Strategic Management Accounting.

Table of Contents
Page No:
1. Working capital management. 2-4
2. Critically evaluation the implication on XYZ co 4-5
3. Strategic Management Accounting -!
4. "elevant co#t an$ "evenue o% SMA !-&
5. 'ualitative %actor con#i$er in the $eci#ion making proce## &-((
6. "e%erence# (2
1
PART A
Report on Working capital management an criticall! e"aluation t#e implication on
$%& co.
Working capital management
Working capital i# the mo#t important %un$ %or the )u#ine## a# it keep# the )u#ine##
running. *t coul$ )e #ai$ it i# li%e line o% the )u#ine## +ithout it )u#ine## coul$ )e
%aile$. Accor$ing to Smith ,(&-!. +orking capital i# the circulate$ capital an$ a# per
hi# concept total gro## +orking capital i# the total current a##et. A# per /uthmann
,(&5. +orking capital i# the part o% current a##et +hich i# %inance$ %or long term
%un$. *t i# e0ce## %un$ o% current a##et over current lia)ilitie#.1et +orking capital i#
the term u#e$ in the )u#ine## i# the net o%% current a##et an$ current lia)ilitie#. 2he
concept i# like ho+ much money le%t a%ter pai$ o%% all the current lia)ilitie#. 2he main
o)3ective i# ho+ much money #houl$ u#e in a# +orking capital to run the )u#ine##
#moothly. Al+ay# )u#ine## +ant# to re$uce it an$ $o )e#t +orking capital
management )y inten$ing to increa#e the current a##ert an$ re$uce lia)ilitie#. Any
%un$ u#e$ in the )u#ine## i# e0pen#ive a# nee$ pay intere#t %or it to the len$er. So it
a$vi#a)le to u#e$ a# le## a# they can.
Su%%icient amount o% +orking capital i# nece##ary %or any )u#ine## operation.
4u#ine## nee$# to inve#tment money e%%iciently each every area o% )u#ine##.
*nve#tment in the long term a##et #houl$ con#i$er long term o)3ective o% the )u#ine##
an$ overall goal o% ma0imi#ation o% #harehol$er +ealth. So management o% ca#h i#
important %or )u#ine##. Shortage o% ca#h coul$ re#ult in non payment o% cre$itor#
+hich $irectly an$ in$irectly a%%ect on organi#ation reputation5 lo## o% market
opportunity i.e. )ulk $i#count5 $ue to ina$e6uate inventory pro$uction coul$ )e hal%
there%ore lo## o% cu#tomer an$ )u#ine## a# +ell. So #u%%icient amount +orking al#o
nee$# to promote the #ale an$ at $epre##ion perio$ o% )u#ine## it #upport# the )u#ine##
to #urvive. Signi%icance o% +orking capital e0plain )y the 78 9onnel et.al,(&4. that
+orking capital help to keep the pro$uction running5 maintain #ale#5 maintain
inventory an$ %un$ the receiva)le. 7rgani#ation #houl$ maintain a %air amount o%
+orking capital %or #mooth %unction o% it )u#ine##. Su%%icient an$ in#u%%icient )oth are
not goo$ %or )u#ine## a# )ooth a%%ect on organi#ation pro%ita)ility an$ #urvival.
2
2here $i%%erent +ay )y +hich +orking capital coul$ )e manage$ in the )u#ine##.
2he#e are:
"e$uce receiva)le $ay# )y collecting money a# early a# po##i)le +hich re$uce
the )a$ $e)t a# +ell a# intere#t o% len$er#. 7verall it +ill re$uce the co#t o%
)u#ine##. 4ut mu#t con#i$er that #houl$ not annoy the cu#tomer a# they are
mo#t important %actor %or any )u#ine##.
*ncrea#e paya)le $ay# o% the cre$itor a# much a# )u#ine## can +hich help the
)u#ine## to circulate the money in )u#ine## to take more )u#ine##
opportunitie# %rom the market place. 4ut #houl$ keep in min$ #upply #houl$
happy5 any pro)lem +ith #upply +ill a%%ect on the )u#ine## operation an$ )a$
reputation at market. So increa#e the paya)le $ay# to rea#ona)le $ay# that
#uppler are happy an$ #upply continuou#ly.
Stop huge inve#tment in %i0e$ a##et#. Any inve#tment in the %i0e$ a##et #houl$
)e )alance$ +ith the #ale# %igure o% the organi#ation. Any inve#tment in the
i$eal %i0e$ a##et +ill )e harm%ul %or the )u#ine## health. Al+ay# inve#t %or the
long term o)3ective o% the )u#ine## i.e. ma0imi#ation o% #harehol$er +ealth
an$ #top over capitali#ation.
Stop inve#t# on huge inventory purcha#e. Some time )u#ine## )uy huge
inventory a# get the )ulk $i#count. *t i# true that #ave money )ut al#o
remem)er there i# chance o% o)#ole#cence i% )u#ine## coul$ not u#e it in time5
the%t $ue lace o% control an$ +a#te $ue mi#han$ling. So +a#te o% money an$
time.
*mplementation o% 3u#t in time inventory #y#tem coul$ #olve the pro)lem o%
o)#ole#cence )ut organi#ation may not a)le to get )ulk $i#count.
Stop to keep e0ce##ive +orking capital +hich co#tly %or the )u#ine## an$
carele## a)out co#t +hich negatively a%%ect )u#ine## health.
4argaining po+er or negating po+er o% the organi#ation al#o help to the
management o% +orking capital.
1ee$ e%%icient +ork%orce to make plan %or the )u#ine## +ho +i#ely can pre$ict
amount o% +orking capital nee$e$ )y the organi#ation to run the %uture
un$i#rupte$ operation.
2here #ome pro)lem in +orking capital management. 2he#e are
9i%%icult to $e%ine amount o% +orking capital nee$e$ %or )u#ine##.
9i%%icult to #elect the mo$e o% %inancing.
;ack o% %un$ coul$ )e a pro)lem %or pay the $ivi$en$.
<ro)lem in meet the )u#ine## commitment $ue to lack o% %un$
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2o collect ca#h %rom market an$ %ul%il the %un$ pro)lem )u#ine## ha# to
#ell the pro$uct in cheap price. So lo#e o% pro%it.
Survival an$ gro+th o% %irm to #ome e0ten$ $epen$ on the +orking capital
management. =irm nee$# to )alance )et+een the li6ui$ity an$ pro%ita)ility. 4u#ine##
i# operating in the market to earn pro%it %or the #harehol$er an$ maintain the ri#k o%
capital inve#tment. Management o% the %un$ #houl$ revie+ or a##e## the +orking
capital re6uirement o% the %irm in a certain interval )y con#i$ering the circum#tance#5
#houl$ con#i$er market opportunity an$ co#t o% capital. Co#t an$ )ene%it analy#i# i#
important %or %irm. So organi#ation o)3ective #houl$ )e at minimum ri#k maintain the
%air amount o% li6ui$ity an$ increa#e the pro%ita)ility.
*mplication on XYZ C7
A# per the in%ormation provi$e$ a)out the company XYZ i# #mall #i>e company +ho
make# the pro$uct an$ #ell the in the market. So typically in the management o%
+orking capital5 it #houl$ manage the level o% ca#h in the current a##et5 )ill# paya)le 5
)ill receiva)le5 %ini#h goo$ in #tock an$ inventory level %or the pro$uction.
A# #mall me$ium #i>e company +orking capital i# very tight an$ %ace# huge
competition in the market a# there i# threat %rom other )ig company +ith huge
+orking capital an$ other capital inve#tment. 2o #urvive in the market XYZ nee$ to
han$le the +orking capital management e%%iciently.
A# very le## in%ormation ha# provi$e$ a)out the organi#ation ho+ are they $o their
+orking capital management 5 a perception i# u#e$ that they are $oing a )etter
+orking capital management )y a$opting all the trick# o% management. 2hey are
Cha#e cu#tomer %or early payment to +ith$ra+ money %rom market.
9o )etter negotiation +ith #upplier to #upply material in time an$ get )etter
cre$it perio$.
?eep rea#ona)le amount o% #tock o% ra+ material )y con#i$er the %uture unit o%
pro$uction an$ o)#ole#cence.
Make #ure very le## %ini#h goo$ #houl$ keep in the #tock a# chance o% $amage
an$ o)#ole#ce. Al+ay# try to $eliver the %ini#h goo$ to cu#tomer a# early a#
po##i)le.
2ry to keep rea#ona)le ca#h in han$ a# thi# i# i$eal ca#h +hich co#tly %or the
)u#ine##. Al#o #houl$ have to remem)er the amount #houl$ rea#ona)le to gra)
the market opportunity.
/oo$ #trategic plan +ith e%%icient +ork %orce. Monitoring i# another important
%actor.
4
7verall )etter +orking capital management i# nee$ %or any organi#ation like XYZ. So
nee$ )etter management i.e. monitoring the cu#tomer5 revie+ the cu#tomer cre$it
perio$5 an$ relation )et+een pro%ita)ility an$ li6ui$ity.
Part.'
a. @valuation an$ $i#cu##ion o% relevant co#t an$ income #houl$ con#i$er )y
Strategic management accountant ,SMA. in a $eci#ion making proce##.
Strategic management accounting
Aohn#on an$ ?aplan ,(&B!. #tate that )e%ore cri#i# in management accounting5
improvi#ation o% the #trategic management accounting ha$ intro$uce$ in the #tu$y.
*t i# important accounting %or management per#onnel %or the $eci#ion making
proce##. Accor$ing to Simmon# ,(&B(. C*n #trategic management accounting
concentrating on all the e0ternal important in%ormation an$ internal generate$
in%ormation )oth an$ it coul$ )e %inancial an$ non %inancial in%ormation to take
$eci#ionD. A# per hi# vie+ 4a#ic accounting tool# coul$ )e u#e$ to create an$
monitor )u#ine## #trategy an$ management accounting can e0pan$ hori>on it#el%
an$ can preciou#ly evaluate the #trategic option# nee$ %or the $eci#ion making. 2o
gain a competitive po#ition #ho+n )y going )eyon$ the tra$itional marketing
#ho+n )y him )ut not a preciou# an$ clear theoretical %rame+ork provi$e. 7ther
author $e%ine# #trategic C#trategic management i# an integrate$ management
approach that )rought together all the in$ivi$ual element# involve$ in planning5
implementing an$ controlling )u#ine## #trategyD.
2he mo#t #igni%icant matter %or #trategic management i# to %ul%ill organi>ation
o)3ective. 7rgani>ation o)3ective# are pro$uce 6uality o% pro$uct +ith lo#t co#t
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an$ le## time than )e%ore pro$uction. 7rgani>ation manager# improvi#e action
plan on $ay to $ay )a#i# )y make a goo$ contract +ith cu#tomer5 #upplier an$
+orker to achieve the organi>ation o)3ective# an$ en#ure #u#taina)ility in long
run. Accor$ing to 4rom+ich ,(&&E. Cthe provi#ion an$ analy#i# o% the %inancial
in%ormation on the %irm8# pro$uct market an$ competitor#5 co#t# an$ co#t
#tructure# an$ the monitoring o% the enterpri#e8# #trategie# an$ tho#e o% it#
competitor# in the#e market# over a num)er o% perio$#D. Fe only %ocu#e# on the
%inancial in%ormation not the non %inancial in%ormation +hich i# important %or the
)u#ine## $eci#ion making proce##. 1o+ #trategic management accounting i#
concentrating on )igger picture +hich i# )igger than tra$itional )u$geting. *t
con#i$er# current economic change an$ po#ition5 pro3ection o% pa#t an$ e0pert
opinion.
"elevant co#t an$ "evenue o% SMA
*n the #trategic management $eci#ion making proce## only con#i$er e0pecte$
e0pen#e# +hich i# relevant to the pro3ect5 incremental co#t i.e. co#t increa#e$ $ue
pro3ect5 an$ e0pecte$ revenue . Sunk co#t# are the co#t# +hich nee$ to e0pen$ any
even management not ten$ to $o the pro3ect #o thi# co#t not con#i$ere$ in the
#trategic management accounting an$ it i# not a%%ect the #peci%ic $eci#ion taken )y
the management. So all relevant co#t an$ revenue very important %or the $eci#ion
maker to un$er#tan$ a# all are %ocu# on the %uture pro3ect +hich i# pro)a)le not
#ure. An e0ample o% relevant co#t an$ revenue i#: current pro$uction capacity i#
5EEE unit5 co#t o% per unit i# G(E an$ ne+ e0pecte$ pro$uction +ill )e EEE unit5
co#t per unit i# G(2. So relevant co#t i# G2.
*n the )elo+ mention ca#e# $eci#ion #houl$ )e taken )y the $eci#ion maker. 2he#e
are
Shut $o+n or keep open part o% )u#ine## i# one o% the important %actor#
%or the organi>ation $eci#ion maker. *t i# con%u#ing %or the $eci#ion maker
+hether #hut or keep# the open. 2hey #houl$ con#i$er %e+ thing#
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*% #hut $o+n +hat i# the con#e6uence# o% thi#. <ro)a)ly lo## o%
cu#tomer5 re$un$ancy payment %or the employee# a##ociate$ +ith
pro$uction5 re$un$ancy payment %or the machinery5 an$ #o on.
*% keep open part o% )u#ine## con#e6uence# are pro)a)le lo##e# %or
the organi>ation +hich increa#e overall lo##e# o% the organi>ation
)ut other co#t a##ociate$ +ith #hut $o+n not there.
So organi>ation ha# to con#i$er care%ully the actual change# i% the lo##
making pro$uct $i#continue$. So in that ca#e relevant co#t coul$ )e
improvi#e$ to $o the co#t )ene%it analy#i#. *% the co#t more than the
)ene%it5 then #hut $o+n approach #houl$ not a$opte$.
<ricing pro$uct or #ervice: <rice o% the pro$uct #houl$ #eem %air to
cu#tomer a# they are the per#on +ho )uy the pro$uct accor$ing it#
6uality an$ %air to #eller to cover all the relevant co#t o% manu%acture o%
the pro$uct. <rice pro$uct #houl$ not )e higher than the #imilar pro$uct
in the market placeH other+i#e organi>ation +ill %ail to reach the
e0pecte$ revenue %igure. So SMA ha# #ome important 3o) regar$ing
calculating relevant co#t o% the pro$uct an$ #et a #elling price %or the
pro$uct.
<ro$uct-mi0 an$ ;imiting %actor analy#i#: When 4u#ine## total
pro$uction capacity i# le## than it# total $eman$ o% pro$uct thi#
#ituation ha# rai#e$. 2here are many rea#on# +hich re#trict the $eman$
pro$uction unit. *t coul$ )e $ue to #hortage o% ra+ material5 #hortage o%
la)our or the total pro$uction capacity. So organi>ation ha# to the
limiting %actor %or the pro$uction +hich limit# the total output. *n thi#
ca#e organi>ation prioritie# tho#e pro$uct +hich i# pro%ita)le %or the
)u#ine## an$ make# a #core car$ Calle$ throughput accounting. So
+hich one i# mo#t pro%ita)le they pro$uce it %ir#t5 then accor$ing to
pro%it level ne0t pro$uct pro$uction. "egar$ing pro$uction
organi>ation )ecome# )ia#e$ o% pro%it a# the overall o)3ective o% the
organi>ation.
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*t i# har$ %or the organi>ation to overcome thi# pro)lem in #hort term
)y ac6uiring e0tra re#ource#. ;imiting %actor concentrate$ pro%it
ma0imi>ation )y e0i#tence o% limiting %actor o% re#ource each time.
Make or 4uy 9eci#ion: Management con#i$er# co#t )ene%it analy#i# o%
make pro$uct in hou#e or )uy# it %rom out#i$e. 2hey con#i$er +hat the
relevant co#t# are i% it make in hou#e i.e. ra+ material5 la)our an$ other
overhea$ co#t an$ it #ource %rom out#i$e +hat are co#t o% purcha#e
each pro$uct an$ con#i$er the 6uality o% pro$uct a# organi>ation
reputation attache$ +ith it. Compari#on o% the co#t ha# ma$e o% the t+o
option# i.e. make or )uy on marginal co#t an$ any e0tra %i0e$ co#t
)a#i#.
,Anon52E(4.
). 'ualitative %actor con#i$er in the $eci#ion making proce##.
Management main activity in the organi>ation i# to make $eci#ion an$ implement it. 2hi#
i# the integral part o% management 3o). Competence o% management 3u$ge )y the $eci#ion
they take i.e. #ucce## o% the organi>ation o)3ective#. So )a#e$ on #ucce## o% $eci#ion5
management per%ormance evaluate. Management per%orm managerial %unction +hen $o
the $eci#ion making proce## i.e. organi>ation planning5 #ta%%ing $eci#ion5 monitoring an$
controlling. All are %or the #ucce## o% the organi>ation $eci#ion. Accor$ing to 2re+atha I
1e+port5 ,(&B2. importance o% $eci#ion making i# not compri#a)le to any one a# all the
management %unction )a#e$ on it an$ cannot per%orm +ithout it. A# per 9rucker5,(&!.
C$eci#ion making i# only one o% the ta#k o% an e0ecutive 5 it# time con#uming )ut a #mall
%raction o% manager8# time. @very e%%ective $eci#ion making proce## #houl$ go though
#ome )a#ic #tep# calle$ 3u$gemental the#e are: pro)lem cla##i%ication5 $e%ine the pro)lem5
#uita)le #olution %or the pro)lem 5 al+ay# con#i$er the right $eci#ion not the accepta)le
one5 proper action plan implementation an$ %ee$)ack o% implemente$ action taken. *n
to$ay8# %ir#t gro+ing +orl$ management nee$ to highly competitive +ith kno+le$ge5 #kill
an$ $eci#ion making proce##. 2hey #houl$ con#i$er 6ualitative an$ 6uantative %actor )oth
o% them. 'ualitative %actor# +hich #houl$ con#i$er in the $eci#ion making proce## are:
Any %actor +hich coul$ in%luence the outcome o% the $eci#ion. 2he#e %actor#
coul$ )e political5 #ocial5 economical or $emographical.
8
Shoul$ con#i$er the impact o% the $eci#ion on the a##et an$ re#ource #houl$
u#e$ in the implementation o% the $eci#ion.
SW72 analy#i# coul$ )e u#e$ to analy#i# the #trength5 +eakne## o% the
company an$ e0ternal opportunity an$ threat +ill create %or the company i% the
$eci#ion implement in the %uture.
Fuman re#ource management %actor #houl$ con#i$er an$ take into account o%
particular a%%ect o% the $eci#ion on the
@mployee8# motivation i.e. they +ill motivate or not $ue the $eci#ion5 are
there any re+ar$ %or #ucce## o% $eci#ion a# employee only motive +hen
there i# any re+ar$ or recognition %or per%ormance.
@mployee#8 moral #houl$ con#i$er. *% the $eci#ion again#t the employee#
moral ethic#5 they #houl$ not motivate$ to e0ecute it.
Shoul$ con#i$er ho+ many ne+ employee# #houl$ recruit %or the $eci#ion
an$ +hat the re6uire$ #kill# %or the 3o) are. 9oe# the e0i#ting employee
#kill match +ith the ne+ $eci#ion or training nee$ to provi$eJ
May )e $i%%icult to a##e## an$ mea#ure the motive to employee or
employee may )e not e0pre## their opinion a)out ne+ $eci#ion.
Shoul$ con#i$er long term an$ #hort term e%%ect o% $eci#ion on the
employee.
<@S2A; Analy#i# coul$ )e u#e to analy#i# the e0ternal 6ualitative %actor# +hich
in%luence the $eci#ion making proce##. 2he#e are
<olitical %actor i# one o% important %actor #houl$ )e con#i$er +hen make
the $eci#ion. A# $ue change o% government economic policy o% the #peci%ic
country change +hich a%%ect on the )u#ine##. Some political government
take con#ervative approach regar$ing country economic an$ #ome take
li)eral approach. So $eci#ion #houl$ take )y con#i$er government policy.
=or e0ample ta0 policy5 $uty on import e0port5 grant to promote the
)u#ine## etc.
@conomical %actor i# another important %actor %or the $eci#ion making. =or
e0ample "ece##ion ha# an a$ver#e a%%ect on the )u#ine##5 people $oe# not
have enough money to e0pen$ #o in the preparation o% $eci#ion #houl$
con#i$er.
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Social: <eople purcha#e goo$ a# per #ocial tren$#. So $eci#ion maker
#houl$ con#i$er the like an$ $i#like# o% the #ociety5 $emographic tren$ o%
purcha#e o% goo$# an$ #o on in the preparation o% the #trategic $eci#ion.
2echnological: it i# one )ig %actor %or the company to $o the tra$e in the
current centurie#. 2echnological a$vancement give# company competitive
a$vantage in the market place. Company can $o )etter than other
competitor in the market place )y a$opting late#t a$vance technology like
automate$ technology %a#ter than manual an$ output i# )etter than )e%ore.
<u)licity an$ pu)lic image: thi# i# another 6ualitative %actor that #houl$
con#i$er the )y the $eci#ion maker. 2o create an pu)lic image an$ $o the
pu)licity organi>ation #houl$ $o #ome #ocial +ork like $onation to charity5
participating in plantation in the local area5 an$ $o #ome a$verti#ement that
like people.
7rgani>ation main o)3ective i# long term #urvival an$ earn pro%it the )u#ine##.
Any action# that #upport thi# o)3ective #houl$ )e a$opte$ )y the )u#ine##.
9o the #take hol$er analy#i#. *t #houl$ )e remem)er that #take hol$er# are the
o+ner o% )u#ine##. Any $eci#ion not #upporte$ )y the #take hol$er cannot )e
procee$# %urther i% o)3ective an$ o% #takehol$er# an$ the $eci#ion maker
o)3ective# i# not match. *n thi# ca#e po+er an$ intere#t o% the #take hol$er i#
important. Men$elo+ matri0 i# the tool# to a##e##. A# per Men$elo+- +ho ha#
high po+er an$ high intere#t they are the mo#t po+er%ul #takehol$er to change
any $eci#ion. So in preparation o% the $eci#ion thi# 6uantative %actor #houl$ )e
con#i$ere$.
"e%erence
Anon 5,2E(4.."elevant co#t an$ revenue. Availa)le at K
http:LL+++.proactivere#olution#.comLrelevant-co#t#-an$-revenue#LM at E-.E5.2E(4 at
2E.2E hr#.
4rom+ich5 M ,(&&E.. 2he ca#e %or #trategic management accounting: Nthe role o%
accounting in%ormation %or #trategy in competitive market#5 Accounting,
Organizations and Society (55 2!-4.
10
9rucker5,(&!.. 2he pro%e##ion o% management. Farvar$ )u#ine## pre##.
789onnel an$ Milton S. /ol$)erge,(&4.. Accountant# =inancial A$mini#tration.
1e+ 9elhi5 <rentice Fall o% *n$ia <rivate ;t$. p.55.
Aohn#on52 an$ ?aplan5". ,(&B!.5 Relevance Lost. The Rise and Fall of Management
Accounting5 4o#ton: Farvar$ 4u#ine## School <re##.
Simmon$#. ? ,(&B(.. Strategic Management Accounting5 Management Accounting
(.!." 5&5 2-2&.
Smith. A ,(&-!. .2he Wealth o% 1ation#. 1e+ York5 Mo$ern ;i)rary *nc. pp.22-2-
2re+atha5. "o)ert ; an$ 1e+port5 M. /ene,(&B2..Management :%unction an$
)ehaviour . 4u#ine## <u)lication# ,<lano5 2e0... -r$ e$ition
/uthmann. F./. an$ 9ougall5 F.@.,(&4B.5 Corporate =inancial <olicy. <rentice Fall5
1e+ 9elhi. =ourth @$ition5 p. (.
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