after the development of their company in the future.

So it needs company’s accountants apply professional judgment in deciding what information and methods can be used and how to establish and operate accounting systems within their organization. They undertake problem solving, scorekeeping and attention directing roles of management accountants. Problem solving involves comparative analysis for decision making, the accountants should judge in the several alternative available cases which is the best Scorekeeping, this involves accumulating data and reporting reliable results to all levels of management, it required accountants understand how the business is doing.

Attention directing involves helping managers properly focus their attention. Attention directing should focus on all opportunities to add value to an organization, not just cost-reduction opportunities. The roles asked pay attention to which opportunities and problems should be emphasized first. In the company, management accountants also need to face decisions that affect the welfare of people internal and external. The process of determining standards and procedures for dealing with judgmental decisions affecting other people is known as ethics.

In a global market, and with a trend to delegate decision making to lower levels of the organization, organizations often implement ethics programs to ensure that employees understand how ethics relates to the organization’s core strategies. Management accountants often provide ethical policy and strategy implementation, especially as they role in decision-making and control, advice and support. In a word, the accountants in Jessup undertake a role to help managers make intelligent economic planning and decisions, and help managers and other employees to aim and strive for goals of the organization.

Relevant and irrelevant costs and revenues for decision making One of the main problems that the organization should meet is how to classify and evaluate the relevant and irrelevant costs and revenues resulting from alternatives. The terms must be related to the decision making, but not all costs are relevant to decision making. According to whether there is a relationship with decision-making or not, cost is divided into two types, relevant costs and irrelevant costs. Relevant costs are the future cost that differs between alternatives and should be considered in decision making.

In contrast, irrelevant costs are costs have no relationship and affect with decision making. The cost of the past can provide useful information, but it is the future, as the cost is not committed as these are controlled relevant. That which we cannot control may inform our decision making by making us aware of the environment in which we exist but the decisions made by management, the focus must be controlled is relevant to understand our decision-making. There are three principles for relevant costs: -Only future costs are relevant Only those costs which differ between the available alternatives are relevant -Only cash costs are to be included Relevant costs and benefits are also required for special studies relating to the following: 1. Special selling price decision, which relate to pricing decisions outside the main market, they usually involve one-time only orders or orders that a price below the current market price. The identification will depends on the circumstances in the decision as to whether a cost is relevant. In one situation a cost may be relevant, but in others it may be irrelevant.

It is not possible to provide a list of costs that would be relevant in particular situations. In each situation should follow the principle that the relevant costs are future costs that differ among alternatives. 2. Product-mix decisions when capacity constraints exist. In the short term sales demands maybe much more than current productivity capacity. For example, outputs maybe restricted by a lack of materials, labor, equipments or space and so on. When sales demands are in excess of an organization’s productive capacity, the export resources that are restricted should be identified.

These scarce resources are known as limiting factors. Within a short term period it is unlikely that production constraints can be removed and additional resources acquired. Where limiting factors apply, profit is maximized when the greatest possible contribution to profit is obtained each time the scarce or limiting factor is used. In a long term additional resources should be acquired if the contribution from the extra capacity exceeds the costs of acquisition. 3. Decision on replacement of equipment. Replacement of equipment is a capital investment or long term decision that requires the use of discounted cash flow procedures. . Outsourcing (make or buy) decision. Outsourcing is the process of obtaining goods or services from external supplies rather than producing the same goods or providing the same services within the organization. Decisions on whether to produce goods or provide services within the organization or to obtain them from external suppliers are called outsourcing or make or buy decision. Many organizations outsource some of their activities such as their payroll and purchasing functions or the purchase of specialty components.

Increasingly public local services such as water disposal, roads and property maintenance are being outsourced. 5. Discontinuation decisions. Most organizations periodically analyze profits by one or more cost objects, such as products or services, customers and locations. Periodic profitability analysis provides striking information that highlights those unprofitable activities that require a more detailed assessment to make certain whether they need to be stopped or not. For decision-making, costs and revenues can be classified accounting to whether they are relevant to a particular decision.

Relevant costs and revenues are those future costs and revenues that will be changed by a decision, whereas irrelevant costs and revenues are those that will not be affected by the decision. Assume a company purchased raw materials a few years ago for ?100 and that there appears to be no possibility of selling these materials or using them in future production apart from in connection with an enquiry from a former customer. This customer is prepared to purchase a product that will require the use of all these materials, but he is not prepared to play more than ?250 per unit.

The additional costs of converting these materials into the required product are ?200. Should the company accept the order for ?250? It appears that the cost of the order is ?300, consisting of ?100 material cost and ?200 conversion cost, but this is incorrect because the ?100 material cost will remain the same whether the order is accepted or rejected. The material cost is therefore irrelevant for the decision, but if the order is accepted the conversion costs will change by ?200, and this conversion cost is a relevant cost.

If we compare the revenue of ?250 with the relevant cost for the order of ?200, it means that the order should be accepted; assuming of course that on higher-priced orders can be obtained elsewhere. The following calculation shows that this is the correct decision. Do not accept (?)Accept(?) Materials100100 Conversion costs-200 Revenues-(250) Net costs10050 The net costs of the company are ?50 less, or alternatively the company is ?50 better off as a result of accepting the order. This agrees with the ?50 advantage which was suggested by the relevant cost method.

In this illustration the sales revenue was relevant to the decision because future revenue changed depending on which alternative was selected; but sales revenue may also be irrelevant for decision making. There are three main reasons why a cost accumulation system is required to generate relevant cost information for decision making: 1. Many indirect costs are relevant for decision making; 2. An attention-directing information system is required to identify those potentially unprofitable products that require more detailed special studies; 3. Product decisions are not independent. Activity-based costing

There are two categories of costs that assigned to cost objects: direct costs and indirect costs. The term overheads are sometimes used instead of indirect costs. Direct costs can be accurately traced to cost objects because they can be specifically and exclusively traced to a particular cost objects while indirect costs cannot. The costing methods of traditional costing and the activity- based costing methods seek to determine how much overheads should be included in the product. Both the traditional systems and the activity-based costing have the same approach to assigning direct costs.

Activity-based costing involves the identification of the factors which cause the costs of an organization’s major activities. Support overheads are charged to products on the basis of their usage of the factor causing the overheads. Thus activity-based costing system allocates indirect costs to cost centre based on activities instead departments. Activity-based costing is used to trace all activity costs to the different products. But activities that focus on only one product involve no tracing difficulties since they generate direct product costs.

Tracing indirect costs is more difficult. There are four steps to design an activity-based system. In order to complete the product cost estimation process; those steps must be followed for each activity. The estimated cost of a product is the sum of the direct product costs and the indirect product costs traced from the various activities. The four steps are: 1. Identifying the major activities that taken place in an organization; 2. Assigning costs to cost pools or cost centers for each activity; 3. Determining the cost driver for each major activity;

4. Assigning the cost of activities to products according to the product’s demand for activities. Jessup is a service company, as Kaplan and cooper (1998) suggest that service companies are ideal candidates for activity-based costing, even more than manufacturing companies. Their explanation for this statement is that most of the costs in service organizations are fixed and indirect. In contrast, manufacturing companies can trace important components, such as direct materials and direct labor, of costs to individual products. Therefore indirect costs are likely to be a much smaller percentage of total costs.

Service organizations must also supply most of their resources in advance and fluctuations in the usage of activity resources by individual services and customers do not influence short term spending to supply the resources. Such costs are treated by traditional costing systems as fixed and irrelevant for most decisions. This resulted in a situation where profitability analysis was not considered helpful for decision making. Furthermore, until recently many service organizations were either government owned monopolies or operated in a highly regulated, protected and non-competitive environment.

These organizations were not subject to any great pressures to improve profitability by identifying and eliminating non-profit making activities. Cost increases could also be absorbed by increasing the prices of services to customers. Little attention was therefore given to developing cost systems that accurately measured the costs and profitability of individual services. Privatization of government owned monopolies, deregulation, intensive competition and an expanding product range created the need for service organizations to develop management accounting systems that enabled them to nderstand their cost base determine the sources of profitability for their products and services, customers and markets. Many service organizations have therefore only recently implemented management accounting systems. They have had the advantage of not having to meet some of the constraints imposed on manufacturing organizations, such as having to meet financial accounting stock valuation requirements or the reluctance to scrap or change existing cost system that might have become embedded in organizations.

Furthermore, service organizations have been implementing new costing systems at the same time as the deficiencies of traditional systems were being widely publicized. Also new insights were beginning to emerge on how cost systems could be viewed as resource consumption models which could be used to make decisions on adjusting the spending on the supply of resources to match resource consumption. Where unit costs are calculated, activity-based costing systems suffer from the same disadvantages as traditional cost system by suggesting an inappropriate degree of variability.

For example, to calculate unit product costs, batch level activity costs are divided by the number of units in the batch and product sustaining costs are divided by the number of products produced. This unitizing approach is an allocation which yields a constant average cost per unit of output which will differ depending on the selected output level. For decision making there is a danger that what started out as a non-volume-related activity cost will be translated into a cost which varies with production volume.

Assume a situation where the cost per set-up is ?1000 for a standard batch size of 100 units for a particular part, giving an average set-up cost per part of ?10. If a special order requiring the part is received for 50 units then the batch size will differ from the standard batch size and the average cost of the set-up for processing the parts of ?10 is not the appropriate cost to use for decision making. There is a danger that costs of ?500 could be assigned to the order.

However, if the special order requires one set-up then the activity resources consumed will be ?1000 for an additional set-up, and not ?500. The accountant must take care when using activity-based costing system. A furthermore problem is that the concept of managing unused capacity is fine for human resources but it does not have the same impact for physical resources, such as the acquisition of plant and equipment. Human resources are more flexible and can be adjusted in small increments.

Therefore the supply of resources can more easily be adjusted to the usage of resources. In contrast, physical resources are acquired or removed in lumpy amounts and large increments. If resources are supplied to cover a wide range of activity usage there would have to be a dramatic change in activity for the supply to be changed. Therefore changes in resources usage would tend not be matched by a change in supply of resources and spending would remain unchanged.

So the accountant must ensure that the cost of human and physical resources is not merged when costs are assigned to activity costs centre within the first stage of the tow-stage allocation process. If the changes in physical resource usage arising from potential decision do not have future cash flow consequences there is unlikely to be a link between resource usage and spending and the future cash flow impact for most decisions will be zero. In other words, the cost of resource usage would be treated as fixed and unavoidable for traditional costing systems.

Also traditional costing systems accurately trace the cost of unit-level activities to products and facility-sustaining costs cannot accurately be assigned to cost objects by any costing system. Thus, for many organizations the proportion of costs that can be more accurately assigned to cost objects by activity-based costing systems, and that can be expected to have a future cash flow impact, might be quite small. For such organizations this would imply that appropriate cost information extracted from simplistic costing systems may be sufficiently accurate for decision making purposes.

Cite this essay

Strategic Management Accounting. (2020, Jun 02). Retrieved from https://studymoose.com/strategic-management-accounting-new-essay

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