STRATEGIC MANAGEMENT ACCOUNTING

Strategic Management Accounting

Management Accounting

PART 1 - Accounting Information

During the late 1980s, criticisms of traditional management accounting practices were widely publicized and new approaches, which were more in tune with the current competitive and business environment, emerged (Drury, 2002, p923). A particularly effective approach was strategic management accounting (SMA). However, Tomkins and Carr (quoted in Drury, 2008, p.570) note that there is no comprehensive definition of SMA, even though it has received a lot of publicity. This essay will seek to compromise the definitions found in literature. It will also focus on some selected modern management accounting techniques encompassed within the domain of SMA, such as life-cycle costing, target costing, value chain analysis and the balanced scorecard. Furthermore it will analyze how they can make their contributions towards the success of an organization.

SMA is the ?provision of information to support the strategic decisions in organizations? (Innes 1996, cited in Drury, 2008, p.570) and these strategic decisions usually involve the longer-term, have a significant effect on the organization and have both internal and external elements. This definition is supported by Cooper and Kaplan (1988). A variety of writers have suggested that target costing, life-cycle costing and activity-based management are additionally encompassed within SMA (Drury, 2008, p.570).

Other writers have adopted definitions that SMA emphasizes external elements (Drury, 2008). Simmonds (1981, 1982, cited in Drury, 2008, p.570), who first created the term SMA, views it as the provision and analysis of information about a business and its competitors which is useful in the development and monitoring of the strategy of that business. In his view, profits emerge not from internal efficiencies but from the firm?s competitive position in its markets. (Drury, 2008, p.570)Although there is a lack of consensus on what SMA is, some basic characteristics are reflected uniformly, that is, involving the external environment and market and hence the entirety. Lord (1996) organized SMA into three strands: external information about competitors, accounting in relation to strategic positioning and gaining competitive advantage using value-chain analysis (cited in Drury, 2008).

Modern costing techniques within SMA, unlike traditional management accounting costing techniques, focus on the reduction rather than the containment of cost. For example, life-cycle costing estimates and accumulates costs over the life-cycle of a product (Drury, 2008, p.538). In order to analyze the implications of life-cycle costing for different products, this example will be based on two products, mobile phones and nuclear power plants, which have very different life-cycles. BPP Learning Media (2008) suggests that, generally, unlike nuclear power plants, mobile phones have a short life cycle. The high cost of the development and introduction stages of mobile phones were due to the development and marketing of the product, whereas in nuclear power plants they were due to building and equipment costs. In the growth stage, due to economies of scale, the cost per phone falls dramatically and similarly cost per unit of electricity for nuclear power plants declines. In the maturity stage, main costs for both products are variable costs; ...