This document discusses strategic management accounting. It begins by defining strategic management accounting as the role of management accounting in strategic analysis, planning, and control of organizations. It then discusses various strategic management accounting techniques like life cycle costing, kaizen costing, target costing, and benchmarking. The document explains these techniques and provides examples. It also discusses Porter's competitive strategies of cost leadership, differentiation, and focus. Finally, the document defines strategic management accounting according to various authors and discusses exploiting internal and external linkages through value chain analysis to gain competitive advantage.

1. STRATEGIC MANAGEMENT
ACCOUNTING
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2.  Identify the strategic issues in MA
 Describe the issues conceptually
 Explain approaches used in handling the
strategic issues
 Discuss the role of management accountant
in confronting the issues
 Discuss strategic environmental MA
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3. Strategy
an integrated set of actions aimed at
securing a sustainable competitive
advantage.
Strategic
planning
- a process of designing a mission
statement, setting long-term goals
and objectives, and establishing
strategies.
- a long term plan.
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4. Strategic
management
long term planning, implementation and
controlling which provides a framework
for all the actions managers take and
how they are assessed.
Strategic
management
accounting
the role of mgt accounting in the
strategic analysis, planning and control
of org.
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5. Why Traditional Management Accounting is
not sufficient to provide information for
strategic decisions?
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6. Conventional
Historical
Manufacturing focus
Existing activities
Reactive
Overlook linkages
Data orientation
SMA
Prospective
Competitive focus
Possibilities
Proactive
Embraces linkages
Information orientation
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7. Ability to acquire, allocate and utilize
resources in line with the needs of
environment is very crucial, so the focus of
management accountant, therefore, should
be outwards and forward.
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8. What is SMA
• The provision of information to support strategic decisions in organizations
(Innes,1998).
• Review of literature by Lord (1996) identified the following strands:
1. Extension from internal focus of management accounting (MA) to
include external information about competitors.
2. The relationship between the strategic position chosen by the
firm and the expected emphasis on MA.
3. Gaining competitive advantage through exploiting linkages in the
value chain.
• Target costing is also identified as falling within the domain of SMA.
• Strategic role of MA emphasized in formulating and supporting the overall
strategy of an organization by developing an integrated framework of
performance measurement.
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9.  Life Cycle Costing (LCC),
 Kaizen Costing
 Target Costing (TC)
 Benchmarking.
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10.  LCC – strategic analysis tool/discussed
in form of life cycle cost management
and life cycle cost analysis.
 Kaizen Costing – effort to reduce costs
of existing products and processes
continually.
 TC – the difference between the sales
price needed to capture a predetermined
market share and the desired per-unit
profit.
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11.  Benchmarking – a close phenomenon to
competitor accounting. Competitor
accounting is a special accounting-based
form of strategic level benchmarking,
which does not include cooperation with
the object of this comparison activity.
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12.  Life Cycle – defined as the period of a
product in the market. Life cycle analysis
should consider the period between birth
and decease which studies the phases of
life, the repeated patterns that occur
during life, and the causes an effects of
incidences, aiming at something that can
be recognized and learned from the earlier
life cycles of the items under study.
.
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13.  Life cycle costing defined as the total cost of
ownership of a system during its operational
life where it embraces all costs associated with
the feasibility studies, research, development,
production, maintenance, replacement and
disposal as well as support, training and
operating costs generated by acquisition of the
equipment (accumulates the actual costs
attributable to each product form start to finish
 Whole life cost, the total cost of ownership over
the life of an asset, also commonly referred to
as "cradle to grave" or "womb to tomb"
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14. Strategies and Techniques in
Management Accounting- LCC
• Traditional management accounting procedures have focused primarily
on the manufacturing stage of a product ’s life cycle.
• LCC focuses on costs over the product ’s entire life cycle to determine
whether profits earned during the manufacturing phase will cover the costs
incurred during the pre-and post-manufacturing stages.
• A large proportion of a product ’s costs can be committed or ‘locked in
’during the planning and design stage (see Figure 2.1).
• Cost management can be most effectively exercised during the planning
and design stage.
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15. Figure 2.1 Cost committed and incurred during a products lifecycle
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16.  Kaizen Costing – defined as the maintenance of
present cost levels for products currently being
manufactured via systematic efforts to achieve
the desired cost level.
 Kaizen means improvement which contain two
elements- improvement and continuity. One
important advantage is its low cost setup.
There is basically not much investment in
terms of equipment. It is more of using the
already existing resources and information to
reduce cost.
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17. Strategies and Techniques in Management
Accounting - Kaizen Costing
• Kaizen costing is applied during manufacturing stage
whereas target costing is during planning stage.
• Kaizen costing focuses on production processes whereas
target costing focuses on the product.
• Kaizen costing aims to reduce costs of processes by a pre-
specified amount relying on employee empowerment.
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18.  Target Costing – is a relatively new concept first
adopted by some Japanese companies in the early
1970’s. it is a procedural approach to determining
a maximum allowable cost for an identifiable,
proposed product assuming a given target profit
margin.
- Has two objectives:
i) To lower the costs of new products so that the
required profit level can be ensured while the new
products meet the levels of quality, delivery timing,
and price required by the market.
ii) To motivate all company employees to achieve the
target profit during new product development by
making target costing a company wide profit
management activity.
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19. Strategies and Techniques in
Management Accounting - Target costing
• Focuses on managing costs during a product/service’s planning and
design phase.
• Involves the following stages:
1. Determine the target price which customers will be prepared to
pay for the product.
2. Deduct a target profit margin from the target price to determine
the target cost.
3. Estimate the actual cost of the product.
4. If estimated actual cost exceeds the target cost investigate ways
of driving down the actual cost to the target cost.
• Iterative process involving:
1. Tear-down analysis
2. Value analysis and functional analysis
• It is important that target costing is supported by an accurate costing
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20. An example of target costing
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21.  Benchmarking – defined as a process of studying
and adapting the best practices of other
organizations to improve the firms own
performance and establish a point of reference by
which other internal performance can be measured.
 Also referred as “best practice benchmarking” or
“process benchmarking”.
 Types of benchmarking:
◦ Internal benchmarking
◦ Functional benchmarking
◦ Competitive benchmarking
◦ Strategic benchmarking
◦ Product benchmarking
◦ Process benchmarking
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22.  Stages of the benchmarking process:
◦ Stage 1 : Internal study and preliminary
competitive analyses
◦ Stage 2: developing long-term commitment to
the benchmarking project and coalescing the
benchmarking team
◦ Stage 3: Identifying benchmarking partners
◦ Stage 4: Information-gathering and sharing
methods
◦ Stage 5: Taking action to meet or exceed the
benchmark.
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23.  In 2008, a comprehensive survey on benchmarking
was commissioned by the (a network of
benchmarking centers representing 22 countries).
Over 450 organizations responded from over 40
countries. The results showed that:
◦ Mission and Vision Statements and Customer (Client)
Surveys are the most used (by 77% of organisations) of 20
improvement tools, followed by SWOT analysis(72%), and
Informal Benchmarking (68%). Performance Benchmarking
was used by (49%) and Best Practice Benchmarking by
(39%).
◦ The tools that are likely to increase in popularity the most
over the next three years are Performance Benchmarking,
Informal Benchmarking, SWOT, and Best Practice
Benchmarking. Over 60% of organizations that are not
currently using these tools indicated they are likely to use
them in the next three years.
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24. Porter’s Approach
 Michael Porter in 1980’s.
 Premised on two basic questions:
 How attractive, from the viewpoint of long-
term profitability, are different industries?
 What is the enterprise’s relative position in its
industry?
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25. Porter’s 5 Forces in formulating & implementing
strategy:
 The threat of new entrants
 Do certain factors such as economics of scale, product
differentiation, capital requirement, protect the firm fr
newcomers?
 Do other factors such as govt regulations & policies
restrict competition?
 To what degree is the firm protected fr competition fr
new entrants to the industry?
 The threat of substitutes
 Will the presence of readily substitutable products
increase the level of intensity of competition for the
firm?
 Eg. plastics, glass & fiber-foil exert pressure on the
metal can market., electronic alarm system vs security
guard market, fax machines & electronic mail vs
express delivery.
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26.  The rivalry amongst existing companies
 Intense rivalry can be result of high entry barriers,
rapid product innovation, slow growth in total market
demand.
 How intense is the overall industry rivalry facing the
firm?
 The bargaining power of supplies
 The greater the bargaining power of a firm’s suppliers,
the greater the overall level of competition facing the
firm.
 The bargaining power of suppliers will be higher when
the group of suppliers to the firm is dominated by a
few large firms, and when these suppliers have other
good outlets for their products.
 Eg. soft-drink firms sell to fast-food restaurant chains
& athletic teams that hv strong bargaining power.
 The bargaining power of consumers
 The greater the bargaining power of a firm’s
customer, the greater the level of competition facing
the firm.
 Barg. power of cust. will likely be higher if there are
relatively low switching costs and if the products are
not differentiated.
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27. Porter’s Competitive Advantage
Competitive Strength/ Strategic
Advantage
Uniqueness
Perceived by the
customer
Low Cost
Position
No.of
Strategic
options/
Targets
Industry Wide DIFFERENTIATION COST
LEADERSHIP
Specific
Segment Only
FOCUS STRATEGY
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28. Cost leadership strategy:
 aims to be the lowest-cost
producer
◦ *product design *scale economics *experience
curve
 To provide the same or better value to
customers at a lower cost than offered by
competitors.
 Example: A company might redesign a product
so that fewer parts are needed, lowering
production costs and the costs of maintaining
the product after purchase.
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29. Focus strategy:
• directed at narrow segments
*avoid strategy distraction *compete with
limited resources *reduce competitive
pressure *bypass competitor skills/assets
• Example: Paging Network, Inc., a paging
services provider, has targeted particular
kinds of customers and is in the process of
weeding out the nontargeted customers.
• Competitive advantage is based on either
cost leadership or product differentiation.
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30.  offer some unique dimension
*generate customer value *be difficult to
copy
 Strives to increase customer value by
increasing what the customer receives
(customer realization).
 Example: A retailer of computers might
offer on-site repair service, a feature not
offered by other rivals in the local market.
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31. Is a strategic analysis tool used to identify
where value to customers can be increased or
costs reduced & to better understand the
firm’s linkage with suppliers, customers &
other firms in the industry.
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32. The value chain
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33. Value chain analysis
Steps required in under-taking value-chain
analysis:
 Identify the appropriate value-chain and
assign costs and assets to it
 Diagnose the cost driver of each activity and
how they interact
 Identify competitor value-chains, and
determine the relative cost of competitors
and the sources of cost differences
 Develop a strategy to achieve a lower relative
cost position through controlling cost
drivers or reconfiguring the value-chain
 Ensure that cost reduction efforts do not
erode differentiation
 Test the cost reduction strategy for
sustainability
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34. 34

35. Organizational activities:
◦ Structural activities: activities that determine the
underlying economic structure of the organization.
◦ Executional activities: activities that define the
processes and capabilities of an organization and
thus are directly related to the ability of an
organization to execute successfully.
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36.  VC analysis is identifying a and exploiting
internal and external linkages with the
objective of strengthening a firm’s strategic
position.
 The exploitation of linkages relies on
analyzing how costs and other nonfinancial
factors vary as different bundles of activities
are considered.
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37. Value-chain framework linkages
◦ Internal linkages: relationships among activities
that are performed within a firm’s portion of the
value chain
◦ External linkages: the firm’s value-chain activities
that are performed with its suppliers and customers
 Supplier linkages
 Customer linkages
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38.  Exploiting Internal linkages
◦ Relationship between activities are assessed and
used to reduce costs and increase value.
 Example: Product design & development
activities are occur before production and are
linked to production activities.
◦ The way the product is designed affects the costs
of production.
◦ How production costs are affected requires a
knowledge of cost drivers.
◦ Thus, knowing the cost drivers of activities is
crucial for understanding and exploiting linkages.
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39.  Exploiting external linkages – supplier &
customer
◦ Means managing these linkages so both the
company and the external parties receive an
increase in benefits.
 Exploiting supplier linkages
◦ Example: in Total quality control, relationship
between company and supplier is very important to
ensure raw materials are delivered on time and high
quality.
◦ Activity-based supplier costing
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40.  Exploiting customer linkages
 Customers can also have a significant
influence on a firm’s strategic position.
 Managing customer service costs
◦ Identify which profitable and unprofitable
customers
◦ Customer profitability analysis
◦ Activity-based customer costing
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41. Gaining competitive advantage through exploiting linkages in the value
chain:
• Focuses on each link in the chain from the customer’s perspective.
• Claimed that traditional management accounting starts too late and finishes
too soon in terms of the value chain.
• Porter advocates identifying the value chain and operation of cost drivers of
competitors in order to understand relative competitiveness.
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42.  Definition of SMA by Simmonds:
The provision and analysis of management
accounting data about a business and its competitors
for use in developing and monitoring the business
strategy
 Emphasizes on:
Real cost and price
Volume
Market share
Cash flow
The proportion demanded of an enterprise’s total
resources
 The focus shifts from the analysis of cost per se to
the value of information
* Data orientation vs Information orientation
 The significant of competitive position as being the
basic determinant of future profits & of the enterprise
value.
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43. Bromwich define SMA as;
- The provision and analysis of financial
information on the firm’s product markets and
competitor’s cost and cost structures and the
monitoring of the enterprise’s strategies and
those of its competitors in these markets over a
number of periods.
 Focus on identifying the distinctive characteristics
of market offering in order that these might be
costed.
 To secure competitive advantage, cost positioning
relative to rivals, should be conducted
 Purpose of analysis: the attribution of costs which
are normally treated as product costs to the
benefits they provide to the customer
 Recommended approach: List separately the
benefits to consumers contained in the market
offering, then to relate costs to these.
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44. ◦ Dr William G.Ouchi, management theorist introduced Theory
Z in 1981. The CLAN based approach.
◦ Traditionally, strategy has been viewed as the response of an
organization to environment.
◦ A growing understanding that strategy of an enterprise, its
structure, people who hold power, its control system, the
way its operates reflect culture of org.
◦ Ouchi suggested that Japanese commitment to democratic
leadership that resulted in increased quality, increased
productivity and decreased costs while making workers at all
levels full partners in business.
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45.  Environmental cost management
• Becoming of increasing importance because:
1. Environmental costs can represent a large proportion of
operating costs in some companies.
2. Demands from society for companies to become
environmentally friendly
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46.  ENVIRONMENTAL COST
◦ Incurred because of poor environmental quality
◦ Environmental quality cost
◦ Link to creation, detection, remediation and
prevention of environmental degradation
◦ Type of environmental cost
 Environmental prevention cost
 Environmental detection cost
 Internal failure environmental cost
 External failure environmental cost
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47.  Environmental prevention cost
◦ Objective: to minimize, if not eliminated, the
amount of waste material generated.
◦ Include: all costs associated with training
employees, evaluating and selecting suppliers,
evaluating and selecting equipment to control
pollution, designing process to reduce
environmental problems etc
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48.  Environmental detection costs
◦ Cost of activities executed to determine if products,
processes and other activities are in compliance
with environmental standards.
◦ Environmental standards:
 Regulatory laws of governments
 ISO 14001
 Environmental policies developed by management
◦ Examples: auditing environmental activities,
inspecting product and processes, carry out
contamination test etc
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49.  Internal failure environmental costs
◦ Cost of activities performed because of
contaminants and waste have been produced but
not discharged into the environment.
◦ Examples: operating equipment to minimize or
eliminate pollution, treating and disposing of toxic
materials, maintaining pollution equipment etc
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50.  External failure environmental costs
◦ Costs of activities performed after discharging
contaminants and waste into the environment
◦ Two types: realized and unrealized
◦ Realized: incurred and paid for the firm
◦ Unrealized: caused by the firm but incurred and
paid by parties outside
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51.  Definition by the Brundland Report
◦ To meet the needs of the present without
compromising the ability of future generations to
meet their own needs
 Combines three dimensions: social, economic
and environment
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52. Sustainable
development
Economy
Social
Environmental
Eco JusticeSocio-
efficiency
Eco-efficiency
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53.  Sustainability – the goal of the process of
sustainable development
 Sustainable development – balancing concept
between economic growth and environmental
protection
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54.  Application of the control system to
environmental management
 Is about learning how people in the firm
manage to control environmental issues as a
whole
 Ensures that environmental issues are dealt
with through a continuous process
 Similar to management control system
◦ Planning, action, measurement, comparison between
plans and actual outcomes, feedback and revision of
expectation for future periods
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55. End of Chapter 2
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