1. © 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

2. Strategic Management Accounting
CHAPTER 16
Strategic Management Accounting
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

3. Learning Objectives
What is strategic management accounting and how does it differ from traditional management accounting?
When developing strategies for a company, why is it important to identify external factors (such as Porter’s five forces: threat of new entrants, power of buyers, power of suppliers, threat of substitutes, and competitive rivalry)?
How can value chain analysis be used to identify areas of strategic opportunity for a company?
How can a company assess which customers are the most profitable?
In what ways is activity-based management (ABM) a strategic management accounting approach?
Why does life-cycle costing provide a more accurate picture of a product’s profitability than traditional costing techniques?
How can cost-reduction tools such as target costing and Kaizen costing be used to create cost advantages for a company?
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

4. Strategic Management Accounting Defined
Linked with business strategy and maintaining or increasing competitive advantage
Defined by the Chartered Institute of Management Accountants as a
. . . form of management accounting in which emphasis is placed on information which relates to factors external to the entity, as well as non-financial information and internally generated information. (2005, p 54.)
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

5. Strategic Management Accounting
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

6. Strategic Management Accounting
Key areas of analysis
Collection and assessment of competitor and supplier information on pricing, costs, volumes, and market share
Collection and analysis of customer information, including the costs involved in serving customers, customer buying patterns, and customer value
Identification of cost-reduction opportunities and a focus on continuous improvement and on non-financial measures of performance
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

7. Accounting Techniques to Support SMA
Five forces analysis
Value chain analysis
Customer profitability analysis
Activity based management
Life-cycle costing
Target costing
Kaizen costing (kaizen is Japanese for continuous improvement)
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

8. Five Forces Analysis Threat of new entrants Power of buyers
Barriers to entry
Power of buyers
Power of suppliers,
Threat of substitutes
Power of substitution
Competitive rivalry
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

9. Value Chain Analysis 1. Identify the firm’s value creating processes
2. Determine the portion of the total cost of the product or service attributable to each value creating process
3. Identify the cost drivers for each process
4. Identify the links between processes
5. Evaluate the opportunities for achieving relative cost advantage
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

10. Customer Profitability Analysis
Enables an organization to make decisions on how to handle unprofitable customers
1. Reduce the costs of servicing unprofitable customers.
2. Increase prices to unprofitable customers to cover those costs.
3. No longer do business with unprofitable customers.
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

11. Customer Profitability Whale Curve for a Large Multiproduct Company
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16

12. Profitability by Customer
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

13. Activity-Based Management (ABM)
Focuses on controlling activities that consume resources
Controlling costs at their source
Operational ABM
Increasing efficiency, lowering costs, and enhancing asset utilization
Strategic ABM
Attempting to alter the demand for activities to increase profitability
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

14. Activity-Based Management (ABM)
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

15. Life-cycle Costing
Estimates and accumulates the costs of a product/service over its entire life cycle, from inception to abandonment
Considers all costs of researching, designing, manufacturing, selling, and discontinuing a product
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

16. Life-cycle Costing
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

17. Target Costing
Concerned with managing whole-of-life costs during the design phase
Most often used when designing products and their related production processes
1. Determining the target price that customers will be prepared to pay for the product/service
2. Deducting a target profit margin to determine the target cost, which becomes the cost to which the product/service should be engineered
3. Estimating the actual cost of the product/service based on the current design
4. Investigating ways of reducing the estimated cost to the target cost
Target cost = Target price - Target profit margin
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

18. Target Costing
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

19. Kaizen Costing
Involves making continuous, incremental improvements to the production process
Applied during the production phase of the life cycle
Focuses on the production process, seeking efficiencies in production, purchasing, and distribution
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

20. Target Costing versus Kaizen Costing
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16
© 2009 John Wiley & Sons, Ltd, Accounting for Managers, 3rd ed., Ch 1

21. Conclusion Strategic Management Accounting (SMA) defined
Accounting Techniques to Support SMA
Five forces analysis
Value chain analysis
Customer profitability analysis
Activity based management
Life-cycle costing
Target costing
Kaizen costing
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16