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© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 1
CHAPTER 16
Strategic
Management
Accounting
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 2
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 3
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 4
Strategic Management Accounting
© 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 6
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
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 7
Five Forces Analysis
Threat of new entrants 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 8
Value Chain Analysis1. 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 9
Customer Profitability Analysis
Enables an organization to make decisions on how to handle unprofitable customers1. 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 10
© 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
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 13
Activity-Based Management (ABM)
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 14
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 15
Life-cycle Costing
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 16
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 17
Target Costing
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 18
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 19
Target Costing versusKaizen Costing
© 2013 John Wiley & Sons, Ltd, Accounting for Managers, 1Ce, Ch 16 20
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 21
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