With the rapid development of the global economy, traditional management accounting has been difficult to meet the business strategic management and requirements. Strategic Management Accounting(SMA) for the modern enterprise is of great significance. However, it is a new techniques and approaches. Although strategic management accounting has been developed over 20 years, the SMA is still debatable. In addition, a number of scholars have experienced to define what SMA is, however, the opinions of the scholars is still not yet able to be generalized. Yet, strategic management accounting is still at the exploratory stage.
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Management accounting plays a crucial role in the business world. It provides important advice in order to make decision for the firms in the western society. The costs of offering excellent products strategically need to be fully integrated into the enterprise cost system and being reported by these systems. Management accounting helps monitoring the performance of the management. Therefore, the customers can then be securely kept in the same market. This could also be helpful on understanding the market in a better way. Strategic management market aims to obtain the information of the rivals in the same market; this provides support to their business when making decision since the owner could adjust their budget plan according the reports of the strategic management market.
Strategic management accounting is recently developed in management accounting. It involved in planning, control and requires financial information. In the strategic management planning and control systems, R.N.Anthony believes that there are two different oriented processes which are externally and internally. Externally oriented process is a financial accounting. Moreover, an internally oriented process is including strategic planning, management control and operational control. During the strategic planning process, it is the role of formulating strategy and it emphasis on planning. Planning defines aims, objectives and targets of organizations and also does formulation, evaluation and selection of policies, strategies, tactics and actions to achieve them. The orientation is planning outside the organization which is relating to the organization’s environment. Secondly, after strategic planning, management control would be followed. The main function of this process is implementing strategy which can be a part of the planning. In the final stage, operational control is mainly responsible for controlling however also performing the tasks as well as planning. In this process it ensure that resources and obtained and used effectively and efficiently to achieve organizational goals and procedures adhered to or appropriate remedial action taken. It normally occurs within the organization.
Strategy orientated accounting complements the traditional concerns of the West accounting. It focuses on the additional costs in order to maintain competitive advantages of enterprises of actual and potential rivals. It focuses on the cost impact enterprise products and marketing strategies and it can be seen as an essence for success in today’s meeting the challenges of an increasingly global market. Generally speaking, such re-orientation is another license management accounting focused on the value of consumer generated relative to its competitors. It also helps monitoring the company’s performance in the market variables using a series of strategic decisions over the horizon which would be long enough to achieve the strategic plan. These concepts form the core of the new concept of SMA. In addition, there are 12 strategic management accounting practices. They are competitive position monitoring, strategic pricing, competitor performance appraisal, competitor cost assessment, strategic costing, value-chain costing, brand value monitoring brand value budgeting, attribute costing, quality costing, life-cycle costing and target costing. However, the main methods in SMA which are strategic costing, target costing and product life-cycle. Although there are a lot of practices, there is still of a lower usage and recognized by a couple of organizations.
In 1981, Ken Simmonds has firstly proposed the “strategic management accounting”, he developed the SMA definition. After his speech, SMA has been concerned day by day. In the speech, he mentioned to collect management accounting information about a business and the competitors for the uses in developing and monitoring the business strategy. He argues that management accounting should be more outward looking and should help the emphasis to place upon relative levels and trends in real costs and prices, cash flow, market share and stewardship of the resources available to the business. It can be developed and controlled the enterprise strategic.
Ken Simmonds suggested that profits are not from internal efficiencies but from the company’s competitive position in its market. He raised several ideas for the application of SMA in the business. He stressed the importance of the learning curve with respect to achieve strategic advantage by forecasting cost reductions and thus selling price reductions of competitors. He also drew attention to the importance of early experience to the new product as a meaning to give a unique advantage over competitors. Major competitor should be able to reduce the sales price of the products which should further increase its production and enhance its market share; which eventually force some competitors to leave the industry. Secondly, Simmonds shows that the cost-volume-profit relationship of competitors could predict the price response and management accounting functions to help assessing the cost structure of each major competitor and relating this to their prices. In addition to handling costs and prices, Simmonds concentrated on volume and market share by monitoring the movement of the market share as the main products, companies can see if it is acquired or lost status and competitors will show different strength in the market share. Including detailed information on the market, management accounting report will help to enable more strategic management accounting-related. Simmonds suggested that the market share of the statements may be included in managed accounts. He believes that SMA will develop in management accounting in the future.
One of the main advocates of Strategic Management Accounting is M.E. Porter(1985). His argument on strategic management is considered as the important information. Porter mentions a two pronged approach.
First, he assessed various aspects of the industry’s long-term profitability. He believes the five competitive forces will contribute to strategic balance. This is a threat to new entrants, substitute products or services enter the market, competition among existing institutions within the industry, bargaining power of suppliers and consumers. These five forces fully reflect the competitiveness of many enterprises in an increasingly competitive. However, Porter has also raised the question of the relative position of the enterprise in the industry. This issue is important because it affects the ability of enterprises to create profits above or below the industry average. Returns may be higher than average to achieve a sustainable competitive advantage. This is achieved by three basic generic strategies which are cost leadership, differentiation and focus.
Cost leadership means that companies intended to serve as the lowest cost of production in the industries. This is achieved by economies of scale; capital of the experience curve effect, tight cost control and cost minimization. Also, the company aims to provide a number of different levels of product and service value to customers. It can generate a premium price. This is the differentiation part. Focus is another part of the bargaining power which concerns about the cost and differentiation focus.
Porter mentioned that the value chain is needed to determine the future of the practice of strategic management accounting. Value is the customer willing to pay which is a function of the image products. In the value chain, there are nine elements. Some of these cost drivers may be controllable. The nine elements of the value chain can also be separated as either support activities or main activities. For the support activities, they are firm infrastructure, human resources, technology development and procurement. And the main activities are inbound logistics, operations, outbound logistics, marketing and sales and services.
For example, Internal value chain analysis is the objectives of promoting enterprises to eliminate useless operations and reduce waste. The factory analyses the operating level step by step. The main reason is to focus on the market and customer. The operations and the activities of the business-internal price chain analysis enable the cost management of enterprises to maintain the basic operating level, and explore each layer of worth operations, eliminating useless operations.
The value of Competitors chain analysis can identify the merits and shortcomings in the company. The conclusion of the market and competitors analysis that compared to the competitors on the market, production quality and diversification may not have too much effect. If the strategic can improve the quality or diversification in product to enhance competitiveness, it would be hard to achieve. On the other hand, if firm blindly relying on low prices to gain market share, it will lead to greater losses.
In the analysis, the impact of the cost drivers on each of the elements must be assessed by efforts. Also, there must be a satisfactory margin which produced by the cost of the nine elements.
Once this is completed, manager must try to make analysis of their own competitors in the same way. Strategic advantage will be able to establish if the elements of the total cost is less than competitors. It is necessary to adopt a more positive attitude to assess if the profit margins higher than those of competition. If not, it is needed to develop strategies to achieve the low cost advantage by controlling the cost drivers. The cost savings would lead to a reduction on costs or improve productivity. Marketing, sales and service costs may be reduced more efficiently, if the reduction in external fault. An obvious example provides a good customer support services to the public. If a Volkswagen breaks down occurs, while the car is in a warranty period, the rescue vehicles comes out and fix it. If it cannot be fixed, and then provide replacement. This is would be good way handle but the cost would be expensive (C.DRURY, 2008).
Shank based on Porter (1985) proposed three generic strategies in order to achieve sustainable competitive advantage. Shank also mentions the needs for management accounting to support the enterprise’s competitive strategy and clarify two different types of competitive strategy the first one is cost leadership and product differentiation. The second one is demand different cost analysis perspective. For example, standard product cost is likely to be a very important tool for management control in the company that pursuing a cost leadership strategy in a mature commodity business.
On the contrary, standard product cost is probably not important after the differentiation strategy of enterprises. With the market-driven, there is rapidly changing and fast-growing business. A company’s pursuit of product differentiation strategy may require more information than on the cost of the leading about new product innovation, design cycles, research and development expenditures and marketing cost analysis. The difference between the cost leadership and product differentiation which depend on the primary strategic thrust of the firm.
Recently, Professor Bromwich(1994) further discusses strategic management accounting and definition of strategic management accounting such as the provision analysis of financial information on the firm’s product markets, competitors’ costs, cost structures, the monitoring of the enterprise’s strategies and those of its competitors in these markets over a number of periods. Bromwich found that SMA is a development of management accounting. This new techniques needed to be further discussed by the accountants in the future. Moreover, Bromwich mentioned that the role of accounting is going to extend in two directions when adding the strategic perspective to traditional management accounting. First, in strategic cost analysis, costs need to integrated into it and thus align costs with strategy. Secondly, in a fairly general way, the cost structure in competitors businesses and to record the changes over time. To achieve this, Bromwich also highlights this distinction identifying two dominant approaches to SMA. One seeks to cost the product attributes offered by a company’s goods. It is to attract customers. The other approach is to cost the functions in the value chain which provide value to the customer. (Bromwich and Bhimani ,1994)
In the cost leadership strategy development trends, as well as obsolete the traditional cost accounting. SMA focus is based on the benefits and it is doubtful for the standard costing performance measurement; suspected the use of flexible manufacturing costs, budget control, a worship of the budget; strict adherence to the traditional product cost pricing decisions; one to consider the cost of competitors; the absence of formal consideration of the marketing costs.
Roslender (1995) determine the target cost as a domain within strategic management accounting. This is the reason why focus on the external part and this is a market-oriented approach for product pricing and cost management. In addition, it involves the proliferation of management accounting throughout the organization and active participation of staff in a broad range of management functions. Their goal is to achieve the target cost, including the identification, evaluation and use of cost functional analysis of the product attributes and research opportunities to reduce costs throughout the value chain. Moreover, a recent contribution to the role of SMA, emphasizing the management accounting in the development and support the overall competitive strategy of an organization is the Balanced Scorecard. The purpose of the Balanced Scorecard is to encourage behavior consistent with organizational strategy. It includes a comprehensive framework for performance measurement to clarify, communication and management strategy. (Kaplan and Norton, 1992). He sees SMA as an approach that to account for strategic positioning by the trials to integrate the views from the previous marketing texts into management accounting.
Robin Roslender and Susan J.Hart mentions that SMA is intimately associated with both management accounting and marketing management because SMA is on a strategic level who attends to change in the environment outside the enterprise but not limited to this one part of the enterprise, SMA explore the whole industry value chain in the business information and improve the enterprise’s economic environment. It emphasis that enterprise development and environmental change are consistent, in order to achieve the optimal effectiveness of industry, SMA requires marketing management to collect the information of competitors. The management accountants collect, compare, and analyze the information. The analysis of SMA is depending on the information from marketing management. It is controversial that if it is necessary for the management accountants to handle to the marketing information or the marketing management can obtain the information with their own tool.
Innes (1998) believes that strategic management accounting for the provision of information to support strategic decision-making in enterprise. Strategic decision-making usually involves in a long-term period, there is a significant impact on the organization, even though they may have an internal element, and they also have external factors. This definition was introduced that provide information in order to support an organization’s principal long-term decisions, such as the use of activity-based costing information, provide the relevant information product structure, the introduction and abandonment decisions are the domain of SMA. This view is support by Cooper and Kaplan (1988) who state that strategic accounting techniques are designed to support the entire organization’s competitive strategy. Generally speaking, the power of using information technology is to develop more sophisticated product and service costs.
Despite strategic management accounting has received, there is still no comprehensive conceptual framework of what strategic management accounting (Tomkins and Carr, 1996). For example, Coad(1996) states that SMA is an emerging field whose boundaries are loose and there is still no unified view of what it is or how it might develop. The existing literature in the field is both disparate and disjointed (Coad, 1996:332).
There is an exception such the survey which conducted by Guilding et al. (2000). The survey sample included 312 large companies. Guilding et al. found that recognition of what is difficult to determine the composition of the strategic management of generally accepted accounting practice. According to the review of the literature, they identified 12 strategic management accounting practices including value-chain costing, strategic costing, target cost, life-cycle costing, attribute costing etc. These are being used to determine the practice, it is a must demonstrate one or more of the following characteristics: the environment and market position focus on competitors; and long-term, forward-looking direction. At the end of the experiment, Guilding et al concluded that 12 strategic management accounting practices are of relatively low usage, there are two factors that should not dismiss their potential. First of all, all the evaluation of SMA practices may be significantly higher than expected utilization of the advantages of scoring points. Secondly, there are still many companies have abandoned the usages of the SMA. These findings showed that there is a difference between the neediness and the actual reports conducted. It finds that there the practicing accountants do not familiar with the usage of the SMA. This gives supports to the findings of Tomkins and Carr’s (1996) while they believed that the SMA is ill-defined.
In addition, it is still lacking of the strategic management accounting consensus. (Lord, 1996) stated that a number of strands have been used to describe the strategic management accounting. It magnifies the internal focus of traditional management accounting and the external information to competitors. The linkage between the strategic position which decided by the companies and the anticipated emphasis on management accounting and lastly obtaining competitive advantage by interpreting methods to reduce costs or to boost the varieties of the companies’ goods by exploiting the relationship between the value chains and generalizing the cost drivers.
In conclusion
Strategic management accounting is recently developed in management accounting. It involved in planning, control and requires financial information. Nevertheless, SMA have not formed a unified knowledge. While some firms may have heard SMA. They may lack for a clear understanding in SMA.
Although SMA has lots of different views from various authors. For example, Simmonds is the earliest to introduce the strategic management accounting. He mentions to collect information on business competitors. Than Bormwich has further information SMA is not only to collect information . It still need to Research and competitors on their own competitive advantage and value creation process and research a long-term decision-making cycle in the enterprise perspective, for the marketing of these products and services give enterprises the total revenue. In addition, Porter identified 3 generic strategies in SMA to achieve sustainable competitive advantage. .However ,Innes (1998) believe that strategic management accounting for the provision of information to support strategic decision-making and Cooper and Kaplan (1988) views that Strategic Accounting technology is designed to support the entire organization’s competitive strategy to develop more sophisticated products and services costs. On the other hand,lord (1996) identified SMA not only analysis external competitor information but also extend the main point of traditional management accounting. They are all authors who hold different evidence to support their own mind in SMA, so SMA is totally confide, it is remains a mystery .,In my opinion, the main reason of SMA occurs because Economic is developing very fast and SMA is reclamation and atone for traditional management accounting in a new environment. However,SMA has many of obstacles in developing process such as enterprise keep continue to apply the SMA in the practical application and do adjustment and innovation , thereby it can promote the development of SMA application to make it update. So I believe that Although SMA lack of consistent theory at this moment , it will be a big management accounting develop in the future.
Bibliographies:
Bromwich, M. “Accounting information for strategic excellence”
Bromwich, M.,1990 “The case for strategic management accounting : the role of accounting information for strategy in competitive markets”.Accounting Organization and Society, Vol 15, No ½ , pp.27-46
Cadez, S.,2008 “An exploratory investigation of an integrated contingency model of strategic management accounting” ,Accounting, Organizations and Society,33,pp.836-863
Drury,C. 2008, Management & Costing Accounting, 7th ed. , London: South-Western.
Horngren,C. T. ,1999,Management and cost accounting London: Prentice Hall, 1999
Lucey,T.,1988 Management accounting 2nd ed. London: DP Publications
Roslender,R. and Hart,S.,2003 “In search of strategic management accounting : theoretical and field study perspectives” .Management Accounting Research 14 , pp.255-279
Ryan, B.,1998, Strategic Accounting for Management 5th ed ,Australia: Thomson Learning
Tillmann, K.,2008 “Strategic management accounting and sense-making in a multinational company”, Management Accounting Research ,19,pp.80-102
Wright, D.,1996 Management accounting London: Longman
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