Use Roslender’s 2003 broad definition of Strategic Management Accounting (SMA)

Use Roslender’s 2003 broad definition of Strategic Management Accounting (SMA)

Use Roslender’s 2003 broad definition of Strategic Management Accounting (SMA). Critically assess whether SMA may give an economic advantage by supporting Strategic Management for firms operating globally. (25 marks)

Roslender and Hart (2003) define strategic management accounting as a generic way to accounting for strategic positioning which is defined by the integration of marketing management and management accounting in the company’s strategic management framework. Strategic management accounting is the approach that combines accounting and strategic management in financial reporting. Strategic management accounting is described as the process used to provide and analyze management information about the company and its competitors which is applied in the development and monitoring of the business strategy.

The concept of SMA can be illustrated by evaluating some of the leading global companies, for example, Tesco which has customized its key performance indicators so as to remain competitive in the global competitive market. For instance, instead of maximizing EVA, the company identifies inventory are its main fixed assets.  To reduce the cost of the store used to hold the inventory the company uses strategic partners to construct stores. In order to evaluate the market position, there is a need for a company to constantly monitor the price of its products compared to the prices charged by the company’s main competitors. In addition, the company may use a store card to promote customer loyalty as a database for analyzing the specific need of the customers based on purchasing patterns.

Global companies can use strategic management accounting to help them to improve their economic competitiveness. the economic advantage can be evaluated from three main perspectives that are the cost perspective, quality perspective, and flexibility, delivery, and innovation.

Cost perspective

According to Baroto et al. (2012) organization must focus on cost so as to lower the cost marketing and production cost of its products so as compare to those of their competitors. The SMA helps the company reduce its cost hence enabling acquisition of higher market share which economics it acts as the basis of superiority and success. From a financial and economic perspective, product price reduction contributes to demand increase as well as profit margin as a result of lower production costs (Sachitra et al., 2016).

Differentiation perspective

Differentiation is approached by businesses to make them different from others in the economic marketplace. Many owners of the business strive to make their business look unique compared to others. Strategic management accounting operates in tandem with other company divisions to enhance customer satisfaction. To differentiate business product most global companies improve on product placement, corporate image, and supply chain, and customer satisfaction. Multinational companies apply SMA to review the costs associated with product differentiation hence ensuring that the company does not lose its cost position.  The company, therefore, does not increase its uniqueness at the expense of total cost. Maintenance of sustainable cost advantage should be observed when differentiating corporate products.

Flexibility perspective

Flexibility refers to the company’s ability to report to changes so as to suit to the current customers’ needs. Unlike traditional accounting which more rigid strategic management accounting promotes flexibility in decision making. The introduction of strategic management accounting promotes innovation and creativity in decision making which promotes the competitiveness of the company in the current global business environment.

Business expansion

Management accountings also focus on increasing business activities. Management assessment and continuous improvement of business activities play a critical role in the success of multinational companies. Strategic management offers information useful for planning, decision making, and other business activities. Through strategic management accounting, the management is able to identify the market trend and hence able to identify the areas for expansion. The management accounting strategy also plays a critical role in assessing the competitive position of the company as well as working with other stakeholders to make sure that the company’s long term competitive advantage in the market is sustained.

Task 2 linked to Unit 3 – A Strategic Cost Management tool in action (Case Study at Appendix 2) (25 marks)

The full absorption cost of the book (8 marks),

Cost

Sheets of Silk Paper = 120/100 x 3.5 = 4.2

1. 150 gsm Paper = 120/50 x 1.5 = 2.88
2. Sewed binding = 2.32
3. Red edge colouring = 0.25
4. Colours on the covers = 0.23
6. Absorption cost formula = (Direct labor cost + Direct material cost + Variable manufacturing overhead cost + Fixed manufacturing overhead) / No. of units produced

The target cost and the cost gap that needs to be closed (4 marks).

Target cost = target selling price – target profit

Target selling price =19.79 +2 = 21.79

Clarify the meaning of value engineering and make suggestions for closing the cost gap (include relevant justifications and calculations). (7 marks)

Value engineering refers to an organized and systematic approach through which an organization offers services at the lowest cost. The objective of value engineering is the application and esteem value of a product awhile reducing the production cost. For instance, in selling a product it is important to consider how the product is packaged. For example, it is a motor vehicle manufacturing company it is possible for the company to reduce the cost of car production by replacing some components that cheaper ones without affecting the esteem value of the car produced. The value engineering closes the gap between the estimated cost and the target cost.

Example

A company intends to produce a new product. Information from market research indicates that the product should sell 10,000 items at $21.00/ item. The mark-up is suggested to be a 40% product cost.

Product costs are as follow: the cost of design is $50,000, manufacturing cost $10/unit and other marketing cost $20,000. The market research suggests that is the company spend £15,000 on design, the cost of manufacturing could be reduced. Compute the maximum cost of manufacturing per unit if the company mark-up remains the same.

Selling price = cost + mark-up = 100% +40%

140/40 x15 =21

Estimated cost = (50,000 +20,000 + (10×10, 000))/10,000= 17

This cost per item is the target cost per unit; hence the selling price will not meet the cost of production

Maximum total cost per unit = $15.

Some of this cost be as a result of the design and marketing costs

($50,000 + $15,000 + $20,000)/10,000 = $8.50

Thus, the maximum cost of manufacturing per unit would decrease from $10 to;

($15 – $8.50) = $6.50

At this level, the company product will maintain value esteem and at the same time the mark-up will still remain the same

Consider the implications of the suggestions in B) and any criticisms that might be leveled at this Target Costing process. (6 marks)

Value engineering reduces the cost of production hence enabling the company to reduce the price products. The company is able to benefit from the economy of scale hence increasing the business profitability. Value engineering also promotes creativity. The business develops a new method of cost reduction without affecting the value delivered to customers.

On the other hand, value engineering is associated with some limitations. Value engineering is associated with sophisticated material that may not be available in the organization. At the initial stage, the company may be required to invest more in technology and hence making the company lose some of the current opportunities.   The process also requires critical thinking which makes it be a complex process for the employees.

Task 3 linked to Unit 4 – Transfer Pricing and SMA (Case Study at Appendix 3)

1. Explain why the Financial Controller is suggesting that the use of the current “Full Cost Plus” transfer price could be causing dysfunctional behavior (5 marks);

Transfer pricing is the allocation of cost to the transaction of products and services between related divisions. Full cost plus is a transfer pricing approach where the price of the product is derived by summing up the direct labour cost, direct material cost, overhead costs, and administrative cost and mark-up percentage. Full cost plus transfer price would result to increase in the transfer price. Fall in the final selling price may, however, lead to dysfunctional decisions.  In case of high transfer price, the receiving division may decide not to procure items from the transferring division since they believe that transfer makes no positive impact on the division. This may also cause the division to abandon the company product line or purchase cheaper products from outside suppliers instead of procuring from their sister division.

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Prepare a Briefing Paper which demonstrates the impact on the Group’s financial performance (after Tax) and considers the potential reaction of the Divisional Managers, if the proposal to change to a “marginal cost plus a lump sum” transfer pricing approach, is implemented (15 marks);

The marginal cost pricing is the practice of pricing a product at slightly above or at variable cost used at applied at producing the product. The selling division transfers products at a marginal plus lump sum charge to cover the fixed cost.

Tax changeable assuming full cost pricing

UK division 19% x175 = 33.25

South Korea: 25A% x 50 =6.25

Australia: 30% x 100= 3

Total tax =42.5

Buy adapting the marginal cost plus a lump sum the transfer between division will mean that the division will make profit neither loss. The profit before tax per unit will increase as a reduction in the cost of the transfer. The tax for the company UK division will go up as a result of the high as to result of high profit however the profit after tax will be high. By considering the proposed changes the company profit after tax will increase. The division manager will also be motivated to buy from the other divisions due to the reduction of the transfer price. In the long run, this would read to increase sales hence increasing the profit after tax for the company.

Suggest an appropriate transfer price for Goggles to be used in the future if the South Korean Division receives an order from a customer from outside the Group for 1000 units at a special price of £175 per unit

£175 = cost + mark-up

Transfer price = variable cost fixed cost

= 25+75 =£100

The most appropriate transfer price is £100. The price is below the selling price to the outside customer and therefore the division is going to make a profit.

Task 4 linked to Unit 6 – Balanced Score Card in SMA (Case Study at Appendix 4)

(25 marks)

Case Study: Sandcastle Dairies Ltd

The performance measurement model refers to the set of formal information-based procedures and routines that a manger applies to alter or maintain patterns in the business activities. The main objective of the performance system is to improve business performance. To enhance the performance of the business the management can implement different changes in the business. The performance measurement models help the company to access greater market shares and also help the manager in creation as well as the implementation of a better strategy. Innovation is the only way to achieve long-term performance in a business.  Innovation is a valuable element of the performance metric.

Balanced scorecard

Balance score is an important tool used by managers to achieve competitive advantage. As a finance director, it is important to understand that the company will be competing in a complex market. The balanced scorecard assesses the performance of the organization in for perspectives. This includes;

Financial perspective: it involves the management of financial resources. The new team should focus on how to invest and how to attract more profit for the organization.

Customer’s perspectives; understanding what your customers require in terms of cost, distribution, and quality is very important. The management should focus on understanding consumer behaviour toward different products offered by the company.

The management should understand the internal process of the company and how they help to achieve the company objective as to how they can enhance consumer experience to the products offered by the company. Improvement of the internal process assists in improving the entire organization’s performance.

The company should also adopt the learning and growth perspective which main focus is the training and development of the team. Human resource training and development helps in offering quality services. Innovation in the company depends on the company internal processes as well as learning and growth perspectives.

The benefit of the balanced scorecard

1. An explanation of the benefits and problems, for Sandcastle Diaries Ltd specifically, of adopting a Balanced Scorecard and conclude whether it would be appropriate, or not, in their case with their current strategic goals.

The balanced scorecard offers an influential framework for development and communication strategy. Business model forces managers to focus on cause-and-effect relationships. Strategy map process development makes sure consensus is achieved over the interrelated strategic goal. The balanced scorecard gives a picture of where the business wants to be in the future.

The balanced scorecard model increases creativity and the sharing of ideas. This helps the management to understand business strategy as well as engage employees and external stakeholders in the review and delivery of the strategy.

The concept of a balanced scorecard offers strategic feedback and learning. This will help the management to understand the customer taste and preference and hence offer marketable products to the market.

Problems of the balanced scorecard

The balanced scorecard is a long-term solution that requires huge investment. All employees require business operation and this leads to increased training expenses. The company may be required to employ external professionals to help in implementing the system. The cost of software purchases and maintenance is high.

The other problem associated with a balanced scorecard is resistance by some of the stakeholders. Not all stakeholders will accept the proposed changes hence affecting the operations of the business. The balanced scorecard focuses more on the internal operation and ignores the external stakeholders. The main focus is the customer ignores other key performance indicators such as business competitors and environmental impact. This may affect the performance of the company negatively.

Balanced scorecard