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Strategic Management Accounting Essay

To discuss how new strategic management accounting practices have emerged, it is important to highlight how business scenario and external environment in which business operate have changed as compared to previous times. Customers are more aware than before. They can find out the right product for themselves in the market. They can compare prices and quality of various products available in the market. Customers’ preferences are changing much more rapidly than before. Customers demand new and improved products. Thus to meet demands of customers, companies have to focus on new trends and techniques to cope up with the demands of customers. Just in time, cost management and other such techniques and evolved to cope up with the demands of customers and to survive in the changing business environment. Customers are not only aware but they are also empowered. They can demand better quality, prices and can demand a greater variety of products. Thus to meet demands of customers and to earn profits, organization have to be flexible and responsive to the changing business situation and consumer nature. Organizations are no longer competing within a particular boundary. Boundaries have diminished, competition has extended beyond geographic boundaries. In such fierce competition, organizations have adopted new models to survive in the dynamic business environment. Technology has played a vital role in changing business environment. Technology puts greater pressure on organizations to come up with new technology in order to stay ahead of competitors. Organizations that fail to update their products and services, unfortunately, lose their customers. Thus technology, globalization and customers have changed the way in which business was done before. Organization are now much more flexible and responsive than before.

Many definitions of strategic management accounting have been researched and recommended by well-known researchers over last thirty years. However, a single consolidated definition is still not available that defines what strategic management accounting practices and techniques are and why are they applied. Some definitions suggested by researchers are as follow

Strategic management accounting pays importance to internal, external and both financial and non-financial information to make strategic decisions.

Strategic management accounting is an amalgamation of accounting and management practices to attain a strategic position in the market and to make a strategic decision. Strategic management accounting utilizes information available to make a strategic decision by using management accounting practices and techniques.

Thus there are several definitions available that define strategic management accounting. However, still, there is no specific definition of what actually strategic management accounting is and what techniques it covers.

Management accounting has three main purposes. The first purpose is the proper allocation of cost. This allows managers to report financial figures in annual reports. The second purpose of the management accounting is the utilization of information to make decisions. The third purpose is to provide information for evaluation and control. There are few points that distinguish tradition management accounting from new strategic management accounting practices. Traditional management accounting reported information for financial reporting purposes. It ignored the utilization of this information in decision making. Traditional management accounting focused on internal and part information. It ignored external trends and information sources. Traditional management accounting failed due to many reasons. First, it failed to make sound decisions because decisions were based on past and internal data and information available. Traditional management accounting didn’t focus on external information to predict future trends as it solely relied on internal information. Information present in annual reports fulfilled the purpose of financial reporting only. Thus using such information for decision making led to failed and incompetent decisions. New strategic management accounting focuses on all types of information both internally and externally available to make informed decisions and to aid in planning and control (Ward, 1992).

Traditional management accounting didn’t focus on future decision making. It paid emphasis on historical data and internally generated information to make decisions. However currently as business environment has changed, business decisions cannot be made primarily depending on internally available data. Managers have to focus on what wasn’t done that lead to failed decision making. Current strategic management accounting if future-oriented. It pays attention to internal as well as external information to make decisions in order to stay ahead of competitors and to satisfy stakeholder’s needs. Traditional management accounting only paid attention to financial figures. However, the non-financial information is as important as financial information to make decisions. Non-financial information yield valuable information about changing industry trends, customers preferences and latest technique. Traditional management accounting ignored non-financial information. Current strategic management accounting pays much attention to both financial and non-financial information to guide business moves and decisions in the future. Strategic management accounting focuses on broad sources of information to make decisions about the future. It utilizes financial and non-financial information, external and internal information and both informal and formal sources of information to make strategic decisions. Traditional manage account paid much emphasis to formal sources of information. Informal information sources like newspaper article on competitors and other such information are as important as formal sources of information to make a decision.

Strategic management accounting plays an integral role in utilizing information from various sources to formulate specific strategies such as cost leadership or other such strategies. Effective utilization of information helps the organization to increase their market share and to improve its position in the market. Effective utilization of strategic management accounting practices plays an integral role in staying ahead of competitors and to earn huge profits. Huge profits mean that the organization is able to discover more opportunities and to tap into a new a market. Strategic management accounting also guides in critical decision making where managers have to evaluate different options or to decide which alternative to choose. For strategic management, accounting can guide whether organizations need to open or shut a specific business unit to maximize profits and to cut down expenses.

In summary differences between traditional management accounting and strategic management accounting are given below:

Traditional management accounting Strategic management accounting
Based on historical data Based on data gathered from all sources
Historical in approach Future-oriented
Concerned with manufacturing Concerned with the competitive business environment
Focused on existing activities Focused on future alternative and options
Reactive Proactive

Strategic management approach is much more expensive to implement than traditional management accounting. Usually, accountants and accounting managers are trained and educated to deal with financial figures and to fulfil requirements of financial reporting. However strategic management accounting presents different demands for accounting managers. It requires accounting managers to use internal as well as external data to make strategic decisions. Implementation of strategic management accounting techniques and practices as well as tools that analyze information from various sources requires a greater cost in terms of implementation and training than incorporating traditional management practices. Implementation of strategic management accounting approach requires proper change management. Managers need to be trained and well equipped to take strategic management accounting approach (Zainuddin & Sulaiman, 2016).

Accounting is the language of any organization to reveal vital and critical information about the business. It conveys important information about the health of the business. The business environment has changed and is constantly changing since past few years. Businesses are more flexible and need to respond to rapid changes in the business environment to earn profits, retain customers and to survive. Accounting is the language of a business has adapted itself to the new changes. New techniques and tools have evolved to cater to new needs of the constantly changing business environment. Thus strategic management accounting practices have emerged to cater to the new needs of emerging business models. Globalization has presented new challenges and benefits to organizations. Technology and globalization have changed ways business are done. Organizations now have to respond to the needs of global customers. Many new terminologies such as global market, global competition and other such terminologies have emerged to meet needs of globalization trends (Efkirin, 2014). Organizations can now enter a market anywhere in the world. Global competition has flared up. Strategic management accounting has changed as a result of this new trend too. Accounting managers can no longer rely on historical financial information to make decisions. They have to gather information from various different sources in order to forecast and predict. Various software and tools have emerged that allow data processing and management by extracting data from multiple sources. Strategic management accountants have to different policy for each region they target accordance to the needs of those regions (Baylis, 1997).

Deregulation has also changed the ways business are done. Public and government-owned organizations are centralized and have many bureaucratic lines. Public owned organization are generally incapable and inflexible to respond to current and rapid changes of the business environment. Most of the public owned organization are now being privatized. Privatization has opened a new pool of opportunities for the organization to capture. With deregulation, strategic management accountants have to shift their practices from traditional management accounting to new methods of management accounting in order to be more flexible, responsive and efficient in making right decisions at the right time. Internal information can reveal information about future market trends. Effective data management is needed before reaching any final decisions. Management accountants have to analyze information from multiple sources to determine their strategic position and to guide their strategic moves (Dent, 1996).

References

Baylis, J. a. S. S., 1997. The Globalization of World Politics: An Introduction to International Relations. s.l. Oxford University Press.

Dent, J., 1996. Global Competition: Challenges for Management Accounting and Control. Management Accounting Research, Volume 7, pp. 247-269.

Efkirin, D. A. E. A. A., 2014. Management Accounting in the New Economy. 2(16), pp. 131-150.

Ward, K., 1992. Strategic Management Accounting. New York: Butterworth Heinemann.

Zainuddin, Z. N. & Sulaiman, S., 2016. Challenges Faced by Management Accountants in The 21st Century. Procedia Economics and Finance, Volume 37, pp. 466-470.

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