Saturday, 18 October 2014

Assignment on Strategic managerial accounting: For UK university students

Topic: Strategic managerial accounting




Part-A.. 1


 Part-B.. 10

Conclusion: 17
Reference: 18


In this assignment, I will go for the critical analysis of different fundamental issues of strategic management accounting. Not only that but also I will go for the application of strategic issues of the   strategic man agent accounting. To the analysis, I am assigned to a specific topic to be investigated on the light of the concept of the strategic management accounting. To make the proper investigation and analysis, I will apply some core concepts models and principles to facilitate my study. I will also identify the shortcomings of the different approaches and I will go for the overcoming the shortcomings. Everything will be done based on my personal consideration of significance
                                 

Part-A

Before presenting my about the prescribed thought I will go for the critical review of the different thoughts concepts and models  & their suitability of the application which will support my opinion regarding the precise but highly important matter among the business all over the world. These are prescribed in the subsequent parts.
A structure of management accounting within which highlighting is placed on information which relates towards factors exterior to the entity, in addition to non-financial information as well as within generated information is the definition of strategic management accounting. Towards offer a forward looking model that assists management within making company decisions, the integration of strategic business objectives through management accounting information is the strategic management accounting (McKinnon, & Bruns, 2003)..
The concept-oriented accounting that managers plus company leaders employ towards keep the company on track is referred as management accounting. Similar amongst many dissimilar styles of management accounting, it is the concepts plus inner strategic plans (McKinnon, & Bruns, 2003)..
Management Accounting Goals: A number of goals are contained by management accounting. Management of the corporation budget is one of its main concerns.
Assigning Costs Outside of Main Offering: Towards estimate the costs, managers who are concerned within the whole picture also need.  Follow-through plus marketplace analysis, The products acquire postproduction the costs of customer service.
Competitor Comparison: Towards scrutinize the costs of other businesses in the same industry; an absolute management accounting system will also have scope.
Strategic Production: Particularly in favour of manufacturing industries, strategic production is the fundamentals of management accounting. Businesses save currency plus wait sharp is helped by this.



Basic Goal Assumptions: A specific of type of goal is required in management accounting. Though, management will at all times attempt towards achieve an acceptable level of income whatsoever form the goal takes (Kaplan, & Norton, 2002).
Role of Management Assumptions: Principally upon the skill plus abilities of management which skills can differ extensively amongst dissimilar managers is dependent through the achievement of the business. Management makes utilize of exact planning as well as control concepts and techniques so as to attain desired results (Hayes, & Abernathy, 2000).
Decision-making Assumptions: Decision‑ making is a significant managerial purpose. As marketing, production, plus financial, decision which management must create may be classify.
Accounting Department Assumptions: A prime foundation of information essential in making decisions is the accounting subdivision.

Nature of Accounting Information: It is essential towards distinguish connecting fixed as well as changeable costs plus other types of costs that are not significant in the footage of business transactions so as to the accounting department towards make significant examination of data.

Decision-making may be merely definite as choosing a path of action since amongst alternatives within strategic management accounting. The one that involves the most proceeds or the least quantity of cost is a foundation assumption is that the best choice. In the following process of strategic management accounting (Horngren, Foster, & Datar, 2007)).
ü  For a specified type of decision, recognize a variety of alternatives.
ü  To assess a variety of alternatives, gain the essential data necessary.
ü  The consequences of each alternative will be analyzed plus resolute.
ü  For achieving the desired result, the alternative will be selected.
ü  The selected substitute will be implemented.
ü  Evaluation of the results of the decisions alongside standards or other wanted results at a suitable time. 

There are 2 basic models of the strategic accounting which assist to make the appropriate decision for the profit maximization, reducing uncertainty in investment and provide a clear and easy way for the achievement of the organizational short-term and long-term goals (Hansen, & Mowen, 1997).
Profit maximization model:
The logical behaviour of equilibrium postulation is profit maximization. At profit maximization model, any firm aiming will go for raising its output till it reaches maximum profit production. Dissimilarity among whole revenue plus full amount of cost is profit.
Marris Growth Maximization Model:
The model has been developed by Robin Marris. Through both the manager in addition to the shareholders contemporary firms are managed consistent with this theory. Maximize the rate of growth of the definite is aspire of the manager whereas maximizing the dividend in addition to the increasing the share price is the aim of the shareholders.
Sales Maximization Model:
For profit maximization model, this is alternative model. With W.J. Baumol, an American Economist, the model has been propounded. Relativity concerning business behaviour is the supposition within this theory. In maximizing sales rather than earnings, managers are more concerned. It was the thought of Baumol.
Shareholder Wealth Maximization Model
The purpose of a firm’s management should be to maximize the present value of the accepted future cash flows towards impartiality owners is the settled goal through the Shareholder-Wealth Maximization model.
A completely different accounting method from financial accounting is strategic management accounting. Whilst the latter prepares financial information mainly in favour of internal plus external stakeholders, the former focuses on interior production operations. An exact set of logical skills nearby plus globally is required by strategic management accounting (McKinnon, & Bruns, 2003)..

Critical Thinking:

Critical thinking is analytical skill. While all individuals have natural critical thinking skills, strategic managerial accountants must focus their critical thinking on financial information.

Mathematical

Fundamental skills for example subtraction, addition, multiplication plus division are included in these capabilities. Glean the essential figures as of them and decide the answer for items for instance objective cost or price, management accountants must be capable towards obtain manifold bits of information (McKinnon, & Bruns, 2003)..
Aptitude
When obtaining an official accounting degree, ability skills narrate to those abilities an personage learns. Frequently accounting, business finance, cost behaviour plus general management courses are built-in in curriculum.

 

 

Identification

Identifying costs plus where they belong in the universal ledger is a bulky part of the job within management accounting. Direct costs, straight labour plus manufacturing overhead, which hold both variable plus fixed costs, are included in examples.

Attention to Detail

All accounting performance necessitates attention towards detail in spite of classification or type. Towards gross misrepresentations of a company's monetary information, wrong categorization of just one cost item can guide.

Key techniques to help the management for generating information to make decision for the profit and wealth maximization are like following:
Return on investment (ROI):
To appraise the competence of an investment or to evaluate the competence of a quantity of dissimilar investments, it is a performance calculation. The result is articulated as a percentage or a ratio, towards compute ROI, the advantage of an investment is alienated through the cost of the investment (Campbell, 2005)

The return on investment formula:
Return On Investment (ROI)










Figure: ROI
Source: tobaccodocuments.org 
It is very much important for an organization to measure organizational performance. For measuring organizational performance, there are three crucial matters for the performance measurement of an organization which can be extracted from ROI. These are to know the:
*     Rate of earnings of total capital employed
*     Rate of earnings on invested capital
*     Rate of earnings on proprietary equity and stock equity
With total liabilities, net income, interest, in addition to taxes are alienated for measuring the rate of earnings of total capital employed. With proprietary equity plus fixed liabilities, the net income plus income taxes are alienated for measuring rate of earnings on invested capital. With total capital plus reserves towards calculate net income will be alienated on behalf of measuring the rate of earnings on proprietary equity plus stock equity (McKinnon, & Bruns, 2003).
The investment should be not be occupied, if an investment does not have a optimistic ROI, or else if there are other chances with a higher ROI.



For example:
 An investor buys $1,000 worth of stocks and sells the shares 1 year later for $1,200. The net profit from the investment would be $200 and the ROI would be calculated as follows:
ROI = (200 / 1,000) x 100 = 20%
The ROI in the example above would be 20%.
If the tax is $250 on this income prevails, than the ROI will be
ROI= (180/1000) x100= 18%

 

ROI gives different performance related information for the organizational management to make the more accurate and effective decision within the organization.

Its theoretical foundation is not, although EVA is reasonably new-fangled to the financial press. Through the consulting firm Stem Stewart & Company, term EVA was recently copyrighted. On value formation, EVA is a revolutionary concept, as well as to abolish most of the performance evaluation trouble besieging corporations it is most probable. On accounting conventions, most performance assessment methods rely a lot which can simply be manipulated. But throughout the employ of economic concepts, EVA focuses the concentration of managers on value creating performance (McKinnon, & Bruns, 2003)..
The investment within assets required to produce that income, in addition to the cost of the investment in assets EVA is financial performances calculate rooted in operating income following taxes.


Within scheming EVA, the three elements are used like following:
*     Operating income after tax,
*     Investment in assets
*     The cost of capital
The formula to measure EVA is:
 
Example:
Assume that Company XYZ has the following components to use in the EVA formula:
NOPAT = $3,380,000
Capital Investment = $1,300,000
WACC = .056 or 5.60%
EVA = $3,380,000 - ($1,300,000 x .056) = $3,307,200

EVA is a financial performance measure based on operating income after taxes, the investment in assets required to generate that income, and the cost of the investment in assets which make the decision making process of management more accurate.
From the above discussion we can say that the ROI & EVA are the two common features of strategic managerial accounting to make the strategic managerial decisions for the financial projection. For that reason we can easily support the following comment (Kaplan, & Norton, 2002).
"Both Return on investment (ROI) and Economic Value Added (EVA), when used as performance measures in an organisation, encourage managers to be short-term in their focus and decision making". 

There are different a limitation of ROI & EVA approaches. One of the most important limitation of the approach is these are a measure which is short term oriented. These focus on the short term financial performance measurement (Johnson, & Kaplan, 2003).)..

ROI:

To remove the short term focus problem the ROI will be in the nature of the long-term calculation. To do so, long-term costs such as maintenance, support, and software upgrades are overlooked will be included in it which may lead the perfect decision investment decisions for the project selection.

EVA:
To remove the short term orientation of EVA in this approach some additional features will be included in it which will also consider the future consideration of the facts which will be helpful for the future prediction. It will enable the managers to check the future validity of the financial result as well as the current predictions.

Part-B

When selling goods or services among corporation divisions plus departments or among a parent company in addition to subsidiary, transfer pricing methods are applied this are the rates or prices. May be the original procure price of the merchandise in question or a rate that is abridged because of internal depreciation, the pricing is set in favour of the exchange. It can assist to more capably manage profit as well as loss ratios in the company when used correctly. Usually, amongst the overall business family, transfer pricing is measured to be a comparatively simple method of moving goods plus services (Johnson, & Kaplan, 2003).
Figure: transfer price mechanism
Sources: www.sciencedirect.com
Regularly in dissimilar countries, corporation with dispersed production facilities, use transfer pricing. Over or undercharging in favour of goods sold among branches at a price dogged through the company is included by it. To take advantage of different tax rates between countries is the main objective. To appraise performance of divisions within a corporation, transfer pricing also is applied (Horngren, Foster, & Datar, 2007).

Tax Savings

Through the transfer pricing the organization can save the tax expense. Like in one multinational corporation, some goods are produced in a subsidiary where the tax rate is very high. But if the company transfer the goods to that division where national tax is very low, the tax amount will be ultimately reduced.

Boost Profits

A company can save currency on customs duties paid through the branch within the importing country with undercharging in favour of goods crossing national limits. In opposition, a corporation can take out more currency from a nation with tighter cash outflow restrictions through overcharging.

Measure Performance

How their individual divisions are performing, business require to know. Transfer pricing is a method of measuring. A corporation can measure the productivity of every division plus settle on where to create organizational adjustments through setting a price for goods within every stage of the production procedure.

Arm’s Length Standard

Through most developed countries is that on behalf of transactions among branches a company should use marketplace prices, the essential principle of this benchmark are used. Particularly when a corporation has branches in many countries, enforcement of this rule is complex.



Example of transfer price calculation:

Figure: TF
Source: tax-consultants-international.com
To employ the market price is the simplest in addition to most stylish transfer price. The upstream subsidiary can sell either inside or outwardly plus make the similar profit with either alternative, through doing so. Rather than being topic towards the odd profit vagaries that can happen beneath mandated pricing schemes, it can also make the uppermost probable profit (Horngren, Foster, & Datar, 2007).

Negotiated transfer prices                                     

Without using any market price as a baseline, it may be required towards negotiate a transfer price among subsidiaries. When there is no perceptible market price since the market is extremely small or the goods are extremely tailored, this circumstance arises. The relation negotiating skills of the parties are the foundation of this result within prices (Hayes, & Abernathy, 2000).
Example of the market-based & negotiated transfer price:

Figure: market based and negotiated transfer price

Sources: www.bdo.uk.com


It may be foolish towards always set transfer price accurately at the changeable costs of production; it is applied inside an imperfect market. For example: prices do not offer for the substitution of permanent assets. On total amalgamation cost to make sure that it will give a contribution to wrap the fixed overheads, the Supply Division will desire to bottom the transfer price. Since managers necessitate an estimate of long-run marginal price in favour of decision-making, full-cost based transfer price is extensively used. Though, to supply poor estimates of long-run trivial cost for decision-making, usual amalgamation costing systems are apt (Hansen, & Mowen, 1997).


A firm could think using a system that creates a transfer price rooted in the cost of the mechanism being transferred, if there is no marketplace price at all on which to bottom a relocate price where the company accumulate the criterion cost of a constituent, add a criterion profit margin, and use the consequence as the move price, the most excellent way towards do this is to add a margin on the cost (Campbell, 2005).

Examples full-cost and cost plus transfer price                          


Figure: full cost and cost plus transfer price
Source: income-taxpert.blogspot.com
Inside the organizations, the innermost management takes the dissimilar strategic decisions. They require the performance connected information of the organization in favour of that explanation. Controlling in addition to monitoring is required towards attain the information the business. An innermost management cannot monitor plus control all the process parameters of each subunit within a great organization. This is why large organizations are typically divorced into divisions. To obtain all essential action, each division is an independent unit plus its manager has the liberty. But, the performance of the division managers, a decentralized business has complexity for evaluating. In addition, organize the activities of the divisions towards make the most of the organization's total income, the innermost management of the association needs. A method is necessary on behalf of measuring the payment of each division towards the total income of the organization so as to assess the performance of every division. From one separation towards another, an ordinary solution to this difficulty is to put prices for middle goods which are transferred. Since transfer prices, these prices are recognized. Transfer prices are mainly used (Brinker, 2005).
*     Anchored in the profits that he produces, towards assess division managers' performance.
*     decisions
*     Similar to the pricing of the concluding product, towards allow the divisions to take decisions
*     Provides the divisional independence

*     Because of the manager’s closeness to local circumstances, decisions are improved plus timely.
*     Through routine, restricted decision trouble, top managers are not unfocused.
*     Because they have additional manage over results, managers’ motivation increases.
*     For managers for senior stage positions within the future, augmented decision making provides better training.


ü  Within dissimilar parts of the business, be short of of goal congruence amongst managers

ü  Towards top management, inadequate information available for making decisions

ü  Amongst managers unresponsive parts of the business, be short of of coordination


In this assignment, I have gone for the critical analysis of different fundamental issues of strategic management accounting. Not only that but also I have gone for the application of strategic issues of the   strategic man agent accounting. To the analysis, I was assigned to a specific topic to be investigated on the light of the concept of the strategic management accounting. To make the proper investigation and analysis, I applied some core concepts models and principles to facilitate my study. I also identified the shortcomings of the different approaches and I have gone for the overcoming the shortcomings. Everything have been done on this assignment based on my personal consideration of significance











1)     Brinker, B. (Ed.). (2005). Handbook of Cost Management. Boston, MA: Warren Gorham Lamont.
2)     Campbell, R. (2005). I, 31-36.
3)     Hansen, D., & Mowen, M. (1997). Cost management: Accounting and control. Cincinnati, OH: Southwestern Publishing.
4)     Hayes, R., & Abernathy, W. (2000). Managing our way to economic decline. Harvard Business Review, 67-77.
5)     Horngren, C., Foster, G., & Datar, S. (2007). Cost accounting: A managerial emphasis. Upper Saddle River, NJ: Prentice Hall.
6)     Johnson, T., & Kaplan, R. (2003). Relevance lost: The rise and fall of management accounting. Boston, MA: Harvard Business School Press.
7)     Kaplan, R., & Norton, D. (2002). The balanced scorecard - Measures that drive performance. Harvard Business Review, 71-79.
8)     McKinnon, S., & Bruns, W. (2003). What production managers really want to know. Management Accounting, 29-35.








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