Strategic Management Accounting

Q1 from Performance Management System (Otley)
Mission and Vision
Q2 from Performance Management System (Otley)
Key Success Factors
Q3 from Performance Management System (Otley)
Organisational Structure
Q4 from Performance Management System (Otley)
Plans and Strategies
Q5 from Performance Management System (Otley)
Key Performance Measure
Q6 from Performance Management System (Otley)
Target Setting
Q7 from Performance Management System (Otley)
Performance Evaluation
Q8 from Performance Management System (Otley)
Reward Systems
Q9 from Performance Management System (Otley)
Information Flows, Systems and Network
Mission and Vision (Otley)
What is the vision?
What networks, mechanisms, and processes are used to convey the business purpose?
The vision is the desired future state or aspiration.
The mission outlines the purpose of the business to its stakeholders.
Key Success Factors (Otley)
What key factors are believed to be central to the organisation future success?
The codification of the vision and mission, in specific terms
Organisational Structure (Otley)
What impact does it have on the design and use on PMS’s?
How does it influence and is it influenced by the strategic management processes?
Plans and Strategies (Otley)
What are they?
Key Performance Measure (Otley)
Key performance measures deriving from its objectives, key success factors, and strategies/plans
Directly linked with the company’s success
The more performance measures you have the less impact they have
Target Setting (Otley)
Level of performance, making sure they are appropriate, challenging yet not too challenging
When moderately challenging targets are set then performance levels increased
Performance Evaluation (Otley)
What processes are used in evaluating?
Are they objective or subjective or mixed?
Reward Systems (Otley)
What rewards are in place as a result of meeting the performance targets?
This includes the other side if not meeting the targets then may incur penalties
Information Flows, Systems and Network (Otley)
Feed-back and feed-forward information flows, systems and networks
Feed-back – enables corrective or adaptive course of actions
Feed- Forward – learn from its experiences, generate new ideas and recreate strategies/plans
what
Dysfunctional Behaivour
Results when targets, performance, or rewards are incorrect
Bags – Airports
School league tables
Supermarkets – timeing transaction length’s
WHAT DIFFICULTIES ARE THERE WITH IMPLEMENTING STRATEGIES?
Managers get distracted with routine day-to-day activities
Not enough focus on strategy
Viewed as once a year event
Employees have little understanding of the company’s strategy
Budgeting process not linked enough to strategy
WHAT ARE THE EFFECT’S OF BSC IN DEALING WITH THE DIFFICULTIES?
Managers forced to focus on strategy on a day-to-day basis
Makes strategy a continuous process not one off
Employees better understand their roles in achieving strategy as the objectives are cascaded downwards
Clear mapping of strategic objectives around the four key perspectives
Cause and effect relationships taken into account when setting objectives
WHAT ARE THE 4 PERSPECTIVES OF A BALANCED SCORECARD?
Finance
Customer
Internal Business Process
Learning and Growth
WHAT IS MEANT BY THE FINANCE PERSPECTIVE?
Focus on shareholders
Objectives are to meet shareholder requirements
Measure can vary according to strategy
Moves beyond focus on financial measures
WHAT IS MEANT BY THE cUSTOMER PERSPECTIVE?
Focus on customers
Strategy could include market leader by differentiation, cost leadership and customer relations
Objectives are developed to achieve these measures
WHAT IS MEANT BY THE IBP PERSPECTIVE?
Innovation/Operations/After Sales Service
Focus on existing and new processes
Innovation – design and development of products/services
Operations – efficiency and effectiveness – internal value chain
After sales – responding to customer needs, process improvements
WHAT IS MEANT BY THE LEARNING AND GROWTH PERSPECTIVE?
Looks at structures needed for long term growth
Mainly covers people, but also systems and procedures
DEVELOPING STRATEGIC OBJECTIVES?
Objectives
Measures
Targets
Initiatives
Examples of where the impementation of a balanced scorecard sucessfully increased financial performance:
Banker et al – Hotel Chain
Davis and Albright – Bank Branches
Examples of where the impementation of a balanced scorecard did not sucessfully increase financial performance:
Ittner – Financial Servies
Hanne Norreklit – The Balanced Scorecard: what is the score?
Definition of Strategy
Direction and scope of an organisation over the long term, which achieves advantage in a changing environment through its configuration of resources and competences with the aim of fulfilling stakeholder expectations
(Johnson and Scholes and Whittington)
Cost Accounting
Looks at the:
True cost of manufacturing
Direct costs
Overhead allocation using either ABC or absorption costing
Preparing budgets
Management Accounting
Wider area of coverage
Emphasis on accounting info by managers
Performance measurement
Decision making
Behavioural factors of budgeting
Used for planning and control
Responsibility accounting
Profit centres
Transfer pricing
Includes non-financial elements
Compares costs to benefits, not costs to products, more tactical than strategic
Strategic Management Accounting
Stahl and Grigsby in 1991, Simmonds in 1981 and Pearson Education all try and define SMA, the genral theme is:
Focus on future, external factors, use of NFM’s and internally generated informnation, it trys to intergrate management accounting with the other functions of a business for example; marketing and strategy.
What are the 6 SMA tools?
1. Attribute Costing
2. Brand Valuation
3. Competitor Analysis
4. Life Cycle Costing
5. Strategic Pricing
6. Target Costing
What is Attribute Costing?
It is the costing of specific product attributes that appeal to customers
What is Brand Valuation?
Identifying the value of a brand to its customers, how much extra can be charged for a branded product than non.
Example – NIKE are able to charge a lot more for their products because they have a very successful brand image that people are prepared to pay for
What is Competitor Analysis?
Understand competitors costs, sales, market share, resources, lanbour costs, raw material costs, and economies of scale.
What is Life Cycle Costing?
Accessing cost/revenues over the products whole life instead of per period.
It provides valuable information to supprt design cost and pricing decsions, and the level of marketing needed.
What is Strategic Pricing?
Traditionally it was Internally Focused but this resulted in sub-optimal pricing
Competitively focused pricing resulted in better informed decisions
Factors to include are competitors’ prices and responses to price changes, price elasticity, market growth
What is Target Costing?
Target cost = market price less required return
Principles of target costing: price led costing, focus on customer, focus on design, cross-functional involvement, value chain involvement, life cycle orientation
Companies that have used Target Costing: Toyota, Nissan, Chrysler, Caterpillar
Role of the FD’s
Internal – manage the management accounting function, aid business decisions, performance measurement, performance evaluation, support resource allocation decisions

External – meeting regulatory and legal reporting requirements

Changes for accountants
Increased focus on entrepreneurial strategies, creating short term shareholder value, and external sources of for opportunities
Increase focus on PMS’s over the last 20 years (Otley)
Drivers for change were: decreasing profitability, changes in strategy, changes in business processes, new technology/competition, for non-financial measures, move from mainly cost focus to quality, flexibility etc
Factors required for a successful PMS (Otley)
Integration with strategy, effective feedback, comprehensive system, support throughout organisation, achievable and fair measures, simple clear and understandable
Common issues with PMS’s (Otley)
Key drivers may not easily be measured, behaviour may not be in line with strategic objectives, system can conflict with the culture, too time consuming or difficult
What can cause Dysfunctional Behaviour (Otley)
Poor measures or targets can lead to dysfunctional behaviour, as employee will look for short cuts to make their life easier
CIMA Code of Ethics
Integrity
Objectively
Professional Competence
Confidentiality
Professional Behaviour
SMA limitations
Impractical because:
Requires high level of man power
Competitor analysis is often subjective because it is based on interpretation
Cost can out-weigh the benefit
Lord – Cyclemakers Group
Differentiation strategy based on Quality, Flexibility, and Meeting Customer Demands.
Achieved a 20% market share in New Zealand
Management Accountants were never involved in the use of SMA tools, yet they were implemented effectively!
Used customer feedback about competitors and their products
From this decided to whether they should make or buy component, and decisions around product launch
They used a value chain to identify their cost structures and identified costs savings (Bulk buying, simplified software, better factory layout)