Different fundamental issues of strategic
management accounting will be described in this report. Not only that but also this
report will show the application of strategic issues of the strategic man agent accounting. To the
analysis will provide the instruction of a specific topic to be investigated on
the light of the concept of the strategic management accounting. To make the
proper investigation and analysis, in this report some core concepts models and
principles will be discussed which will to facilitate my study. the
shortcomings of the different approaches will be identified and ways for the
overcoming the shortcomings will be described in this report. 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:
(Total Investment Revenue
–Total Investment Cost) X100
Figure: ROI
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%
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
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
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).
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).
Example:
Figure: full cost and cost plus transfer price
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 coordination
Conclusion:
Different fundamental issues of strategic
management accounting are described in this report. Not only that but also this
report is shown the application of strategic issues of the strategic man agent accounting. To the
analysis the instruction of a specific topic to be investigated on the light of
the concept of the strategic management accounting is provided in this report.
To make the proper investigation and analysis, in this report, some core
concepts models and principles discussed here which will to facilitate my
study. The shortcomings of the different approaches identified and ways for the
overcoming the shortcomings described in this report. Everything will be done
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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