Chapter 22 - Strategic management accounting and emerging issues Flashcards

1
Q

1 Recognise that different conceptions of strategy exist. How can we define strategy (according to Marcus)?

A

Strategy is an elusive concept. Many definitions and notions of strategy exist in the management literature.

Strategy: How does an organization match its own capabilities with the opportunities in the marketplace to accomplish its overall objectives?

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2
Q

What is prescriptive or normative approach and the descriptive approach to strategy?

A

Some management theorists view strategy in terms of how it is supposed to be according to them (prescriptive or normative approach) while others prefer to explore how strategies arise in organisations (the descriptive approach). While the prescriptive approach has tended to dominate writings on the design of strategic management accounting systems and techniques, the descriptive perspective has been useful in explaining the process by which such techniques emerge and are operationalised.

Normative/prescriptive approach: How is strategy supposed to be?
Descriptive approach: How do strategies arise?

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3
Q

In formulating its strategy, an organisation would seek to understand the industry in which it operates. Industry analysis might focus on five forces, what are they and what is the collective effect?

A

The five forces are (a) competitors, (b) potential entrants into the market, (c) equivalent products, (d) bargaining power of customers, and (e) bargaining power of input suppliers. The collective effect of these forces shapes an organisation’s profit potential. In general, profit potential decreases with greater competition, stronger potential entrants, products that are similar, and tougher customers and suppliers.

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4
Q

2 Describe how some organisations adopt identifiable generic strategies such as product differentiation and cost leadership

A

Two popularised notional strategies that some organisations may be considered to use are product differentiation and cost leadership. Product differentiation refers to offering products and services that are perceived by customers as being superior and unique. Cost leadership refers to the pursuit of low costs relative to those of competitors.

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5
Q

Define strategic management accounting

A

A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information.

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6
Q

3 Identify key aspects of SMA practices

A

Strategic management accounting (SMA) places particular emphasis on blending external with internal organisational information. SMA encompasses both financial and non-financial information. SMA may be viewed as an attempt to integrate insights from marketing management and management accounting within a strategic management framework.

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7
Q

What are some key differences between conventional management accounting and SMA?

A

Conventional management accounting adopts a historical orientation coupled with a focus on single decisions, single periods and single entities. SMA is oriented towards the future. Moreover, it seeks to emphasise the cohesiveness and consistency of macro- and micro-level activities and short- and long-term decisions. Emphasis in SMA is also placed on an enterprise’s position relative to that of its competitors in the context of sequences of decisions over multiple time periods.

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8
Q

4 What are the objectives of balanced scorecards as systems of performance measurement?

A

The balanced scorecard seeks to translate an organisation’s mission and strategy into a comprehensive set of performance measures that provides the framework for a strategic performance management and measurement system. The balanced scorecard does not focus solely on achieving financial objectives. It also highlights the non-financial objectives than an organisation must achieve in order to meet its financial objectives. The scorecard measures performance from four key perspectives: (1) financial, (2) customer, (3) internal business process, and (4) learning and growth. A company’s strategy influences the measures used in each of these perspectives.

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9
Q

What is financial and the customer perspective of the balanced scorecard?

A

Financial perspective: operating profit, revenue growth, revenues from new products, gross margin percentage, cost reductions in key areas, economic value added (EVA®), ROI
Customer perspective: market share, customer satisfaction, customer retention percentage, time taken to fulfil customer’s requests

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10
Q

What is the internal process and the learning and growth perspective of the balanced scorecard?

A

Internal business process perspective: innovation process (manufacturing capabilities, number of new products or services, new product development times, number of new patents), operations process (yield, defect rates, time taken to deliver product to customers, percentage of on-time deliveries, average time taken to manufacture orders, set-up time, manufacturing downtime), after-sales service (time taken to replace or repair defective products, hours of customer raining for using the product)
Learning and growth perspective: employee education and skill levels, employee satisfaction scores, employee turnover rates, information system availability, percentage of processes with advanced controls, percentage of employee suggestions implemented, percentage of compensation based on individual and team incentives

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11
Q

Why does the balances scorecard reduce managers’ emphasis on short-run financial performance?

A

Because the non-financial and operational indicators measure fundamental changes that a company is making. The financial benefits of these changes may not be captured in short-run earnings, but strong improvements in non-financial measures signal the prospect of creating economic value in the future. By balancing the mix of financial and non-financial measures, the balanced scorecard focuses management’s attention on both short-run and long-run performance.

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12
Q

What is reengineering?

A

Reengineering is the fundamental rethinking and redesign of business processes in seeking to achieve improvements in critical measures of performance such as cost, quality, service, speed and customer satisfaction.

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13
Q

Name five features of a good balanced scorecard

A

(1) It tells the story of a company’s strategy by articulating a sequence of cause-and-effect relationships. Each measure in the scorecard is part of a cause-and-effect chain, a linkage from strategy formulation to financial outcomes.
(2) It helps communicate the strategy to all members of the organisation by translating the strategy into a coherent and linked set of understandable and measurable operational targets. Guided by the scorecard, managers and employees take actions and make decisions that aim to achieve the company’s strategy.
(3) In for-profit companies, the balanced scorecard places strong emphasis on financial objectives and measures. A balanced scorecard emphasises non-financial measures as a part of a programme to achieve future financial performance.
(4) The balanced scorecard limits the number of measures used by identifying only the most critical ones. Focuses management’s attentional on those that are key to the implementation of strategy.
(5) The scorecard highlights suboptimal trade-offs that managers may make when they fail to consider operational and financial measures together.
Correct implementation is key to the successful deployment of a balanced scorecard. It is particularly important that some common objectives drive the desire to use a balanced scorecard within an organisation.

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14
Q

Name five pitfalls to avoid when implementing a balanced scorecard

A

(1) Do not assume the cause-and-effect linkages to be precise, they are merely hypotheses. Hence, an organisation must gather evidence of these linkages over time and alter their scorecards.
(2) Do not seek improvements across all of the measures all of the time. This approach may be inappropriate because trade-offs may need to be made across various strategic goals.
(3) Do not use only objective measures in the scorecard.
(4) Do not fail to consider both costs and benefits of initiatives such as spending on information technology and R&D before including these objectives in the scorecard. Otherwise, management may focus the organisation on measures that will not result in overall long-run financial benefits.
(5) Do not ignore non-financial measures when evaluating managers and employees. Think carefully about linking balanced scorecard categories to performance measures.

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15
Q

What should managers and accountants consider when evaluating the success of a strategy?

A

They need to evaluate the success of a strategy on the basis of whether the sources of operating profit increases are the result of implementing the chosen strategy. To use operating profit numbers for evaluating the success of a strategy, a company needs to isolate the operating profit due to cost leadership from the operating profit due to product differentiation. To evaluate the success of a company’s strategy, one can subdivide changes in operating profit into components that can be identified with growth, product differentiation and cost leadership. Subdividing the change in operating profit to evaluate the success of a company’s strategy is similar to variance analysis.

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16
Q

5 What is a tableau de bord ?

A

A tableau de bord is a customised multidimensional control system encompassing both financial and non-financial information to identify and measure organisational objectives, key variables and indicators. French companies use a series of TdBs carved to overlay their organisational structure. Localised responsibilities are assigned, and hierarchical lines of authority are respected.

17
Q

How might the tableau de bord be different within the organisation?

A

The managing director has a TdB detailing overall company objectives and attainments. The managing director’s Tdb aggregates data from subordinate TdBs such as those of divisional heads, functional heads etc. E.g. there might be TdBs for manufacturing, finance and marketing. The manufacturing TdB itself would aggregate those of its departments: production, purchases, receiving and storage. Production in turn would have TdBs for line A, line B and so on down to the nadir of the pyramid.

18
Q

What type of information is included in a Tableau de Bord?

A

TdBs consist of a range of diverse information. TdBs report forecasts, actual results and variances in the conventional manner, but this this information relates to non-financial data as well as financial data (e.g. consumption of materials, production hours reject rates and also financial information such as contribution margins). Beyond financial and non-financial information differences, TdBs include externally sourced information and general information on the business environment.

19
Q

What is the advantage of using a Tableau de Bord?

A

TdBs go beyond measuring values, they attempt to understand processes that create value. The use of TdBs can lead to rapid action. Managers can respond more readily to physical indicators than financial indicators of performance. Physical events occur ahead of financial results. Physical indicators enable future financial results to be anticipated and indicate where action is needed. TdBs provide real-time information to guide an organisation towards the attainment of its objectives.

20
Q

What are 5 corporate governance characteristics which can affect effectiveness in compliance?

A

Some corporate governance characteristics which can affect effectiveness in compliance include executive compensation package design, workings and structure of the board of directs, internal control mechanisms and top management style of control and thinking. Bad corporate governance practices can result in aggressive management of earnings by senior enterprise officers.

21
Q

6 Describe how a strategic scorecard can contribute to enterprise governance

A

Enterprise governance is about both corporate governance (conformance) and business governance (performance). The strategic scorecard aims to assist boards of directors achieve effective business governance. The strategic scorecard forces boards to consider where the company is now, what its options are, how it will implement the options it chooses and how it will manage risk.

22
Q

What are the four generic dimensions of the strategic scorecard?

A

(1) Strategic position: An organisation needs to continuously review its strategic position. This should include the microenvironment (competition, market, customers) and the macro environment (economic, political, regulatory), threats, business positions, capabilities and stakeholders.
(2) Strategic options
(3) Strategic implementation: track progress of project
(4) Strategic risk

23
Q

7 What is the scope of SMA in practice ?

A

Strategic management accounting practices exist in different forms within organisations seeking to use both financial and non-financial information as well as integrating internal with external market-based information. It is also subject to wider contextual influences including nation-specific effects.

24
Q

8 How does the potential of SMA systems rely on understanding the organisational context?

A

Strategic management accounting systems may include a wide array of techniques or may be narrowly focused in terms of their cost management priorities. Their implementation and effects within organisations are best considered in visionary and creative rather than in reactive and technical terms. Understanding organisational context is key to the development of an effective SMA potential.

25
Q

9 How does the rise of social media and ‘Big Data’ affect management accounting?

A

Internet technologies are enabling many enterprises to establish variable pricing alongside variable costing mechanism. Advances in web-based technologies and telephony combines with the plummeting costs of information production and retrieval and the falling cost of hardware are making easier the input of consumer desires into organisational-design and product fabrication functions.

Major technologies affecting business firms include mobile technologies, social media, cloud computing and ‘Big Data’. The cloud has enabled enterprises to store, access and share resources at lower costs and with much greater ease, economy and flexibility. Companies can better make use of data due to better programmes able to process ‘Big Data’. A customer making online searches can collecting product information will leave a trail of information disclosure about choice and information assessment prior to making the purchase.

26
Q

9 How does the emerging issue of environmental management accounting affect management accounting practices?

A

There are enhanced corporate governance mechanisms and ethical guidelines. In addition, the emergence of voluntary corporate social responsibility reporting guidelines and management systems permits management to go beyond compliance with government regulations and accounting rules. Finally, advances in the sciences have driven the evolution of eco-efficient production process, better measurement mechanisms and the use of renewable energy sources.

27
Q

9 Consider how knowledge management and intellectual capital creation affect management accounting

A

It is argued that management accounting processes can play a key role in the coordination and integration of knowledge. Intellectual capital is commonly defines as complementary to financial capital, and compromises the accumulated knowledge of a firm, both in dynamic and in static terms (i.e. knowledge flows and knowledge stocks). Management accounting systems can help interrelationships between the three forms of capital - human, relational and structural. Often, the connectivity between the former two help stage the routines in the later. It is the interaction between the three which enhances knowledge exchange and value creation.

28
Q

Name 4 forces that can shape the profit potential in the market

A

Bargaining power of suppliers, threat of new entrants, bargaining power of buyers, threat of substitute products.

29
Q

What are 6 common suggestions and dimensions of strategic management accounting?

A

Information on competitors, customers, market valuation of product characteristics
Cost management over the whole value chain
Competitive analyses of costs (cost drivers)
Strategic product costing considerations
Long-term performance measurement
Long-term assessment of organizational strategies

30
Q

What are 5 types of performance measures?

A

Internal financial and accounting information (e.g., operating profit)
External financial information (e.g., stock prices)
Internal non-financial information (e.g., manufacturing efficiency measures)
External non-financial information (e.g., customer satisfaction)
Benchmarking against best-practice numbers from competitors

You need different performance measures since there are different levels of performance measurement

31
Q

Name 6 levels of performance measurement

A
Total-organisation level
Subunit level
Customer/market level
Individual-facility level
Team level
Individual-activity level