Transcript Chapter 18 Strategic Management Accounting © 2012 John Wiley & Sons, Ltd, Accounting for Managers, 4th edition,

Chapter 18
Strategic Management Accounting
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,
9781119979678
1
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,
9781119979678
2
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,
9781119979678
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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,
9781119979678
4
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,
9781119979678
5
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,
9781119979678
6
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,
9781119979678
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The dimensions of SMA
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,
9781119979678
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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,
9781119979678
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Techniques to support SMA
•
•
•
•
•
•
•
•
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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,
9781119979678
10
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,
9781119979678
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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,
9781119979678
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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,
9781119979678
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Activity-based cost management
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,
9781119979678
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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,
9781119979678
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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,
9781119979678
16
Life cycle costing
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,
9781119979678
17
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,
9781119979678
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Target costing
•
Target costing is concerned with managing whole
of life costs during the design phase
 Target price – Target profit margin = Target cost
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•
•
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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,
9781119979678
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Example of target costing
Target price
Target margin
Target cost
$1,000
20%
= $200
$800
But, design suggests cost is $900
Action taken before going into production
© 2012 John Wiley & Sons, Ltd,
Accounting for Managers, 4th edition,
9781119979678
20
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,
9781119979678
21
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,
9781119979678
22
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,
9781119979678
23
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,
9781119979678
24
Lean accounting
• Lean accounting does not require standard costing, activitybased 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,
9781119979678
25
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,
9781119979678
26
Key points
• Management accounting v. strategic management
accounting
– Linking MA techniques with strategy,
– beyond accounting numbers to incorporate the nonfinancial;
– 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,
9781119979678
27