Accounting can be divided into two branches financial and management accounting. Initially, management accounting can be defined as the provision of information to people within the business to help in making better decisions. It tends to improve efficiency and effectiveness of current operations for example manufacturing whilst financial accounting also provides the provision of information to external or third parties who are outside the company, hence, could be termed as internal reporting for management accounting and external reporting for financial accounting (Drury, 2012, p.6).
The purpose of cost and management accounting is to assign costs between cost of goods sold and stock from internal and external profits earned, provide significant information to help managers making a better decision on a situation and provide information for planning, control, performance and Kaizen costing or improvements continuation (Drury, 2012, p.16).
Strategic Management Accounting (SMA) can be defined in different ways. Innes, 1998, defined strategic management accounting as the provision of information to support the strategic decisions in organisations (Drury, 2012, p.579). By using the definition by Innes, this suggests that the provision of information that supports an organisations major long-term decisions, for example capital investment appraisals, strategic planning and budgeting and the activity base cost process, and introduction and of decisions are in the scope of strategic management accounting (ibid). Hogue defined strategic management accounting as 'a process of identifying, gathering, choosing and analyzing accounting for helping the management team to make strategic decisions and to assess organisational effectiveness' (Hogue, 2001: 2 in Kirli and Gumus, 2011, p.316)
The UK Chartered Institute of Management Accountants (CIMA) gives an official meaning of Strategic Management Accounting as: 'a form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information' (Bhami et al, 2008, p. 774).
Exploration of Strategic Management Accounting strands
Lord, 1996, identified some strands to be used to characterise strategic management accounting, initially; external of traditional management accounting's internal aim to include external information about its competitors, the relationship of strategic position chosen and the expected emphasis on management accounting and gaining competitive advantage by analysing ways to reduce costs/expenses or improve product differentiation of its goods to make it more attractive than its competitors and in addition, Porter, 1985, supporter of using the Value Chain Analysis (VCA) to gain competitive advantage (Drury, 2012, p.580-581). Simmonds (1981, 1982) coined the phrase 'strategic management accounting' for the accounting information that would assist strategic decision-makers (Lord, 1996, p.347). Furthermore, strategic management accounting is a theory and practice of accounting information that looks at an organisation's cost position, cost advantages and product differentiation to make market decisions (Kirli and Gumus, 2011, p.307).
Strategic management accounting is apprehensive with providing information to sustain strategic plans and decisions and it is more external looking, more concerned with outperforming the competition and observes the progress towards strategic or planned objectives than conventional management accounting (Atrill and Mclaney, 2007, p.339).
Comparisons of traditional and strategic management accounting.
There are some disadvantages when the traditional management accounting information for strategic management. If the traditional method is used it is to short term and emphasizes on profit and unreal accounting periods whilst the strategic method of accounting has a long term focus looking at profit in the firms context of competitiveness over time therefore the traditional method is more backward looking whilst the strategic method is forward looking (Lord in Hopper, Northcott and Scapens, 2007, p.137). The characteristics of the conventional and strategic method of accounting shown in table 1 below:
Conventional/traditional accounting method
Strategic management accounting method
Historical or backward looking
Forward-looking
Introspective
Outward-looking
Narrow scope
Broad scope
Internal performance
Performance related to competitors
Single period
Multiple periods
Manufacturing focus
Competitive focus
Existing activities
Possibilities
Reactive
Proactive
Programmed (often)
Un-programmed
Overlooks linkages
Exploits linkages
Based on existing systems
Unconstrained by existing systems
Built on conventions
Ignores conventions
Financial measures
Financial and non-financial measures
Exact figures
Approximations
Table 1
Source: adopted from Wilson (1995) in Hopper, Northcott and Scapens, 2007, p. 137
From table 1 above compares the differences between traditional and strategic management accounting. Initially, the table shows that is conventional method prefers looking at historic events or costs whilst strategic is more future looking for the business. The difference also is that strategic management method tends to be more competitor focus comparing to traditional method that only focuses on manufacturing. Figures are exact on the traditional method compared to strategic management method are based on approximations. The conventional method only looks at financial measures but the strategic method looks on both sides of financial and non-financial factors such as employee satisfaction, customer loyalty and so on.
The traditional method tends to be built on conventions and based on existing systems but the strategic method does not acknowledges conventions and usually are not constrained or limited by existing systems. By looking at the table, there are more benefits for the strategic method for future development whilst the traditional method only focuses on current and short term basis.
Strategic Management Accounting practices.
Guilding, Craven and Tayles, (2000), realised that it was not easy to identify what are generally accepted as constituting strategic management accounting practices but they identified 12 strategic management accounting practices (Drury, 2012, p.582). Some practices are; competitive position monitoring. This is done by analyse competitor positions by assessing and monitoring trends in competitor sales, market share, volume, unit costs and return on sales. Next is strategic pricing. This is the analysis of strategic factors in the pricing decision process.
Competitor performance appraisal tends to be on published financial statement. Competitor cost assessment is the provision of regularly updated estimates of a competitors cost base. Strategic costing uses the cost data on strategic and marketing information to develop and identify strategies to sustain competitive advantage.
Value chain costing is an activity based costing approach where costs were a ratio or allocated to activities. Brand value monitoring is done by the financial valuation through the assessment of brand strength factors. Attribute costing refers to specific products that appeal to customers and brand value budgeting is the use of brand value as a basis for managerial decisions (Drury, 2012, p. 582-583). In addition, a study done by Langfield-Smith (2008), where he reported that strategic management accounting techniques have not been adopted in a wider perspective neither strategic management accounting are extensively used or understood, furthermore, characteristics of strategic management accounting have had an impact and the manipulation of the philosophy and jargon of business (Drury, 2012, p.584).
Bromwich (1990, 2001), examines strategic management accounting as going beyond collecting data on businesses and their competitors to considering the advantages that good gives to the consumer, and how the advantages contribute to build and sustain competitive advantage (Bhami et al, 2008, p.775).
Relationship with strategies and cost management
Shank, 1989, illustrated in a table below, showing the relationships between strategies and management costing. The table is as follow;
Particular/description
Product differentiation
Cost leadership
Role of standard costs in assessing performance
Not important
Very important
Importance of such concepts as flexible budgeting for manufacturing cost control
Moderate to low
High to very high
Perceived importance of meeting budgets
Moderate to low
High to very high
Importance of analysis of marketing costs
Critical to success
Often not done at all on a formal basis
Importance of product costs as an input to pricing decisions
Low
High
Importance of competitor cost analysis
Low
high
Table 2
Source: adopted from Shank, J.K., (1989) Strategic cost management: New wines or just new bottles? Journal of management accounting research (1) 47-65, in Drury, 2012, p.582
The table above illustrates the relationships of strategies and cost management. The role of standard costs in assessing are less concerned for product differentiation compared to cost role which is very crucial in the process. Flexible budgeting cost for manufacturing cost control, and perceived importance of meeting budgets are taken seriously for the cost leadership whilst product differentiation is in the middle range of importance. The importance of marketing cost analysis is critical to success for product segregation or differentiation but not mostly done for cost leadership approach. The importance of product cost as an input to pricing decisions and competitor cost analysis is taken into high consideration for the cost leadership approach and not high for the product differentiation method.
Shank, 1989, stated that for every dollar of manufacturing cost the assembly plants saved by adopting the Just In Time (JIT) management perception, the supplier pays out more than one dollar because of the timetable precariousness happens from its introduction of JIT (Shank, 1989: 51 in Drury, 2012, p. 582).
Strategy can be translated into action. As soon as the objectives are set out, the progress of the objectives have to be monitored. This means that appropriate measures must be present by which the progress is accessible which could include financial and non-financial measures (Atrill and Mclaney, 2007, p.313).
Value chain costing as a tool for Strategic Management accounting
Strategic management accounting is recognized with a broad approach of accounting for strategic positioning. Value chain costing intends an approach to accounting that considers all the activities performed from the design to the delivery of the item for consumption; the strategic allegation regarding the exploitation of the economies and efficiencies obtained from the outside linkages between the company and both the supplier and consumers (Carmen and Corina, 2009: 739 in Kirli and Gumus, 2011, p.316).
The conventional management accounting systems are based on within the oriented concept of value added, which obstruct firms in taking benefits of the chance to coordinate interdependence in the value chain (Dekker, 2003: 5 in Kirli and Gumus, 2011, p.317). Shank argues that an essential problem of the value added perception is that it 'starts too late and it stops too soon' (Shank and Govindarajan, 1989: 51 in Kirli and Gumus, 2011, p.317).
This perspective of adding value focuses on profit maximizing which are purchases cost with selling price which results in profit or loss. It also tends to assess competitive advantage and businesses must have knowledge both the company's and competitors' cost of value chain therefore, value chain depends on "value creation" (Kirli and Gumus, 2011, p.317).
The balanced scorecard as a contribution and critiques to Strategic Management Accounting?
The latest contribution to strategic management accounting has emphasized the role of management accounting in formulating and supporting the overall competitive strategy of an organisation. An innovative idea to strategic management was discovered by Kaplan and Norton in the 1990's whom they named this system the 'balance scorecard'. (http://www.chimc.in/Volume1.2/Volume1Issue-2/NachikeVechalekar.pdf)
Kaplan and Norton described the innovation of the balance scorecard as a retention of traditional financial measures, but, financial measures tells the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not crucial for achievement, and these financial measures were not enough (http://www.chimc.in/Volume1.2/Volume1Issue-2/NachikeVechalekar.pdf). In addition, it was also said that it is converting the firms' operation and approach into an all-inclusive set of performance that would give the framework for applying the firms' strategy (Belkaoui, 2002, p.37).
Drury, 2005, also explains the balance scorecard as a strategic management system. Kaplan and Norton (1996b) explore how modern companies are using the measurement focus of the scorecard to achieve the following important management processes; description and transformation of vision and strategy into precise strategic objectives, communicating and connecting strategic objectives and measures which leads to planning, setting targets and align strategic initiatives, and to augment strategic response and development so that managers can keep an eye on the strategic processes and alter implementation of their strategy at any point of time (Drury, 2005, p.471).
There are several advantages and drawbacks on the balance scorecard approach. The benefits for this approach are that it brings together in a single report four different perspectives on a company's performance (Drury, 2005). The first perspective is the financial perspective which will specify the financial returns required by shareholders and may involve financial ratios such as return on investment or capital employed, net profit margin and so on. The second perspective is customers' perspective where this will identify the type of consumer and markets the business wishes to service and will do suitable measures (Atrill and Mclaney, 2007, p 314). The third perspective is internal business process and this will deal with business operations such as innovations that are important to the achievement of the business which may include product life cycle and efficiency response for customer complaints. The fourth perspective is learning and growth which will specify the type of people, systems and procedures that are essential to deliver long term business growth (ibid).
Kaplan and Norton lay emphasis on the point that a balance scorecard must reflect a concern on financial statements and objectives and must have a clear cause and effect relationship. As an example; an investment in staff training (learning and growth) may lead to an enhanced customer service (internal business process) leading to a higher level of customer satisfaction (customer perspective) which ultimately increase profits for the business (Atrill and Mclaney, 2007, p.316). Other contributions include a complete framework for interpreting a company's strategic objective into a rational set of performance measures. It can also assist managers to take into consideration all critical factors of the operational measures and develops communications within the organization (Drury, 2005, p.471).
Possible critiques, in Drury, 2005, are the omission of important perspectives on the environment and employee perspective, the cause and effect relationship assumption are too ambiguous and lack of theoretical empirical support and the undertaken studies have failed in linking non financial date and future financial performance (American Accounting Associate Financial Accounting Standards Committee, 2002 in Drury, 2005, p.472).
Benefits and criticisms of Strategic management accounting
There are some possible benefits and disadvantages of strategic management accounting. Bromwich (1990) tried to expand strategic management accounting to take into account the advantages of the products given to consumers and how it would add to sustainable competitive advantage. He compared the relevant cost of the product characteristics with the purchasing power of the consumer to pay for that product. Bromwich argues that subject of appropriate analysis should be the product aspects or elements or quality to attribute the costs which are treated as cost of the product to the benefits they provide to the consumer. This could be done by matching costs with benefits so that companies can make comparisons whether profit can exceed costs (Drury, 2008, p.574).
Other the balance, Roslender (1995), has acknowledged target costing will fall within the strategic management accounting perspective. It can be justified that the external focus and it is a market driven approach to pricing of the product and the management of costs. Their aim is to accomplish or reach the target of target costs that involves categorizing, assessing and cost product attributes by using functional analysis and the examination of reducing costs prospective (Drury, 2008, p.574).
There are possible criticisms to strategic management accounting approach. Nyamori et al (2001, p.63) made an assessment on strategic management accounting for omitting 'what is strategy, how has it been created, how it can change and how it constitutes and constitutes by accounting. Mintzberg (1978) highlighted that strategies are not always an outcome of strategic planning. Dermer (1990: 68) named this strategic planning as 'teleological' which elaborates as; 'predicted on the assumption that organisations are purposeful cohesive systems and that issues and support are controlled by management' (Hopper, Northcott and Scapens, 2007, p.147).
Harari (1994, p.38) said to take caution of becoming too persistent on competitor analysis, alternatively, firms can compete and gain advantage by innovation and product differentiation. Carr and Tomkins (1996) found that German companies analysed strategic considerations thoroughly but were critical of formal strategic planning techniques such as SWOT analysis. Therefore Harari and Carr and Tomkins are advising that competitor analysis as a component of strategic management accounting may have a negative impact if often done omitting the consideration of intuitive and immeasurable characteristics.
Lord, (1996), presented a small cycle producer exploited linkages in the value chain regardless of the need of the analysis of financial matters. He also described a firm that was using many of the components of strategic management accounting (Hopper, Northcott and Scapens, 2007, p.149). Rickwood et al (1990) provided an example of a management accountant who led the strategic management accounting approach due to his power in the authorization the accountant had the power to pressurise the marketing department to give the accountant the competitor information being held by that department (Hopper, Northcott and Scapens, 2007, p.149-150). Coad (1996) claimed that strategic management accounting needs to be adjusted towards learning new dexterity and mastering missions such as errors and mistakes are a part of the learning process and communication skills need to be good with the ability to emphasize with others internally and externally. Hence, he explains that how a small area of a big company could carry out strategic management accounting excluding the involvement of the company as a whole (Hopper, Northcott and Scapens, 2007, p.150).
Conclusion
In conclusion to the essay above, Guilding et al (2000) found little use of strategic management accounting where more research needs to be done and further development needs to be done to present its role in emergent strategy and its advantages in the formulation of strategy and the term 'Strategic Management Accounting' is rarely used in organisations and the appraisal of its definition is limited.
Furthermore, strategic management accounting has its limitations and benefits but has a larger scope for improvement in order for it to be implemented successfully in a company. The balance scorecard could be made a positive contribution to strategic management accounting because it takes into consideration of financial and non-financial factors. Therefore, it depends on the company who implements the approach and its successfulness. A matter of re-marketing accounting techniques also depends on how the company lay out their strategic approach on accounting techniques.
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