A Study On Strategic Management Accounting Accounting Essay

Strategic direction accounting is an extension of traditional direction accounting where analyse both internal and external information in order to accomplish a coveted strategic place by the usage of competitory advantages that the company is holding ( Smith, 2007: p.11 ) . Strategic direction is at that place to supply relevant information required for the direction of the company for determination devising. Generally companies appoint a strategic direction comptroller to transport out the assorted activity analysis needed in order to take most accurate and suited determination devising. Here in this study it has been mentioned about the key functions which a strategic direction comptroller would set about in an administration. When sing the cost of a production procedure there are both relevant and irrelevant costs and it is of import to place them individually. So here the significances of relevant and irrelevant costs have been discussed. Activity based costing is another method in cost accounting and it contains both benefits and jobs. Here in this study benefits and jobs of activity based costing have besides been mentioned.

As per ( Norton and Hughes, 2009: p.3 ) scheme can be defined as a class of action, set to accomplish a specific aim which includes specification of resources required. In a really natural sense, the scheme could be identified as how a individual, a company, a group or even a state would acquire its aims fulfilled. Strategic direction is about understanding the nature of the competitory environment, stakeholder direction schemes and taking relevant actions to,

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Achieve scheme necessities: Which include a clear aim for the company.

Future: Being aware of future environmental context.

Direction: Concentrating on the way company is traveling into.

Environment: Understanding the place of authorities, clients, providers and rivals.

Resources: Understanding the resources the company has with itself.

Strategic tantrum: make up one’s minding on how to utilize the resources to run into current and future challenges.

Competitive advantage: How the administration would derive a better place in the heads of the clients and market compared to rivals ( Kazmi, 2008: p.333 ) .

To: Directors of Jessup Ltd

From: Consultant direction comptroller

Capable: To depict the cardinal functions of which a strategic direction comptroller would set about in an administration, To specify the significances of relevant and irrelevant costs and gross in strategic direction determination devising, To province the benefits and jobs associated with activity based costing in an administration.

Date: 20/09/2012

To transport out operations under strategic direction accounting, Jessup Ltd will necessitate a strategic direction comptroller and it will supply several strategic benefits for Jessup Ltd.

Key functions which a strategic direction comptroller would set about in an administration.

The strategic direction comptroller is responsible for supplying all the relevant information in a the suited format as it can be used for the determination doing procedure of the organisation. This information would be utile in the planning procedure, commanding procedures, nonsubjective designation procedure, the procedure of placing appropriate determinations and etc ( Belkoui, 2002: p.36 ) . But the function of strategic direction accountant differs from the function of other general comptrollers. By and large the responsibility is to show the fiscal Numberss in a mode it is utile for determination shapers and as it can be straight used for determination devising procedure. But the strategic direction comptroller is responsible for puting all the relevant fiscal Numberss into a wider context and associate all those fiscal factors to the key non fiscal factors. This will incorporate the fiscal factors and non fiscal factors of the administration and it will enable the directors obtain a proper apprehension about fiscal consequences, runing public presentation and the strategic way of the company ( Botten, 2009: p.390 ) .

In order to execute the expected function of the strategic direction comptroller, the strategic direction comptroller must develop fiscal cognition like other direction comptroller and farther, he will necessitate to hold a wide personal accomplishments ans commercial capablenesss. This is because of the excess function that strategic direction comptroller have to execute by associating the fiscal factors of the company with the non fiscal factors which include undertaking the external environment information such as information on clients, rivals and market place and etc. This is what make the function of strategic direction comptroller this much of import because, presently it is impossible to execute a taking portion in the industry without associating the fiscal information of the company with the non fiscal information ( Ward, 2012: p.10 ) .

When a individual gets to keep the place as the strategic direction comptroller of the Jessup Ltd, he will be responsible identifying, associating, analyzing and accomplishing following.

Supplying all the relevant information needed: Here the strategic direction history of Jessup Ltd will supply the information needed for measuring each state of affairs and steer the managers of Jessup Ltd to acquire the most suited and accurate determinations for each state of affairs arise. And here, the information he supply will be utile to place the degree of public presentation Jessup Ltd is executing when compared to the the other participants in the advertisement field, who can be identified as the rivals of Jessup Ltd ( Blocher, 2006: p.23 ) .

Facilitate the communicating between director and comptrollers: Directors are responsible for determination devising of the Jessup Ltd and they will acquire the usage of fiscal information provided by the comptrollers of the Jessup Ltd when doing the determinations. But it is the strategic direction comptroller who performs the function between them by enabling a proper information flow between directors and comptrollers of Jessup Ltd ( Hirsch, 2000: p.4 ) .

Identifying the most suited type of determination lucifers for each state of affairs arise. There are 3 chief strategic determinations that can be made. One of them is altering the sum of resources allocated for the activity. For illustration, if the sum of quality draughtss allocated per a centre, the the direction of Jessup can see naming some more in order to accomplish the mark quality degree. Another type of determinations that can be used is come ining into a new concern country ( Khan and Jain, 2006: p.10 ) . For illustration, Jessup can see come ining into 3D creative activities in line with the general advertisement activities they are transporting out. Another strategic determination that can be taken is exit determination. For illustration, if it is clear that the advertisement on newspapers does non bring forth a turnover at a satisfactory degree which is adequate for the attempt made, so the direction of Jessup Ltd can see go outing from newspaper advertisement.

Puting the appropriate fiscal indexs: Here the public presentation indexs of the internal factors of the organisation should be set along with the supervising the public presentation of clients and rivals every bit good. Those are they 2 parties who can do the most important impact on the company. So the strategic director should roll up information about the other advertisement houses as good in order to compare the public presentation of Jessup with the public presentation of them ( Drury, 2007: p.570 ) .

Distinguish the managerial and economic public presentation: The administrative cost of Jessup Ltd is something governable. But the authorities revenue enhancement sum is out of control of Jessup Ltd. So strategic direction comptroller will guarantee to supply the existent public presentation of the company by merely sing the governable costs.

Supplying relevant information: The chief responsibility of strategic direction comptroller is to supply information required for determination devising. But the issue here is the content of irrelevant information in the statements fixing by the comptrollers as it wastes the clip of determination shapers. But the strategic direction comptroller will guarantee to supply merely the relevant information needed ( Barnwell, 2009: p.199 ) .

Individually place and show the committed costs, discretional costs and engineered costs.

Identifying the possible alteration over options: the demands and wants of clients are dynamic. So in order to maintain the clients with the Jessup Ltd, it is of import to analyze and place possible alteration over options and following the suited options ( Clarke, 2002: p.202 ) .

Relevant and irrelevant costs and grosss in strategic direction accounting determination devising

Relevant Costss

Relevant costs are the costs appropriate to a specific direction determination. These are represented by future hard currency flows whose magnitude will change depending on the result resulted from the determinations made by the direction. When a cost to be classified as a relevant cost, it should carry through 3 factors.

Relevant costs are future costs: if the cost sum is already incurred before start the operations of a specific activity, those costs are called as sunk costs and they can non sort as a relevant cost. For illustration, if Jessup Ltd is sing the 3D picture ocular devising, they may necessitate to look into and place the possible ways to execute. In this affair, Jessup Ltd needs to keep a research and development procedure and pass on that. But even Jessup spends on research and development of 3D ocular devising, the cost of research and development can non sort as a relevant cost of the undertaking as it is non a hereafter cost, alternatively it is a sunk cost which has been already incurred ( Lucey, 2003: p.326 ) .

Relevant costs are hard currency flows: There are 2 types of minutess as hard currency flow minutess and non hard currency flow minutess. If Jessup Ltd makes payments for its employees, it is a hard currency flow dealing. But the costs that are accounted as depreciation of the computing machines that are used in the advertisement house, in world, a hard currency flow did n’t take topographic point. So they are called as non hard currency flow minutess which can non include as a relevant cost of the production.

Relevant costs are incremental: If the Jessup Ltd expands its premises which presently costs $ 50million of rent and put up a new centre which needs excess $ 20million rent, the incremental cost of puting new centre is $ 20million ( Lal, 2009: p.723 ) .

There are other footings that can be used to depict relevant costs. One of them is ‘avoidable costs ‘ , which includes the costs that can be avoided if the determination is non made. This is the reciprocal of incremental cost. If the same illustration is considered where Jessup Ltd spread out its premises, the evitable cost of that determination is $ 20million because Jessup Ltd does non necessitate to pay it if the enlargement did non take topographic point. But still $ 50million is ineluctable as Jessup has to incur it no affair what the determination is. Another term that can be used to depict relevant costs is ‘differential cost ‘ ( Young, 2003: p.65 ) . This is the cost difference between different alternatives.For illustration, if Jessup has 2 options to spread out its premises as one costs $ 15million and the other costs $ 20million, the differential cost is $ 5million. ‘Opportunity cost ‘ is another term that describes the relevant cost. Opportunity cost is the value of following best alternate forgone. In other words, the chance cost is the benefit which could hold been earned, but which has been given up by taking one option alternatively of another. Therefore they will stand for hereafter lost hard currency flows ( Mankiw, 2011: p.55 ) .

Non relevant costs

Non relevant costs are the costs which are non appropriate for a specific direction determination. There are 3 chief types of non relevant costs as sunk costs, committed costs and fanciful or imputed costs ( Burke and Wilks, 2006: p.54 ) .

Sunk costs: these are the costs that have been irreversibly incurred or committed prior to a determination point and which can non hence be considered relevant to subsequent determinations. Sunk costs may besides be termed unrecoverable costs.

Committed costs: these are the costs originating from anterior determinations, which can non be changed in the short tally. Committed cost incurrence frequently stems from strategic determinations refering capacity, with ensuing outgo on works and installations. This includes the hereafter costs that are to be incurred as a consequence of past determination such as lease payment ( Jagels, 2006: p.299 ) .

Notional or Imputed costs: These are the costs used to stand for the cost of utilizing resources which have no conventional existent cost. In simple, these costs are non existent, merely imagined costs. This includes costs such as fixed operating expense absorbed, depreciation, commissariats and etc. Fanciful costs will be relevant merely if they represent chance costs.

Identifying relevant costs

The relevant cost of stuff

Transporting out operations of Jessup Ltd, the direction needs to acquire the usage of different stuffs such as stationary. Particularly when make up one’s minding on the monetary value of the merchandise, it is of import to accurately cipher the relevant cost of stuff used. For this affair following flow chart can be used to place the relevant costs of stuffs.

Figure Relevant cost of stuff

( Beginning: Bowhill, 2008: p.71 )

Relevant cost of operating expense costs

Operating expense costs are another major cost manufacturer in the fiscal statements of a company. The cost of utilizing the machines and etc includes for this cost class. To place the relevant cost of operating expenses, following chart can be used.

Figure Relevant cost of operating expense costs

( Beginning: Mowen et Al, 2011: p.546 )

Relevant cost of labor

For an advertisement house such as Jessup Ltd, labor is something that is indispensable to be decently maintained because the advertisement companies like Jessup Ltd are extremely dependent on human capital. So when placing relevant cost, cost of labor should besides see. The relevant cost of labor can be identified utilizing following diagram.

Figure Relevant cost of labor

( Beginning: Avis, 2009: p.81 )

Benefits and jobs of presenting activity based bing into an organisation

Activity based costing is an attack to the monitoring and costing activities, which involves following resource ingestion and bing concluding end products ( Rajasekaran, 2010: p.271 ) . Activity based costing is another method of bing which is considered as a better method than traditional costing methods. But both traditional soaking up costing and activity based bing systems follow the two phase allotment procedure which includes following 2 phases.

Allotment of operating expense: Activity based bing establishes separate cost pools for support activities. As the cost of these activities is assigned straight to merchandises through cost driver rates, reallotment of service section costs is avoided.

Absorption of operating expenses: Absorption bing largely uses a few soaking up bases such as labour hours or machine hours, to bear down operating expenses to merchandises. Activity based bing utilizations many cost drivers as soaking up bases. Absorption rates under activity based costing should hence be more closely linked to the causes of overhead costs ( Lal, 2009: p.323 ) .

In traditional soaking up bing operating expenses are foremost related to cost centres and so to be objects. In activity based costing, operating expenses are foremost related to activities or grouped into cost pools and so related to cost objects. Just like traditional soaking up bing rates, activity based costing rates are calculated in progress which calls as predetermined rates.

The major rules behind activity based costing are as follows.

Activities cause costs.

Producing merchandises creates demand for the activities.

Costss are assigned to a merchandise on the footing of the merchandise ‘s ingestion of the activity ( Warren, 2010: p.391 ) .

The lineation of an activity based costing system

If Jessup Ltd is sing to follow activity based costing system, the lineation of an activity based system should be identified. This contains 5 chief stairss as follows.

Measure 1: Identify the major activities of Jessup Ltd.

Measure 2: Identify the factors which determine the size of the costs of an activity/cause the costs of an activity. These are called as Cost drivers.

Measure 3: Roll up the costs associated with each cost driver into what is known as cost pools.

Measure 4: Calculate the cost driver rates.

Measure 5: Charge the costs of each cost pool to merchandises on the footing of their use of the activity ( Hansen and Mowen, 2006: p.51 ) .

Analysis of activities

Activity based bing associate the incidence of costs to the degree of activities undertaken. A hierarchy of activities has been suggested.

Type of activities

Costss are dependent on


Unit degree

Volume of production

Direct labor, direct stuffs

Batch degree

Number of batches

Inspection, set up costs

Merchandise sustaining

The being of a merchandise group/line

Product direction, equipment care

Facility prolonging

Administration merely being in concern

Rent, edifice depreciation

Table Activity based bing – analysis of activities

Benefits of utilizing activity based costing system

The complexness of fabrication has increased its wider merchandise rages, more complex production procedures and shorter merchandise life rhythm. Activity based costing recognises this complexness in the production procedure, with its multiple cost drivers. Absorption rates under activity based costing should hence be more closely linked to the causes of overhead costs ( Leitner, 2007: p.5 ) .

Activity based bing facilitates a good apprehension of what drives operating expense costs which in bend improves the merchandise pricing.

In modern fabrication systems, overhead maps include a batch of non mill floor activities. Activity based bing takes direction accounting beyond its traditional mill floor boundaries.

By commanding the incidence of the cost driver, the degree of the cost can be controlled.

The costs of activities non included in the costs of the merchandises an organisation makes or the services it provides can be considered to be non lending to the value of the product/ service. Activity based costing helps to extinguish these non value added activities.

Activity based costing can be used in the service sector as good ( Weil and Maher, 2005: p.233 ) .

Criticisms of Activity based costing

Some step of cost allotment may still be required at the cost pooling phase for points like rent, rates and edifice depreciation.

It is questionable whether a individual cost driver can explicate the cost behavior of all points in its associated pool.

The figure of cost pools and cost drivers can non be inordinate otherwise an Activity based costing system would be excessively complex and excessively expensive.

Unless costs are caused by an activity that is measured in quantitative footings and which can be related to production end product, cost drivers will non be useable ( Kinney and Raiborn, 2012: p.121 ) .


The strategic direction comptroller holds the duty of supplying the cardinal information that is needed for determination doing procedure of the administration. So naming a individual who can clearly set up the information without messing it out and who is capable of supplying the needed information when and where it is of import, is a critical factor in the way to the success of the company. And the use of lone relevant informations in the procedure of determination devising is another cardinal factor that should be concerned of. As a service supplying entity use of activity based costing in Jessup Ltd will be more appropriate. But if the direction is to follow up activity based costing, they should clearly understand the logic behind its procedure and should be cognizant of both benefits and jobs that can originate out of it.


For any company to be successful, a clearly defined suited scheme is a critical factor. And determination devising is a procedure is another of import factor which ensures proper public presentation of a company. In order to do the most suited and accurate determination for the assorted state of affairss arise in a company, proper flow of information with all the relevant information, to the determination shapers is indispensable. This is why the assignment of a strategic direction comptroller can make a immense impact on any company in any industry. The strategic direction comptroller will guarantee that the determination shapers of the company can obtain all the information needed when and where needed. But the most of import thing is, he will guarantee that the determination shapers merely obtain the relevant information, in order to extinguish unneeded complexnesss in the determination devising procedure. The relevant and non relevant costs designation is utile for pricing determinations of the company every bit good. But still for companies such as Jessup Ltd, the advertisement company, cost allotment would be hard as they are non in fabrication merchandises. So to apportion the costs decently, the direction of Jessup Ltd can acquire the usage of activity based costing.


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