1. Strategic Management Accounting
Priyanka Darshana
MBA(Strategy), ACMA(UK), CGMA, ACMA( SL), B.B MGT(MKTG)SP

2. Accounting
“Accounting is provision of information for the relevant stakeholders of the business”

3. Branches of Accounting for Information purpose
Financial Accounting
Management Accounting
Financial Management
External reporting
Internal reporting
Investment Decision
Finance Decision
Dividend Decision

4. Diffusion of Management Accounting
Cost Accounting
Management Accounting
Strategic Management Accounting
Sustainable Management Accounting
After 1990
Customer value & Shareholder value
Before 1950
Cost focus
Profitability & Waste reduction
2013
Economic, Environmental and Social

5. Management Accounting and Changing Business Landscape
By the 1990s, many organisations realised that they needed to improve their product and service quality, delivery responsiveness and cost performance in order to improve market share and profits
Competitive success factors are fast response, innovation, operational excellence and customer intimacy.
Adoption of new management structures, systems and practices, including new management accounting techniques and systems

6. What is SMA?
“ SMA considers the plans of competitors, where the main objective is to place and keep the firm in a position of competitive advantage. Therefore SMA is collection of competitor information, exploiting the cost reduction opportunities, and matching of accounting emphasis with strategic position” Lord(1996)

7. SMA
“In increasingly dynamic environment the provision of strategically relevant information is paramount importance to formulate and execute the business strategies and methods of providing such a information is SMA” Dixon & Smith (1993)

8. Strategic information
Internal organizational information
External information
Strategic planning, execution and control

9. Strategic Management Accounting practices
Balance score card (BSC)
Activity base costing(ABC)
Activity base management (ABM)
Value chain analysis
Life cycle costing
Target costing
Customer profitability analysis
BCG Matrix
Porters generic strategy
Ansoff matrix
Porters 5 forces Analysis

10. Strategic Cost Management Techniques Decision Tools
Activity Based Costing, budgeting and management
Customer Profitability Analysis
Life cycle costing and pricing
Target Costing
Business Process Re-engineering
Balance Score Card
Learning curve

11. Assigning overhead cost to a product or a service
Conventional absorption costing system
Activity Base Costing (ABC)

12. Cost Accumulation system
Role of conventional cost accounting system is to accumulate the wider categories of the organization costs to determine the product or service cost.

13. Cost
“The amount of expenditure incurred on or attributable to a specified thing or activity” CIMA

14. Classification of cost
Cost classification Objectives
1.Nature
2.Inventory valuation and profit measurement
3.Decison making(Cost behavior)

15. Nature
Material cost
Labour cost
Overhead cost

16. 2.Inventory valuation and profit measurement purpose
Direct cost
Indirect cost

17. Direct cost
Direct cost are the cost which can be directly traced to a product or service.
Direct material cost
Direct labor cost
Direct expenses
PRIME COST

18. Direct material cost and Direct labor cost
Example: manufacturing an apparel
Cloth, collar, buttons, thread
Primary packing material (e.g., carton, wrapping, cardboard, boxes, etc.)
Direct labor cost
Operational staff wages cost

19. Direct expenses The cost of special design or lay out
Hire of equipment for special job

20. Cost and decision making
Fixed cost structure
Variable cost structure
Proposition depend on what business are you in and the business model you operate
Proposition of FC increase the operating leverage
Manage the committed FC than discretionary FC

21. Direct cost tracing
Assigning direct cost to a product or service is identified as a cost tracing.

22. “Costing”
Assigning total direct cost and indirect cost to the product, job or a batch is referred to as costing or cost accounting.
Direct material cost + Direct labour cost Direct expenses+ Overhead cost
Cost accumulation system
Product or Service

23. Costing for different purpose
Costing for internal pricing
Costing for external reporting (Manufacturing cost)

24. Costing for internal pricing
Direct material xx
Direct labour xx
Direct expenses xx
Manufacturing overhead xx
No-manufacturing overhead xx
Full cost xxx

25. Costing for external reporting
Direct material xx
Direct labour xx
Direct expenses xx
Manufacturing overhead xx
Manufacturing cost xx

26. Assigning direct cost
Assigning direct cost to a product or service is referred to as cost tracing.
Direct material xx
Direct labour xx
Direct expenses xx

27. Assigning indirect cost to the product
Assigning indirect cost or overhead cost to a product or service is referred to as overhead absorption.

28. Overhead
Overhead cost is ‘expenditure on labour, materials or services that cannot be economically identified with a specific saleable cost unit’
Overhead cost as defined by CIMA Official Terminology

29. Overhead cost – key points
The total of all indirect costs
Costs incurred that cannot be traced directly to a specific cost unit
A ‘shared’ cost

30. Why is overhead cost important?
Management need to be aware of the level of expenditure on overheads. If left uncontrolled, the amount spent can increase year on year, eroding significant proportions of gross profit and reducing competitiveness. Managers need to know:
Overhead expenditure per cost centre or department.
Overhead costs per unit.

31. Steps of overhead absorption
Over head allotment
Overhead apportionment
Overhead absorption

32. Absorption Costing

33. Absorption costing
Absorption costing (overhead recovery) can be explained as the process whereby the overheads of the various cost centres are added to cost units or jobs. 
Absorption costing is the traditional approach to charging overhead costs to cost units.
Absorption costing can be explained as a process for sharing out the overhead costs of each cost centre to each product or service that is provided by that cost centre.

34. Absorption costing steps
Apportion all overheads to cost centres.
Identify the support or service cost centres, and re-apportion the costs of these to the cost centres involved in producing the products or services.
Calculate the overhead absorption rate (OAR) for each cost centre involved in producing products or services, using the most appropriate base.
Use the OAR to establish the overhead cost per unit.

35. Dealing with overhead cost

36. Establishing an overhead absorption rate
This step involves the establishment of an overhead absorption rate that allows the overhead cost of a product or service to be calculated.
The calculation of an overhead absorption rate requires two variables:
The total overhead attributable to a cost centre.
The absorption base.

37. Absorption basis

38. Activity 01
ABC LTD has incurred Rs.2,500, manufacturing overhead cost for the last quarter. Compute overhead absorption rates for absorbing overhead cost to the company products.
Actual production 1,000,000 units
Labour hours 500,000
Material cost 5,000,000.00
Labour cost 7,000,000.00

39. Example 3.3: Overhead absorption rates

40. Example 3.3: Overhead absorption rates

41. Establishing the overhead cost per unit
Once the overhead absorption rate is established then the total cost of a product or service can be calculated.
This can be demonstrated by using the data from example 3.3

42. The absorption process

43. Predetermined overhead absorption rates
A predetermined overhead absorption rate can help management estimate the full cost of a product or service during the year to provide more accurate information for pricing decisions.
Predetermined overhead absorption rates are based on budgeted figures. 
If a predetermined rate is used, the overhead cost per unit is calculated prior to the accounting period, using budgeted figures for overheads and units of activity.

44. Example 3.5: Predetermined overhead absorption rates

45. Under / over absorption
Because the overhead cost per unit is based on estimates, it is almost inevitable that at the end of the accounting year there will have been an under-absorption (recovery) or over-absorption (recovery) of the overhead actually incurred.
The estimates for both overhead and activity level are unlikely to be the same as what actually occurred.
In an absorption costing system where the predetermined cost per unit is charged in the accounting records, it is necessary to check the amount under- or over-absorbed (charged) and make an adjustment in the accounts.

46. Under / over absorption

47. Example 3.6: Under- or over-recovery of overhead

48. Arguments for absorption costing
Absorption costing recognises that selling price must cover all costs incurred. If absorption costing is used, then organisations should ensure that all costs are included when setting selling prices.
Production cannot be achieved without incurring overheads, therefore all such costs, should be included in stock valuations. This is in accordance with the requirements of the accounting standard (SSAP 9) which requires that production cost should include all costs incurred (including fixed overhead) in bringing the product to its current condition and location.
Absorption costing recognises the importance of working at full capacity. The under- and over-absorption (recovery) explained above can focus attention on the cost effect of actual activity being different to the budget or capacity levels established prior to the period. If an organisation fails to work to full capacity, then the overhead cost per unit may be higher than necessary. This is because overhead cost is charged out to fewer units.

49. Arguments against absorption costing
Absorption costing involves the apportionment of overhead, which can be subjective. The resulting information can be misleading for management decision-making.
Profits can be manipulated in a manufacturing organisation by simply increasing production without actually selling the additional items. Because fixed overhead is included in stock valuation, increasing production without increasing sales will result in a higher closing stock figure and hence a lower cost of sales and a higher profit figure. Fixed overhead is transferred from the current period’s cost (reducing costs in the profit statements) to a future period. Although this approach complies with accounting concepts, it may encourage management to build excessive stock levels to achieve a short-term profit increase.

50. Blanket or single overhead absorption rate
A company can take the simplistic view of choosing a single overhead absorption base for the entire organisation, one which is most reflective of the organisations activity. This is known as using a blanket overhead absorption rate or a single factory-wide rate. This is a simplistic approach and not very accurate.