Accounting is the art of recording, classifying, and summarizing in a
significant manner and in terms of money, transactions, and events which
are, in part at least, of a financial character, and interpreting the results
thereof." – Committee on Terminology, AICPA
Strategic Management Accounting
Strategic management accounting (SMA) extends beyond traditional cost
accounting by integrating financial data with strategic insights about the
business environment, competitors, and market trends. It aids management
in long-term planning and decision-making by providing comprehensive
information that encompasses both internal operations and external factors.
SMA involves the collection, processing, and evaluation of operating data—
such as product costs, operational processes, job performance, material
consumption, and labor usage—for internal planning, control, and strategic
decision-making. Unlike traditional cost accounting, SMA emphasizes the
analysis of both financial and non-financial information, including
competitor behavior and market dynamics, to inform strategic choices.
Applications of Strategic Management Accounting
 Pricing Strategies: SMA assists in determining appropriate pricing by
analyzing unit costs of production, administration, and sales, ensuring
prices are competitive yet profitable.
 Cost Control and Efficiency: By identifying controllable and
uncontrollable costs at each production and sales stage, SMA enables
management to focus on areas where cost reductions are feasible.
 Creditor Assurance: SMA provides insights into the company's
operational efficiency and financial health, offering assurance to creditors
and investors regarding the organization's ability to meet its obligations.
 Make-or-Buy Decisions: Through detailed cost analysis, SMA aids in
deciding whether to manufacture components in-house or purchase them
externally, considering both cost and strategic implications.
 Verification of Financial Accounts: An effective SMA system serves as a
reliable check on the accuracy of financial accounts, ensuring consistency
and integrity in financial reporting.
 Governmental Applications: SMA supports government functions such
as tariff formation, price control policies, development of cost standards
for contracts, and determination of export incentives.
Factors to Consider When Implementing
Management Accounting System
a
Strategic
 Product or Service Range
The number of products being manufactured or services being rendered
should also taken into consideration.
 Future Planning Needs
The system must provide reliable information for future planning.
 Nature of Operations
The system should be designed after careful analysis of the nature of
operations involved the object of costing and the type of cost data required
by management. The areas of should also be kept in view while designing a
cost accounting system.
 Simplicity and Usability
Costing system should be simple and easy to operate. The procedure should
be easily understood by the operating staff of all categories.
 Organizational Size
Size of the concern should be taken into consideration whether it is large,
medium of small one.
 Use of Standardized Forms
Printed forms should be used record cost data so as reduce the clerical works
as far as possible.
 Flexibility
It must change itself with the changing requirements of the concern.
 Comparative Data Provision
The system must provide comparative data for analysis and cost control.
 Coordination with Financial Accounting
There should be sufficient Co-ordination between the financial accounting
and cost accounting departments.
 Cost-Effectiveness
The cost accounting system must not be very costly but the expenditure
which the concern can afford in its installation and for its successful
operations must be considered.
 Business Nature
Nature of business whether manufacturing or merchandising should be taken
into consideration when a cost accounting system is installed.
 Requirement Fulfillment
The system should fulfill all requirements of the business concern or the
management.
 Technical Considerations
The technical aspects of the business should be taken into consideration and
an attempt to be made to get the sympathetic assistance and support of the
supervisory staff and workers for costing system.
 Regular Reporting
There should be promptitude, frequency and regularity in the presentation of
costing reports to management.
 Accuracy Levels
The degree of accuracy desired should be determined.
Advantages
Accounting
and
Objectives
of
Strategic
Management
 Strategic Planning Support
Costing guides future production policies. It explains the costs incurred and
profits made in various lines of business and processes and thereby provides
data on the basis of which future production can be appropriately planned.
 Financial Accuracy Verification
It provides an independent and reliable check on the accuracy of financial
accounts with the help of the reconciliation of the two at the end of the year.
 Profitability Analysis
SM accounting discloses what products are profitable or less profitable and
might be eliminated or lesser sales pressure be given to them.
 Inefficiency Detection
It reveals losses or inefficiencies occurring in any form, such as idle time,
excessive spoilage, or scrap, underutilization of plant machinery.
 Quotation and Tender Preparation
Costing provides such information upon which estimates and tenders may be
based prices may be adjusted to meet market conditions. In case of big
contracts or jobs, it is difficult to give quotations without knowing estimated
cost.
 Profit and Loss Analysis
The exact cause of a decrease or an increase in the profit or loss of business
can be located. Management can know whether the profits have come down
because of increase in the cost of materials or increase in labour rates or
both.
 Inventory Management
It provides a perpetual inventory systems which helps in the preparation of
interim profit and loss account and Balance Sheet without any stock taking.
 Cost Analysis and Classification
The expenditure recorded and summarized in financial accounts is analyzed
and classified with reference to the cost of products and operations.
 Cost Determination
To arrive at the cost of production of every unit, job, operation process,
department or services, cost accounting is very helpful.
 Cost Control
It helps in controlling the cost with the application of standard costing and
budgetary control. Cost comparison also helps in cost control.
Essentials of an Effective Strategic Management Accounting
System
 Executive Support
If a costing system is to be successful, it must be fully supported by
executives of various departments and everyone should participate in it.
 Defined Cost Centers
In order to derive maximum benefits from costing system, well defined cost
centers and responsibility centers should be built within the organization.
 Method Suitability
Method of costing adopted, i.e. job or process costing, shoul be suitable to
the industry and serve the objectives of installing the system.
 Continuous Education:- Well trained and educated staff should be
employed to operate the system. In order to educate the costing staff
written manuals and meetings etc, should be arranged on a continuous
basis.
 Specially designed system:
A ready made costing system cannot be suitable for every business. The
cost accounting system should be tailor made according to the requirements
of a business.
 Cost of the system:The cost of installing and operating the system should be justified the
results produced.
 Integration with financial accounts:There should be cooperation and coordination between cost accounting and
financial accounting departments In order to avoid duplication of accounts,
cost and financial accounts may be integrated.
 Avoid unnecessary details:Resources should not be wasted on collecting and compiling cost data not
required. Only useful cost information shold be compiled and used whenever
required.