The objective of Strategic Management Accounting Essay

1.0 Introduction

Strategic Management Accounting is concerned with supplying information that will back up the strategic programs and determinations made within a concern. It is a development in the accounting literature that acts as a model for the assorted strategic elements in the subject of direction. The aim of Strategic Management Accounting ( SMA ) is to supply information to directors that will assist them to run concern in a manner towards accomplishment of strategic direction of concerns ‘ strategic aims.

1.1 Cost Centres

Harmonizing to ( Chartered Institute of Management Accountants ) CIMA Official Terminology, a cost Centre is a production or service location, map, activity or point of equipment for which costs are accumulated. It can be divisions, sections, mercantile establishments, or even single merchandises within an administration.

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Typical illustrations of Cost Centres are many subdivisions of Building Societies and Banks. In these instances all costs are allocated to a subdivision. So for illustration, the subdivision will be charged for the booklets it uses, its pay measure, its telephone costs, and will be apportioned portion of caput office costs. The overhead costs allocated can frequently be linked to the income earned by each subdivision, and hence profitableness of each subdivision can be judged. There are two types of Cost Centres ; the production cost Centres that are straight involved with the production procedure for illustration, the film editing and finishing section. The other one is the service cost Centres, which provide support services for the production cost Centres. Examples include the care section and the shops.

1.1.1 Advantages and Disadvantages of Cost Centre Managers

A Cost Centre Manager ‘s occupation is to bring forth the demanded measure and mix of doodads in an efficient mode.

Advantages of Cost Centre Managers are as follows:

Motivate staff, who feel committed to the cost Centre

Improve monitoring of costs and outgo

Improve direction information on profit-ability

Improve monitoring of investing returns

Determine the end products that will be green goodss every bit good as the expected inputs required to bring forth each unit of end product

Allow the concern to place which countries are most profitable

Aid with the administration of sections and resources

Control over costs

Disadvantages of Cost Centre Managers are as follows:

Incorrect allotment of operating expenses can take to under or overestimated of profitableness

Additions disposal and paperwork

The public presentation is evaluated by a complex system of cost discrepancies that compare existent to budgeted cost public presentation

No control over gross or capital

1.2 Net income Centre

Net income Centres take the basic thought of cost Centres slightly farther. They are run as a separate concern within a concern. They will purchase services from other divisions and net income Centres within the parent administration, and so selling their end product on to the concluding client or to another portion of the parent administration. However, they will hold an ain net income and loss history and command for investing capital from the parent company. An illustration of an administration operating net income Centres is Corus ( once British Steel ) . Within Corus the Tin Plate division operates as a net income Centre. Corus Tin Plate buys services and goods from within the administration, and sells end product to other divisions and to external clients.

1.2.1 Advantages and Disadvantages of Profit Centre Directors

Advantages of Profit Centre Managers are as follows:

Allows decision-making and power to be delegated efficaciously

Improves velocity and efficiency of determination devising

Increased motive

Responsible for both costs and grosss in their divisions

Responsible for production and gross revenues public presentation and make up one’s mind on affairs such as pricing, selling, volume of end product, beginnings of supply and gross revenues mix

Allows more effectual usage of fillips and other signifiers of fiscal motive, all linked to profitableness of net income Centre

Assigned non-current assets and working capital by top direction

Generate net incomes from the effectual usage of assets

Create value from the resources the company has put at their disposal

Free to follow ain opinion except within expressed restraints

Keep a combination of all sorts of ends at the same time

Disadvantages of Profit Centre Managers are as follows:

Net income Centre Managers are often caught in a barbarous quandary. They are frequently asked to transport out policies that they strongly feel to be unwise. Yet, they know that they will be held responsible for failure, whatever the cause

Loss of overall control of the company

Working towards different or non-company dockets

Increased chance for imperium edifice by direction

Do non hold the authorization to find the degree of capital investing in their installations

The executive emphasis is hard to exaggerate when there is struggle between policy limitations, close term public presentation, the long term good of the company and personal endurance

Situation becomes more hard when corporate staff becomes profoundly involved of how the concern should be run. Hence, the most of import determinations a director makes tend to deject short term reported public presentation in order to significantly better long term consequences

Corporate Management has a different construct of the demands for future success from the constructs of the Profit Centre Management

1.3 Investment Centre

An Investment Centre is a net income Centre with added authorization to do investing determinations. It is, in many respects, a concern within a concern. In its strongest signifier of costs, grosss, the acquisition and disposal of the assets it supports the division ‘s activities. In fact, it is an country of duty.

( Du Pont ) was the first major company in the United States to acknowledge that the public presentation of an investing Centre must see the degree of investing along with the income generated from the investing. Return on Investment ( ROI ) measures the rate of return generated by an investing Centre ‘s assets.

Investing Centre Directors are evaluated with prosodies as ( ROI ) and economic value-added.

ROI evaluates an investing ‘s possible by comparing the magnitude and timing of expected additions to the investing costs. For illustration, a new enterprise costs $ 500,000 and will present an extra $ 700,000 in increased net incomes. Simple ROI = additions – investing costs ? investing costs. ( $ 700,000 – $ 500,000 = $ 200,000. $ 200,000 ? $ 500,000 = 40 % ) This computation works good in state of affairss where benefits and costs are easy known, and is normally expressed as an one-year per centum return.

Therefore public presentation assessment within investing Centres is, based upon two component, net income and investing.

1.3.1 Advantages and Disadvantages of Investment Centre Managers

Advantages of Investment Centre Managers are as follows:

Discretion over capital outgo and working capital determinations every bit good as production and gross revenues public presentation

Responsible for net incomes

Authority to be after, command and duty within divisionalised organisations

Responsible for choice and public presentation of peculiar investings

More powerful scheme direction system built upon the model of scheme maps and Balanced Scorecards to actuate, align and measure the public presentation

Decisions are frequently made in a more timely manner

By forcing decision-making authorization, directors most familiar with the a job have the chance to work out it

The usage of endeavor resource planning ( ERP ) systems to supply information to directors throughout an organisation

Disadvantages of Investment Centre Managers are as follows:

Fiscal prosodies are no longer sufficient for mensurating the one-year public presentation of the directors to make long-run value

Ethical impact of decisions-making

Changing market and economic conditions

Unexpected production jobs

Fails to construct lower-level employee that may do struggle

Time-consuming and hard to pull off logistically

Directors become so concerned with ain countries of duty that they lose sight of the large image. Because of this deficiency of focal point on the company as a whole, directors may be given to do determinations profiting their ain sections, which may non ever be in the best involvement of the company

Lack of coordination and communicating between sections

Difficult to portion alone and advanced thoughts

May consequence in duplicative attempts and duplicative costs

Lack of well-developed and well-designed information systems

Economic factors influence such as: high rising prices, strength of implicit in capital markets and the strength of the local currency

Social, cultural, political and linguistic communication barriers

Part B

A survey by Horngren ( 1995 ) found that the focal point of cost direction should be on determinations and the assorted cost direction techniques, systems and measurings that spur and help directors to do wiser economic determinations.

2.0 Marginal or variable costing

Fringy costing is besides termed as variable costing, a technique of bing which includes merely variable fabrication costs, in the signifier of direct stuffs, direct labor, and variable fabrication operating expenses while finding the cost per unit of a merchandise. Fringy costing is an alternate method of bing to soaking up bing. Closing stocks of work in advancement or finished goods are valued at fringy ( variable ) production cost. Fixed costs are treated as a period cost, and are charged in full to the net income and loss history of the accounting period in which they are incurred.

The fringy cost of a merchandise – ” is its variable cost ” . This is usually taken to be ; direct labor, direct stuff, direct disbursals and the variable portion of operating expenses.

The term ‘contribution ‘ mentioned in the formal definition is the term given to the difference between Gross saless and Fringy cost. Thus








2.1 Advantages of Marginal Costing

Simple and easy method to utilize

The mark-up per centum can be varied. In pattern, mark-up pricing is used in concerns where there is a readily identifiable basic variable cost

2.2 Disadvantages of Marginal Costing

It gives fixed operating expenses in pricing

3.0 Full or soaking up costing

Absorption costing is a costing technique that includes all fabrication costs, in the signifier of direct stuffs, direct labor, and both variable and fixed fabrication operating expenses, while finding the cost per unit of a merchandise. It is besides referred to as the full- cost technique.

3.1 Advantages of full or soaking up costing

A concern might hold an thought of the per centum net income border it would wish to gain and so might make up one’s mind on an mean net income mark-up as a general guideline for pricing determinations. This would be peculiarly utile for concerns that carry out a big sum of contract work or jobbing work, for which single occupation or contract monetary values must be quoted on a regular basis to prospective clients.

3.2 Disadvantages of full or soaking up costing

Possibly the most important job with full costing is that it fails to recognize that since demand may be determined by monetary value ; there will be a profit-maximizing combination of monetary value and demand. This attack to pricing will be most improbable to get at the profit-maximizing monetary value.

Monetary values must be adjusted to market and demand conditions: the determination can non merely be made on a cost footing merely.

4.0 Activity Based Costing ( ABC )

In 1988 ( Cooper and Kaplan ) developed a more refined attack for delegating operating expenses to merchandises and calculating merchandise costs, the Activity Based Costing ( ABC ) . ABC is a dynamic attack to finding costs by delegating them to the principal activities performed within an organisation.

4.1 Advantages of ABC

Greater apprehension of client profitableness

Designation of non value-adding activities ; that is undertakings which add no farther value to the merchandise or service, such as manual checking of client orders and specifications

Designation and apprehension of cost behavior and therefore the potency to better cost appraisal

Improves truth and public-service corporation value of direction information, therefore enabling directors to do better informed determinations a both tactical and strategic degrees

Allows all directors to understand and command costs in their country

By engagement with ABC, comptrollers can now lend to the administration ‘s hereafter, instead than simply describing on its yesteryear

4.1 Disadvantages of ABC

Identifying cost drivers is a job. This would necessitate to be explored with each section director

Operating expenses, common to several cost-pools, may be required to be randomly apportioned across all merchandise lines or clients. Examples: rent ; rates ; insurance ; depreciation ; power ; heat and visible radiation

Overall clip and cost involved in execution.

Departmental opposition to alter, or to supply information

Reluctance to alter traditional accounting methods

5.0 Example exemplifying why Marginal costing is better than soaking up costing and the ground for the pick

XYZ produces a merchandise that sells for ?60 per unit. Variable production costs are ?35 per unit and the fixed production costs of ?30,000 per period are absorbed on the footing of the normal capacity of 5,000 units per period. Fixed disposal, selling and distribution operating expenses are ?19,000 per period. There was no gap stock list for the latest period. We shall be ciphering the net income reported for gross revenues of 5,000 units last period for production volumes 5,000 units, 6,000 units and 7,000 units, utilizing Absorption and Marginal costing.

Absorption bing

Fixed production cost per unit = ?30,000/5,000 = ?6 per unit

Full production cost per unit = ?35 + ?6 =?41 per unit

Fringy costing

This illustration above demonstrates an of import point when sing the impact on net income coverage of fringy and soaking up bing methods.

For a given degree of gross revenues, fringy costing will describe the same degree of net income whatever the degree of production. In contrast, soaking up costing will describe higher degrees of net income for the same degree of gross revenues, if production degrees are higher.

Here, the unfavorable judgment of the usage of soaking up bing for the internal coverage of net income is that, if a director ‘s wages is based on the net income for the period, the director will be encouraged to increase production even if the ensuing end product can non be sold.

5.1 Example exemplifying why Marginal costing is better than ABC and the ground for the pick

Example if a house needs to entree the viability of two merchandises ; it needs to look at the hard currency flow of the two products/ services:

Merchandise A:

Variable cost – $ 10,000

Gross saless: $ 50,000

Other fringy cozy of goad: $ 25,000

Contribution: $ 15,000

Merchandise Bacillus:

Variable cost – $ 15,000

Gross saless: $ 65,000

Other fringy cozy of goad: $ 15,000

Contribution: $ 35,000

Therefore, merchandise B is more profitable as the administration is gaining more in footings of part and is sufficient to cover other fixed cost.

Fringy costing helps direction to make up one’s mind on pricing policy:

The demand to do a net income

Market demand

Requirement to increase selling portion for a merchandise

Competition from other houses

Maximal use of resources

Economic status

Political factors

In the ABC attack the coating system produce different figures for net runing income and difference can be rather big though directors preferred this attack for internal determination devising.

6.0 Example exemplifying why Absorption costing is better than fringy costing and the ground for the pick

The normal degree of activity for the current twelvemonth is 60,000 units, and fixed costs are incurred equally throughout the twelvemonth.

There were no stocks of the merchandise at the start of the one-fourth, in which 16,500 units were made and 13,500 units were sold. Actual fixed costs were the same as budgeted.

Then, assorted computations sing Absorption V. Fringy costing can be worked out as under: –

The rate of soaking up of fixed production operating expenses will hence be:

Rs.1, 50, 000 ? 60,000 = Rs. 2.50 per unit.

( I ) The fixed production operating expense absorbed by the merchandises would be 16,500 units produced A- Rs. 2.50 = Rs. 41,250

( two ) Budgeted one-year fixed production operating expense = Rs.1, 50, 000

Actual quarterly fixed production operating expense = budgeted quarterly fixed

production operating expense ( 1,50,000 ? 4 )

Production operating expense absorbed into production [ see ( one ) above ]

Over -absorption of fixed production operating expense

( three ) ( a ) Net income statement for the one-fourth, utilizing Absorption Costing

In the context of costing of a product/service, an soaking up bing considers a portion of all costs incurred by a concern to each of its products/services. In soaking up costing technique ; costs are classified harmonizing to their maps. The gross net income is calculated after subtracting production costs from gross revenues and from gross net income, costs incurred in relation to other concern maps are deducted to get at the net net income.

Absorption bing gives better information for pricing merchandises as it includes both variable and fixed costs. Hence, Profits as shown by Marginal and Absorption Costing techniques are non the same

6.1 Example exemplifying why Absorption costing is better than ABC and the ground for the pick

The traditional attack to fixed overhead soaking up has the virtue of being simple to cipher and use. However, simpleness does non warrant the production and usage of information that might be incorrect or deceptive. ABC doubtless requires an administration to pass clip and attempt look intoing more to the full what causes it to incur costs, and so to utilize that elaborate information for costing intents. But understanding the drivers of costs must be an indispensable portion of good Performance Management.

7.0 Example exemplifying why ABC is better than fringy costing and the ground for the pick

Fringy costs change in entire in proportion to the degree of activity. For illustration if a car manufacturers production additions by 5 % , its tyre costs will increase by approximately 5 % .

The ABC method of gauging costs has many advantages over fringy costing methods. More costs can be accurately traced to the merchandise under survey, which consequences in the ability to accomplish more relevant pricing. In add-on, more accurate costs help in the decision-making procedure. Because ABC has constitutional flexibleness, survey contrivers can experiment with assorted what-if scenarios before the undertaking begins and even change the survey design after the survey is underway.

7.1 Example exemplifying why ABC is better than soaking up costing and the ground for the pick

An alternate method of absorbing operating expenses is to utilize activity-based costing, where costs are collected on the footing of the activities which consume resources and operating expenses are allocated to merchandises on the footing of appropriate cost drivers.


Shops costs ( state ?20,000 ) may be driven by the figure of requisitions raised ( state 50 )

A cost per requisition can hence be calculated ( ?20,000/50 = ?400 )

A peculiar merchandise line will therefore absorb shops costs on the footing of the figure

of requisitions raised in order to bring forth that line. So, if to bring forth all of Product X

required 6 requisitions, so Product X would absorb ?400 x 6 = ?2,400 of shops costs

If 12,000 units of Product X were made in entire, the component of shops cost in the overall

unit cost of Product X would be ?2,400/12,000 = ?0.2

8.0 Appendixs


An illustration of Overhead Allocation

Wagess of the supervisor of section A ?200

Wagess of the supervisor of section B ?150

Indirect stuffs consumed in section A ?50

Rent of the premises shared by sections A and B ?300

The cost accounting system might include three cost Centres

Cost Centre: 101 Department Angstrom

Department B


Operating expense costs would be allocated straight to each cost Centre, i.e. ?200 + ?50 to be centre 101, ?150 to be centre 102 and ?300 to be centre 201. The rent of the mill will be later shared between the two production sections, but for the intent of twenty-four hours to twenty-four hours cost recording in this peculiar system, the rent will first of all be charged in full to a separate cost Centre.


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