MANAGEMENT
AND COST
ACCOUNTING
SIXTH EDITION
COLIN DRURY
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
Part Five:
Cost management and strategic management accounting
Chapter Twenty-three:
Strategic management accounting
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.1
What is strategic management accounting (SMA)
•
The provision of information to support strategic decisions in organizations (Innes,1998).
•
Review of literature by Lord (1996) identified the following strands:
1.
2.
3.
Extension from internal focus of management accounting (MA) to include external
information about competitors.
The relationship between the strategic position chosen by the
firm and the expected emphasis on MA.
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.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.2a
External information about competitors
•
MA should help firm evaluate its competitive position relative to
the rest of the industry.
•
Managers require information that indicates by whom and by how
much they are gaining or being beaten.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.2b
Accounting in relation to strategic positioning
•
Advocates that firms should place more emphasis on particular techniques depending
upon the strategic position they adopt.
•
Evidence to suggest that:
1.
2.
3.
Business units following a defender strategy place a greater emphasis on the use of
financial measures for rewarding managers.
Non-financial measures for determining executives’ bonuses increases with the
extent to which firms follow prospector strategies.
Businesses following a build strategy rely more on non-financial measures of
performance for determining managers’ bonuses.
•
Advocated that defenders (Miles and Snow) and business units pursuing a low cost
strategy (Porter) should adopt results measures that emphasize cost reductions and
budget achievement.
•
Business units competing on the basis of differentiation (Porter) or those prospecting new
markets should require more information than a cost leader about new product
innovations, design cycle times and research and development.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.3
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.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.4
The balanced scorecard
•
Traditionally MA focused mainly on financial performance measures.
•
Greater emphasis now being given to incorporating non-financial
measures into the formal reporting system.
•
Result was a proliferation of performance measures.
•
To integrate financial and non-financial measures the Balanced
Scorecard (BSC) emerged.
•
BSC seeks to link performance measures to an organization’s strategy —
Should be used to clarify, communicate and manage strategy.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.5
•
BSC Advocates looking at the business from four different perspectives by seeking to
provide answers to the following four basic questions:
1.
2.
3.
4.
How do customers see us? (customer perspective)
What must we excel at? (internal business process perspective)
Can we continue to improve and create value? (learning and growth perspective)
How do we look to shareholders? (financial perspective)
•
To implement the BSC the major objectives for each of the 4 perspectives should be
articulated and these objectives should be translated into specific performance
measures.
•
A critical assumption of BSC is that each performance measure is part of a cause-andeffect relationship.
•
The BSC consists of two types of performance measures:
1.
2.
Lagging measures
Leading measures
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.6
Figure 23.1 The Balanced Scorecard (Source: Kaplan and Norton, 1996b)
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.7a
The financial perspective
•
Typical measures include ROI, RI and EVA TM
•
Besides targets for the above, other objectives include revenue growth, cost
reduction and asset utilization.
•
Argued by some that by focusing on other perspectives, financial measures
will take care of themselves.
The customer perspective
•
Typical generic measures include:
1. Market share
2. Customer retention and loyalty
3. Customer acquisition
4. Customer satisfaction
5. Customer profitability
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.7b
The internal business perspective
•
Critical internal processes for which the organization must excel
(e.g.innovation, operation and post-service sales processes).
•
Typical innovation measures include:
1. Percentage of sales from new products.
2. New product introduction versus competitors.
3. Product development break-even time.
•
Typical operation process measures include:
1. Cycle time
2. Quality
3. Activity and process costs
•
Post-sales service processes:
1. Develop appropriate time,quality and process measurements.
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury
23.8
The learning and growth perspective
•
Focuses on the infrastructure that the business must build to create longterm growth and improvement.
•
Three principal categories identified:
1. Employee capabilities
2. Information system capabilities
3. Motivation,empowerment and alignment
Management and Cost Accounting, 6th edition, ISBN 1-84480-028-8
© 2000 Colin Drury
© 2004 Colin Drury