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8/12/2019 8. Lect 8 Strattegic Management Accounting
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Management Accounting
Lecture 8
Strategic Management Accounting
8/12/2019 8. Lect 8 Strattegic Management Accounting
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Problems with Traditional
Management Accounting
Key literature:
Kaplan and Johnson: Relevance Lost
the Rise and Fall of Management
Accounting.
Bromwich and Bhimani: Management
AccountingEvolution not Revolution
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It took Johnson and Kaplans book RelevanceLostThe rise and fall of managementaccounting (1987) to make the majority ofaccountants face the inevitable.
The Chartered Institute of ManagementAccountants (CIMA) commissioned aninvestigation of the state of managementaccounting in the late 80s.
Findings published in Management AccountingEvolution not Revolution by Bromwich andBhimani
Evolvement of Management
Accounting
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Strategic Management Accounting
(SMA)
Definition
A form of management accounting in whichemphasis is placed on information whichrelates to factors external to the firm, as wellas non-financial information and internallygenerated information.
CIMA Official Terminology
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SMAother definitions
The provision and analysis of financial information on the
firms product markets , competitors costs , cost structures
and the monitoring of the enterprises strategies and those of
its competitors in these markets over a number of periods.
(Bromwich 1990) The provision of information to support the strategic decisions
in organisations. (Innes 1998)
Strategic management accounting techniques are designed to
support the overall competitive strategy of the organisation,principally by the power of using information technology to
develop more refined product and service costs. (Cooper and
Kaplan 1988)
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Strategic Management Accounting
(SMA)
Despite the publicity SMA has received there is
still no comprehensive conceptual framework of
what strategic management accounting is.
Coad (1996)states:Strategic Management Accounting is an
emerging field whose boundaries are lose and,
as yet, there is no unified view of what it is or
how it might develop.
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Strategic Management Accounting
(SMA)
Lord (1996)identifies the following strands fromliterature that constitutes SMA:
The extension of traditional managementaccountings internal focus to include external
information about competitors The relationship between the strategic position
chosen by the company and the expected emphasison management accounting
Gaining competitive advantage by analysing ways todecrease costs and/ or enhance the differentiation ofa firms products, by exploiting linkages in the valuechain and optimising cost drivers.
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Summary - SMA
Provides relevant information to enableorganisations to make strategic plans anddecisions
Emphasis is on external information
Non-financial information plays animportant role in managing organisations
today.
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External Information
For an organisation to succeed it cannot rely on
internal information alone.
Internal information?
Simmonds (1981) argues management accountingshould be outward looking to evaluate its
position against the rest of the industry.
Why?What additional information is required and from
whom?
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Non Financial Information
For an organisation to operate efficiently its
performance should be constantly
monitored.
Traditional performance measures tended tobe financial.
Is this sufficient?
What are the critical success factors of anorganisation today?
How can these be monitored?
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Johnson and Kaplan were instrumental in thedevelopment of ABC, ABB and ABM.
Cooper and Kaplan introduced the Balancedscorecard.
Other SMA techniques include quality costing,lifecycle costing, target costing, kaizen costing
and customer account profitability analysis etc.
Some SMA Techniques
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Life Cycle Costing
Life cycle of a product spans the timefrom initial R & D to the time whensupport to customers is withdrawn.
Time span can vary from industry toindustry.
Life cycle costingtracks and
accumulates costs attributable to aproduct over the life of the product ratherthan periodically.
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90% of a products life cycle cost isdetermined by decisions made at the initialstage of the life cycle. A large fraction of thelife cycle costs consists of costs incurred on
product design, prototyping, process designand equipment acquisition.
Berliner and Brimmer
Information relating to the cost implications ofalternative product designs, target coststhroughout the product life cycle etc. Are usedto manage costs.
Life Cycle Costing
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Kaizen Costing
Kaizen (continuous improvement) costinga mechanism for reducing and managingcosts.
Focuses on the production process unliketarget costing which focuses on thedesign stage.
Relies on employee empowerment whohave a better knowledge of theprocesses.
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Quality
QualityFitness for purpose
Inferior quality can be overcome by
implementing quality improvements
initiatives.
This would involve additional costs but
will also result in cost savings and higher
revenue.
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Quality Costs
Costs can be managed by analysing quality
related costs as:
Prevention costs
Appraisal costs
Internal failure costs
External failure costs
Investing in prevention and appraisal will
reduce internal and external failure costs.
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Just in Time
Just-in-time (JIT) is a system whose objective isto produce or to procure products or
components as they are required by a customer
or for use, rather than for stock.
A just-in-time system is a pull system, which
responds to demand, in contrast to a push
system, in which stocks act as buffers between
the different elements of the system, such as
purchasing, production and sales.
(CIMA Official Terminology)
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Just in Time
JIT is not an inventory system to minimise
stocksthis is just an outcome of JIT.
JIT involves commitment to excellence in
all phases of manufacturing, systems
design and operations, and seeks to
eliminate waste.
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The two aspects of JIT
JIT Production is a production system that is
driven by demand for finished products
whereby each component on a production line
is produced only when needed for the nextstage.
JIT Purchasing is a purchasing system in which
material purchases are contracted so that the
receipt and usage of material, to the maximum
extent possible, coincide.
(CIMA Official Terminology)
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The aim of JIT is to:
Produce the required items
At the required quality
In the required quantity At the precise time it is require
and
Improve profits, return on investment etc.through:
Cost reductions Inventory reductions and
Quality improvements
Just in Time - Aims
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Attacks and eliminates waste
Zero inventory
Zero defects
Batch size of one
Zero breakdowns
Exposes production problems and
bottlenecks
100% on-time delivery
JIT manages costs through:
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Employee participation
Suitable factory layout
Continuous improvement
Total quality control
Small lot sizes
Co-ordination of supplier customer chain
Reliable suppliers Good transport system
A cultural change
Successful JIT requires
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