Strategic Management Accounting System - Essay Example

Running head: STRATEGIC MANAGEMENT ACCOUNTING SYSTEM Strategic Management Accounting System s Summary: This project report is addressed to the Managing Director of Highline co. Ltd. The project report examines the reasons of the inadequacy of the information provided by the management accounting system to assist in strategic decision making in order to defend and strengthen its position. The project report then looks at the aims and objectives of establishing a management accounting system and the characteristics of information flow at the strategic level. It also analyse the effectiveness of SMA system in the provision of information to assist the senior management team in the achievement of the corporate objectives at Highline. It further explains the control procedures expected at the three levels of management control (strategic, tactical and operational) and provides a discussion of how control is exercised and information required at each management level, relates to Highline Co. Ltd. In the last section of report the importance of the design of management accounting information systems and their effects on the functioning of the business has been discussed. Finally the project report recommends courses of action for the management of Highline Co. Ltd. in order to avoid possible dysfunctional consequences. Inadequacy of Traditional Accounting Systems: The traditional management accounting systems are of minimal use in the preparation of the strategic plans, monitoring of achievement process of predetermined objectives of the organization and performance evaluation of the employees. The failure of traditional accounting systems have triggered the process of research in order to find out the suitable methods which can eke the changing business techniques in order to achieve the organisational objectives in today's global business environment (Ittner & Larker, 1998). According to the evaluation of the manufacturing data in different companies it has been found that the manufacturing has been transformed. Labour cost is no more considered as the significant cost of manufacturing, it has been replaced by the overhead cost which has become a significant cost of manufacturing process. This change has reduced the usefulness of the traditional accounting techniques. By undertaking the examination of the material cost and labour cost data the validity and generality of these claims can be tested. Moreover, the extent to which manufacturing has changed over time and the nature of these changes can also be examined. This can help the management of the company in designing an effective and up to date management accounting system according to the current needs of the company. The changing products and management styles have reduced the usefulness of cost accounting and management control systems in the modern age of information technology which were previously used in many organizations. Decline in Direct Labour: The automation of the machinery assembling plant in the company has reduced the number of labour used in the production process. Labour cost constitutes a small portion of the manufacturing costs and the overhead costs have become the major constituent of the manufacturing cost. The changing trend has also raised the level of manufacturing overhead which represents 33% of the total manufacturing cost in the company. Due to the changing pattern of manufacturing process the traditional cost systems also tend to fail in the true valuation of cost. It has been noted that the management has taken inaccurate decisions and adopted strategies which have restrain the manufacturing process. In order to confirm the above assertions the management can gather data to analyze two important issues: 1. The production labour has declined as a percentage of total manufacturing costs. 2. The ratio of the total wage expenditures to production wages has been increased for all, most, or some manufacturing companies over time. (Boer and Jeter, 1993) For each of the principal issues, the management should also examine the data to address two more additional issues: 1. To ascertain whether the change, if such a change is detected, occurred abruptly or gradually over time. 2. To identify whether the behaviour of these variables has been uniform or diverse across the organisation (Boer & Jeter, 1993). Aims of strategic management accounting (SMA) and the characteristics of information flow at a strategic level: Management accounting is the design and use of accounting information systems to achieve the organisation's objectives by supporting decision-makers inside the enterprise. Internal decision-makers are employed by the enterprise. These internal decision-makers create and use internal accounting information not only for exclusive use inside the organisation but also with the purpose of sharing some of it with external decision-makers." (Meigs, Williams, Haka & Bettner, 1999) The Chartered Institute of Management Accountants Official Terminology defines management accounting as "an integral part of management concerned with identifying, presenting and interpreting information used for: * Formulating strategy * Planning and controlling activities * Decision taking * Optimising the use of resources." (Chartered Institute of Management Accountant, 1991) The Strategic Management Accounting System is aimed at generating information which is useful to those managing a firm. In other word it is aimed at generating the information which can eke the process of strategic management in the organisation. The data generated by the SMA system is tailored to meet the specific needs and preferences of the individual managers who will receive and use the information. The information generated for a specific function of organization cannot be used for other functions for instance the information which can help a manager in setting the selling price of a product cannot help in undertaking the decision regarding the purchase of new asset or acquiring a loan for the business. The SMA system doesn't merely provide information on the basis of accounting. Its area of concentration can extend beyond the principles of accounting and draws upon other disciplines such as finance, economics and statistics or other disciplines which can support the management in directing and planning the affairs of an organisation (Taylor & Pincus, 2002). SMA is aimed at undertaking the evaluation of the firm's environment. This includes the internal environment including the relationship with the employees and suppliers and the external environment including the relationship with the customers. The external environment analysis also includes the information regarding the competitive position of the company in comparison to both existing and potential competitors. The system will analyze the marketing mix being implemented by the company in order to analyze its competitive position. Role of SMA system in corporate objectives achievement at Highline: The effective SMA system can provide the management of the company with the information regarding the areas which need improvement. For instance if there is a requirement of the implementation of cost control strategy or implementation of total quality management program, the right strategy at the right time can only be selected through the effective SMA system. The SMA system can eke the management in order to undertake the decision to make the products with in the company or to purchase the products from other companies. In case of heavy reliance on bought in products, the cost control can be implemented by managing the supply chain of the company. The SMA system provides the company with the opportunity to undertake innovative business techniques rather than following the prevailing trend in the industry. The innovative strategy of the company can provide it with the cutting edge over its competitors, as innovation is the most effective strategy in toady's volatile and competitive environment. The SMA system also ekes the successful strategic implementation process at the company by providing the relevant and up to date information. If the company tends to implement the price centric strategy, the goal cannot be achieved by merely implementing the budgetary control, additional performance measures such as balanced scorecard will be required to be use. The SMA system can also support the process of organizational learning by becoming important part of an interactive communication by co-coordinating between all the stakeholders including the management, employees, customers and suppliers of the organization. In the SMA system the traditional management accounting techniques can be used in different context of analyzing the relative market positions and relative costs. The evaluation of the competitive position of the company is the main characteristic which set it apart from traditional management accounting. Expected control procedures at the three levels of management control (strategic, tactical and operational): Planning in an organisation is undertaken in three levels: STRATEGIC LEVEL: The strategic planning in an organization is undertaken by the board of directors and an executive committee of the CEO. At strategic level the long run strategies of an organization are converted in long-range plans. These plans contain details about the resources and technical capability of the company. The strategic plans are aimed at generating actions in order to accomplish the goals of the organization. The decisions undertaken at the strategic level are unstructured. TACTICAL LEVEL: Tactical planning is undertaken by the middle management. The tactical planning in organization involves details regarding the next year. Tactical plans represent management commitment. The tactical planning is undertaken in order to assess the performance of managers and performance of different units in organization. The information at the tactical level is used to eke the process of undertaking and implementation of longer-range plans. The information at the tactical level interlinks the short term plans to long term plans hence becoming the foundation for operational plans. The decisions undertaken at the tactical level are semi-structured. OPERATIONAL LEVEL: Operational planning provides direction for near term activities. Operational management level involves activities such as assigning tasks to employees, placing orders for purchasing etc. The short term plans are subject to control so it is important to measure the results and to undertake change according to the requirements of the organisation. The decisions undertaken at the operational level are more structured than at any other level. The planning undertaken at the Strategic level forms the basis of control in the organisation. The management of the company can measure the performance of the firm through undertaking the comparative analysis of the actual performance and planned performance. In case of variance detection the company should take corrective measures (Information Technology Planning). The control environment sets the tone of an organisation, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure. Control environment factors include the integrity, ethical values and competence of entity's people; management's philosophy and operating style; the way management assigns authority and responsibility, and organises and develops its people; and the attention and direction provided by the board of directors. (COSO Report as cited in Taylor & Pincus) Importance of Management Accounting Control System Design: There are different behavioural and technical elements which are essential to be included in the design of accounting control systems. The first and most important element is ethics. The system should be designed according to the ethical guidelines. There should be proper balance between the short term and long term measures. Short term measures should be given preference as compare to the long term measures. The system should cover both the qualitative and quantitative aspects of business operations. The effectiveness of the SMA system can be enhanced by empowering the employees of the organization and providing them with suitable incentives. The ethical elements should be well supported by the technical elements in order to increase the effectiveness of the SMA system. It is important for the SMA system to provide relevant and accurate information in timely manner. Failure to do so can minimize the usefulness of information. Consistency of information across all departments of organization is also essential. The information contained in the SMA system should be flexible enough in order to meet the requirements of users all over the company. The specified nature of information can reduce its usefulness.Another important characteristic of a well designed SMA system is that it should have a broader scope to cover the whole value chain of the organization. . References Atkinson, A. A., R. D. Banker, R. S. Kaplan and S. M. Young. (2001). Management Accounting 3rd edition. Upper Saddle River: NJ: Prentice Hall, retrieved as on 21st March, 2009 from http://maaw.info/ABKYBook/ABKYChapter9.htm Boer, G. and D. Jeter. (1993). What's new about modern manufacturing Empirical evidence of manufacturing changes. Journal of Management Accounting Research (5): 61-83. Chartered Institute of Management Accountants, (1991). Management accountancy-official terminology. London: CIMA. Chapter Seventeen, Strategic management accounting and the Balanced Scorecard Ittner, C. D. and D. F. Larcker. (1998). Innovations in performance measurement: Trends and research implications. Journal of Management Accounting Research (10): 205-238. Information Technology Planning, Part I, Chapter 4, retrieved as on 21 March, 2009 from http://www.stetson.edu/goliphan/IS591/class/notes/chapter4.html Keys D. E., Merwe A. V., (2002). Gaining Effective Organizational Control with RCA: Strategic Finance, retrieved as on 21 March, 2009 from www.imanet.org/pdf/5van.pdf Meigs, F.R., Williams, J. R., Haka, S. F. & Bettner, M. S., (2001). Accounting, Eleventh edition, Irwin McGraw Hill, United States of America, ISBN0-07 289709, pp. 12 Taylor D. W. & Pincus, K. P., (2002). Core Concepts of Accounting Information: A New Introduction to Accounting, Irwin/McGraw-Hill, pp.211 & 313. Read More