What is Strategic Management Accounting? Meaning and Characteristics

Strategic management accounting and control is a relatively new paradigm in the field of management accounting. This new perspective of management accounting and control system was made popular as a result of the criticism levelled on the traditional management accounting by both academia and professionals in the late 1980s and early 1990s.

The intense competition in today’s tough business environment made it reasonable and realistic for a new approach to management accounting to be advocated. While commenting on the question; what is strategic management accounting, Drury pointed out that strategic management accounting has been identified as the only way forward.

As important as this topic is, there is however no comprehensive encyclopaedia that contains all that strategic management controls and accounting has to offer. This article adds to the body of knowledge in the area of strategic management accounting.

EXPLANATION OF STRATEGIC MANAGEMENT ACCOUNTING AND CONTROL

Managers and business executives of modern and vibrant companies in the quest to overcome the information overload that is facing corporations in the ‘now economy’ believed by many to have emerged as a result of efficiency in the information super high way turned to management accounting and accountants to supply information that will help steer their businesses in the right direction. A major problem with the traditional and old way of gathering and processing cost information is the fact that too much focus is placed on internal activities that can easily be manipulated by managers.

This problem of manipulating the internal business processes made internal decisions biased and more likely to be based on uncompetitive figures. Reliance on the information produced from this system for managerial decision making puts a company in a very uncompetitive position. Hence, a system that will gather and assess external information that can be used to benchmark the internally processed
information is needed. Who else is more qualified to supply information of this nature other than the management accountant?

A new perspective to processing accounting information that is more extroverts in nature is called for. That is when the concept of strategic management accounting was first introduced. It is officially defined as a form of management accounting whereby emphasis is laid on information that are external to a business entity, non-financial in nature and are not internally processed information. A closer look at this
definition of strategic management accounting reveals that it contains traditional management accounting with extras, i.e. bringing strategy, marketing management and management accounting under one roof.

COMPONENTS OF STRATEGIC MANAGEMENT ACCOUNTING

Strategic management accounting which is that perspective of accounting information gathering and processing system that focuses on the external and long term prospect of a company has components that makes it possible for its objectives to be achieved. The components are tools used by decision makers in their everyday to day business activities.

This section of this article briefly introduces the most common components of a strategic management accounting system.

Balanced scorecard (BSC) or performance measurement: you can read this article for more on balanced scorecard.

Target costing: this is a system of costing whereby organizations begin the process of costing by finding out what customers are willing to pay for a product first, then complete and accurate cost of what the product will cost is ascertain, based on this, management can then focus their attention on reducing the cost of making the product.

Activity based management and costing: activity based management and costing are built on the philosophy of plucking loopholes in businesses. Any activity that does not directly or indirectly bring money to the business is stopped.

Life cycle costing: in ever competitive market place, for companies to remain a force to reckon with, it has to get her costing right. The life cycle costing ensures that complete and accurate costing information is gathered and processed.

Characteristics of a robust strategic management accounting system

  • Futuristic
  • Focus on external information
  • Aggregates information
  • Integration of risk analysis into traditional process

Advancement in computing technology and the integration of what was once complex system into simplified and fully integrated system has placed real pressure on the job of management accountants. But, the value that a management accountant brings to the table in the form of insightful analysis should not be overlooked.