Strengths and Weaknesses of the Management Accounting Technique - Literature review Example

Management Accounting Name Institution Course Date Management Accounting Introduction Accounting is the process of identifying, evaluating, measuring and sharing of economic information and data to allow informed judgements and decisions from information users (Hancock, Barley and Robinson, 2015). The information in accounting structures is related to financial data of business transactions presented in monetary terms. The accounting systems and structures allow the generation of forecast and predictions necessary for decision making (Roselender and Stevenson, 2009). In general, accounting offer a medium where marketing, human resource and other aspects of decision may be presented in monetary terms. The accounting literatures present various specialised fields of accounting (Hancock, Barley and Robinson, 2015). One of these accounting fields includes the management accounting. Management accounting provides appropriate information to help the management in decision making and also management control. Management accounting can be defined as the application of necessary information in a manner in which it assist the management in the development of policies and in the control of business operations (Hancock, Barley and Robinson, 2015). Management accounting is noted as an integral part of any management process; therefore, management accountants are considered important strategic partners in a firm’s management team. Management teams always seek to create value for their organisation through management of resources, employees and operations in order to achieve organisational objectives and goals effectively. Therefore, managers require information and data which can be utilised in decision making and in controlling business operations. Management accounting thereby serve management by providing the required information, advice and recommendations (Nixon and Burns, 2012). Different companies make use of different management accounting techniques in decision making for the purpose of achieving business objectives. The purpose of this paper is to critically evaluate and investigate the management accounting technique used in my company to assess the performance of departments and organisation at large. The paper will highlight the strengths and weaknesses of the management accounting technique with reference to strategic management accounting. Management accounting in practice The rapid changing and evolution of business environment is significant today. It has led to the change in management accounting practices in companies. However, the main functions of management accounting have not changed and are to improve the performance and profitability of a business organisation by offering necessary information and data for planning, coordinating, controlling and decision making (Roselender and Hart, 2003). A more complex business environment is handled by a sophisticated management accounting technique. Different organisations have implemented different management accounting techniques. In the globalised environment, all business organisations have to operate in a very competitive business surrounding (Roselender and Hart, 2003). The witnessed changing business environment into global and competitive environment has impacted how individuals carry out their businesses in organisations either big or small company or either profit or non-profit oriented company. The impacts of intensified competition globalised economy, scarce resources, technological advancements and complex business environment drive organisations to realising the importance of more detailed information and data (Langfield-Smith, 2008). In every competitive market, detailed information is the core factor needed for survival. Major information required is management accounting information. Management accounting processes have to ensure that information and data presented to the managers are useful in carrying out their functions (Roselender and Hart, 2003). When companies become more sophisticated and complex, management accounting concept becomes more crucial. If management accounting is to be used to maintain its importance, it requires adjustment according to manager’s needs. Some management techniques include activity based techniques, target costing, strategic management accounting and balance scorecard (Norreklit and Mitchell, 2007). Management accounting process which provide relevant and essential information assist in creating effective decision making vale and offers an integrated perspective to management approach with relevant information (Nixon and Burns, 2012). Strategic Management Accounting in organisation The relationship existing between strategy, performance and management accounting has attracted attention in accounting (Tucker et al., 2009). Management accounting plays a core role in the creation and execution of nosiness strategy. Therefore, incorporating a company’s management accounting control process to its business strategy will result to enhanced performance. Accountant’s involvement in a business strategic management process depends largely on the organisational positions, resources available, the abilities of the accountants, organisational culture to name a few (Tucker et al., 2009). Strategic management accounting is the utilisation of the management accounting system and structure in enhancing strategic decision making. The success of companies today can be attributed to the use of management accounting process that pave way for successful assessment and evaluation of strategic situations. Strategic management accounting is known to provide such a function. The term strategic management accounting was brought into existence by Simmonds who defined it as the provision, analysis and the evaluation of management accounting data and information about a business organisation and its competitors necessary in developing and controlling business strategy (Langfield-Smith, 2008). Strategic management accounting generally entails provision, analysis and evaluation of management accounting information about an organisation and its competitors which is required in the development and monitoring of approaches and strategies to be used by that organisation (Codez, Hocevar and Zaman, 2005). Strategic management accounting processes are designed to enhance the overall competitive strategy of a company by using information technology to create more appropriate product and service costs. Strategic management accounting came into existence in 1980s as a new management accounting technique designed to restore and reinstate the relevance of management accounting (Langfield-Smith, 2008). What differentiates strategic management accounting from other accounting developments where it’s external orientation; it offered way for management accounting to leave the ‘factory floor’. SMA offers a wider range of management accounting and thus it is a potentially important concept. It was established as an externally oriented concept that encompassed collecting and evaluating data and information on costs, sales, market share, resources utilisation etc. from a business organisation and its competitors (Cravens and Gilding, 2001). Traditionally, management accounting is considered as a framework for positioning cost systems to specific business environments or technological responsibilities. For instance, processor job costing systems can be applied in terms of batch sizes and product nature. Strategic choices in such instances means that organisations can select which products or sector they would like to compete in but it can also mean that different organisations found in the same industry sector may decide to embrace different strategies with very different inferences for management accounting (Cravens and Gilding, 2001). For instance, an organisation’s strategy can determine whether management will focus on a fixed control of costs, generating new commodity ideas or maintaining quality. In addition, as more confidence is focused on bought-in products and services, a large percentage of costs are produced by an organisation’s suppliers suggesting that more improvements with regard to costs, creativity and innovation and quality are potentially accessible through operational management of the supply chain (Langfield-Smith, 2008). To this effect, generally, the distinguishing feature of strategic management accounting as opposed to the traditional management accounting is the acknowledgment that managers have the freedom to select which industry sector to operate in, how to structure the business and which technology to use (Langfield-Smith, 2008). Therefore, instead of blindly adapting to particular competitive, technological or organisational concepts, strategic management accounting assist managers in making choices through information support. SMA is also focused on the implementation of control systems that operate through the chosen strategies (Langfield-Smith, 2008). For instance, if a business organisation chooses to follow allow-cost strategy then any traditional budgetary control may assist in the implementation. Nevertheless, few organisations compete on price alone therefore additional performance measures can prove to be non-financial like delivery or queuing time. In addition, in some companies, strategy can be viewed as entailing organisational leaning other than a top-down centralised process. In such a business concept, management accounting can be utilised as part of communication process within the company and between the company and the customers and the supplies (Roselender, 2006. In a number of instances, strategic management accounting encompasses new applications of existing strategies other than new practices. For example, strategic management accounting that measure competitors’ and suppliers’ costs may use other available techniques. Yet the information of the cost analysis will differ since strategic management aim to establish comparative market positions and costs. Without a doubt, the awareness of competitive circumstances is the major distinguishing feature of SMA compared to other management accounting processes.Strategic management accounting techniques are able to provide information for assessment of departmental and sustainability performances. Strategic management techniques can be classified broadly into costing, customer accounting, strategic decision making and performance management. Accounting information system is expected to provide information and data necessary for managers to make decision on organisational and departmental performances (Roselender, 2006. Traditional management accounting techniques are not enough to fulfil this as they focus too much on financial information neglecting the operational environment where decisions are implemented in the business. In the company I work in, integrated performance measurement technique is used in assessing the performance of departments that determines the performance of the organisation in general. The technique uses integrated performance measurement systems considering the financial and non-financial measurements. The performance of the department when able to evaluate and analyse information, is assessed with the financial indicators and other factors such as reliability, creativity and innovativeness, and efficiency. This is to say that the performance of the departments is accessed not only using the financial criteria but by focusing on intangible criteria. Performance outcomes obtained by comparing the financial and intangible aspects of a department in comparative with other departments may offer an explanatory information and data about performance (Roselender, 2006. The integrated performance measurement is considered a standard approach for measuring performance especially using the elements of scorecard. The techniques recognise that measurement concept should be process-oriented and applied across functional areas. Efficient form of measurement often provides more that scorekeeping in order to assist in understanding what changes are required to improve scores. Performance measurement relies heavily on Key Performance Indicators which are often simple (Roselender, 2006. Basic techniques of SMA Strategic management accounting has a positioning towards an organisation’s environment (Roselender, 2006). Appropriate environment may involve its value chain, its relationship with the customers and the relationship with the suppliers. Another appropriate environment is the competitor’s position with regard to the existing and potential competitors. Organisational competitive position will not only depend on price but will also depend on the marketing mix. In some instances, strategic management accounting uses existing information and data and in other instances new information and data will be sought. For instance, the enhanced emphasis on marketing may entail the utilisation of techniques or methods like attribute costing that costs for products that is appealing to customers by using brand value with regard to managerial decisions and quality measurement (Tayles, 2010). The competitive position and situation is evaluated through estimates of competitors’ costs founded upon an appraisal of facilities, economies of scale, unit costs, technology to name a few. Also, strategic management accounting may entail a long-run framework through the use of life-cycle costing that is focussed on the costs incurred in all the stages of the life of a product when it goes through the stages such as development and production (Tayles, 2010). Another important technique of strategic management accounting is benchmarking which involves choosing the best and appropriate practices and comparing the performance of a company to the practices with regard to the goal of improvement. Quality costing on the other hand involves the classification and monitoring of costs deriving from external and internal failures and quality prevention. The techniques support the element of quality. Obstacles to strategic management accounting Strategic management accounting is not yet a branded management accounting technique used by organisations (Nixon and Burns, 2012). One reason for this is the fact that many organisations are already curbing business challenges and issues using principles that entails SMA without adoption of strategic management accounting packages. Another challenge may be that a good number of traditional management accountants are based on performance and not leaning orientation. Therefore, rather than seeking out new data and information outside the organisation and the out-dated accounting systems and fearing risks, management accountants often stick to what they are familiar with (Nixon and Burns, 2012). The familiarity to these management, accountants mean the financial data. Moreover, although the data and information for strategic management accounting may be placed in operational areas within the organisation, there may exist a reluctance to willingly share with other existing operational areas in the organisation such as a management accounting. The data and information for SMA is often available somewhere in the organisation, the problem is pulling it together within an organisational content (Cravens and Guilding, 2001). Contingency theory of SMA The contingency theory of strategic management accounting practice has been used by many researchers (Chenhall, 2003). The key concept of contingency theory approach of SMA is based on fit, where the contextual factors of an accounting system must satisfactorily fit together in order for a company to be effective. There are three forms of fit regarding to the structural contingency theory and they include selection, interaction and systems. The former analyses the relationship existing between contextual factors and structure of a business organisation without analysing whether the relationship affects performance (Chanhall, 2003). On the other hand, the interaction approach is aimed at highlighting the variations in organisational performance brought about by the interaction between organisational structure and context. This means that only particular designs give high performance in specific context and different approaches give lower performance (Cadez and Guilding, 2008). In order for a high degree of fit to achieve between context and structure, the task of a researcher is based on higher performance since organisations are regarded to having varying degrees of fit. The contingency theory has attributed to the understanding of SMA but is prone to a number of drawbacks in that variable selection has been eclectic and conflicting results have been obtained. Also, there is little on the basis of empirical observations that contingency theory approach of strategic management accounting can be built (Gerdin and Greve, 2008). Configurational theory of SMA Organisational configurations can be termed as the clusters of companies that share identical profile owing to the key features including strategy, decision making processes and structures (Short et al., 2008). Configurational theory is based on the concept that organisations can be grouped around key features. The theory is distinguished from the contingency theory by its strict principles of inquiry and the assumption of equifinality. Generally, configurational theory is founded upon how a pattern of various independent variables such as strategy and SMA relate specifically to a given dependant variable such as performance. Extensive research of configurationally approach focuses its attention on the connection existing between clusters of identical organisations and performance (Fiss, 2007). Equifinality can be seen when organisations using different strategic and structural methodologies attain equivalent degree of performance. There are three forms of equifinality which include suboptimal, configurational and trade-off (Fiss, 2007). Configurational approach confirms that performance is endorsed by internal consistency of the patterns of structural and strategic factors. Organisational performance is simplified when strategic management accounting system manifest horizontal and vertical fit. Horizontal fit is concerned with internal consistency of a particular organisation’s practices and procedures. Since SMA techniques have an outward and long-term orientations, degree of usage across a given SMA dimensions will imply internal consistency (Marlin et al., 2007). Vertical fit is concerned with the congruence of an organisation’s strategy and SMA. For instance, high strategic management accounting technique usage together with involvement of management accountants in strategy processes exhibit higher degree of congruency with a vibrant prospector type strategy. Strategic cost management In today’s competitive business environment, cost management is a critical survival technique for organisations (Shank, 2007). However, reducing costs is not enough; instead, costs should be managed strategically. Therefore, strategic cost management is defined as the presentation of cost management techniques to improve and enhance the strategic position of an organisation and minimize costs. It is applied to service and manufacturing sectors and not-for-profit businesses. The three costs management initiatives include those that strengthen competitive position of an organisation, those that do not have any impact on competitive advantage and those that tend to weaken it (Shank, 2007). The implementation of strategic cost management initiatives may include creation of strategic plan, establishing priorities in business operations and making sure that it is utilizing the limited resources effectively (Shank, 2007). Strategic cost management initiative assist businesses in achieving its goals and objectives in addition to saving on costs. Additionally, it provides necessary information and data to determine whether a new business strategy should be implemented. Strategic cost analysis A strategic cost analysis can be defined as the study of how an organisation’s costs are compared to its competitors in the production process and selling products (Creese and Adithan, 2012). Doing such an analysis, an organisation can figure out where its cost structure is stronger and where excess costs make the business weaker than the competitor’s (Hussey and Ong, 2012). The core aspects to be considered when carrying out strategic cost analysis include the costs of resource acquisition, product pricing, and labour among others. It is very essential to perform strategic cost analysis when an organisation is looking for a strategy of cost differentiation to acquire competitive advantage (Cresse and Adithan, 2012). Many organisations heavily rely on the revenue yield from sales of products and services. Nevertheless, it is essential for such organisations to also concentrate on the costs incurred in the process of yielding the revenue.it is only by keeping the costs incurred down in comparative to the revenue that profits can be earned. It is also important to figure out how their cost structure compares to the competitor’s. Therefore, it is important for any organisation that wants to be competitive to periodically conduct a cost analysis (Cresse and Adithan, 2012). Strengths of Strategic Management Accounting Strategic Management Accounting (SMA) comes with a number of benefits up its sleeves. One of the benefits of SMA is that it aids in coming up with cost leadership strategies which give companies the advantage of cost control in the economic market and also control of shares (Ward, 2012). This in turn helps in cost control and eradication of overall problems related to allocation of which comes with enhancement of management accounting systems. In addition, SMA brings about reporting of accurate and thorough accounting information given by top management. This helps in summarizing the data into a more presentable format which makes it efficient and easy to root out problematic areas that might be present and hence examine the facts therefore defining a proper course of action (Drury, 2008). This helps in prevention of errors in a company’s financial reports. In addition, it allows measurement of progress. It makes sure that organizations or businesses set aims of success. This forces the senior management to focus on various establishments of objectives aiming at keeping critical procedures at the forefront of the board. Last but not least, SMA is very efficient in measuring performances in management (Ward, 2012). It organizes companies’ records, transactions and events making them more accessible which in turn increases the performances of companies. Weaknesses of Strategic Management Accounting On the other hand, Strategic Management Accounting also has its own weaknesses. These include the following. It is a complex process since it entails constant evaluation of external and also internal environs, structure of the organization and also long and short term goals of a certain company (Bowhill, 2008). This comes with its limitation since a change in one of the above mentioned components might affect another. The complexity of its structure ultimately affects leadership and decision making within the company. Secondly, the process is time consuming. This comes about with the number of hours set aside by management to come up with relevant strategies. This will obstruct day to day functioning of the business in a negative manner. An example of such is when management oversees a subject which needs scrutiny and proper resolution which brings about a fall in productivity within its employees hence encountering serious consequences like short term sales. Therefore, when issues aren’t addressed accordingly in proper time, it may result to employee turnover which forces the business to focus on critical resources other than strategic management initiatives (Analoui and Karami, 2003). Thirdly, SMA faces problems with implementation. Most of times, it is difficult to implement Strategic Management Accounting since it requires full accountability and active participation by members of the management. This is a very serious form of weakness for it weakens the management system if the leaders are not accountable for their actions. For example, if a leader involves him/her in the formulation process and neglects the implementation process, this brings about lack of accountability with regard to the decisions made (Analoui and Karami, 2003). Recommendation for future improvement of Strategic Management Accounting All in all, there are also various methods in how Strategic Management Accounting can be improved. One of the methods of improving such is by putting greater emphasis in getting professional management accounting credentials (Vrontis and Thrassou, 2013). This therefore allows proper scrutiny in the area of management accounting other than financial accounting by bringing in strategic management accountant in place of chartered accountants. Secondly, in order to encourage innovation, intense research and creativity should be incorporated in the presentation of solutions with regard to Strategic Management Accounting (Vrontis and Thrassou, 2013). This improves the how companies and businesses can be able to find solutions to problems in the most effective way. Also, it is recommended that the management should expose their members of staff to alternative methods of management accounting. This helps in focusing on the strengths and weaknesses that come about therefore giving it a competitive advantage with regard to Strategic Management Accounting. Furthermore, early focus on methods of data improvement, gathering and reporting systems that will help in freeing up time as well as resources. In addition, the use of sophisticated techniques in costing plays a major role since it benefits the management in investigation of other management techniques that can be relevant in their business (Vrontis and Thrassou, 2013). Lastly, development of interpersonal skills is highly recommended since it significantly contributes in gaining technical skills which in turn improves how various managements make use of their management strategies in deriving solutions to problems thus increasing their working efficiency. Conclusion As business organisation becomes complex and competitive, managers are forced to develop consistent business strategies which provide necessarily information for decision-making. To this effect there has been a number of management accounting processes implemented that focus on accounting information. Strategic management accounting is the utilisation of the management accounting system and structure in enhancing strategic decision making. The key strategic management accounting techniques include benchmarking, customer analysis, competitive analysis, costing techniques to name a few. Implementation of strategic management accounting has brought about some strengths and weaknesses in business operations. Some advantages include development of cost leadership strategies; cost control, performance analysis to name a few. The weaknesses of SMA are that it is a complex process and time consuming. References Analoui, F. & Karami, A. (2003). Strategic management in small and medium enterprises. Australia London: Thomson Learning. Bowhill, B. (2008). Business planning and control : integrating accounting, strategy, and people. Chichester, England Hoboken, NJ: Wiley. Cadez, S. & Guilding, C. (2008). An exploratory investigation of an integrated contingency model of strategic management accounting. Accounting, Organizations and Society, 33(7/8): 836-863. Cadez, S., Hocevar, M. and Zaman, M. 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