Introduction:

This report gives a brief description about the key roles of the strategic management

accountant in the situation of expansion of the business. This report also provides

information about relevant, irrelevant and revenue of the company. How managers makes

decision with the helps of the relevant and irrelevant cost method it also illustrated in this

assignment. This report will focus on the benefits and disadvantages introducing activity

based costing in the small to medium organization such as Jessup. This paper seeks to address

the above key points though three main questions which are given as the main body of this

report.

Q.1. what are the key roles which a strategic management accountant would undertake

in an organization such as Jessup?

Strategic management accounting:

According to the Charted Institute of Management Accountants (CIMA), management

accounting is defined as the important part of the management of the organization which

concerns about information which are identifying, presenting and interpreting for various

purpose including decision making; strategic planning; resource allocation and disclosure of

employees and shareholders (Evolution and Revolution).

Features of strategic management accounting:

1. By using management accounting models management board of the organization can

record and plan for the activities.

2. To prepare a management account there is no legal requirements.

3. The management accounting is the format something like management discretion. For

presentation and preparation of the management accounting information there is no

strict rules and regulation.

4. It also can focus on the particular activities of the organization.

5. It can be use both as historical records and important tools for future planning.

The importance of the strategic management accounting:

The strategic management accounting can be used in the following areas of the organization

effectively (Berliner & Brimson, 1988). They are as follows:

1. Strategic planning: to help planning in order to meet the organizational goals and

objectives.

2. Budgeting / profit planning: it involves the planning of short- term operation.

3. Financial management: it includes acquisition, records of transactions and cost

accounting.

4. Internal management audit: this is area where financial information and findings are

reviewing and reported to the management of the organization.

Key roles of the strategic management accounting:

According to Drury (2005), there are three main key roles for the strategic management

accounting. They are

1. Allocation of costs between the cost of the sold goods and stock goods.

2. Providing the important and relevant information in order to help managers for

making a better decision.

3. Providing information to help manager for planning and controlling. It can be sued for

performance measurement.

In the case of the Jessup ltd a fast growing medium to large company, strategic management

accounting helps to handle the situation when they are trying to expand their business in

advertising and public relation sectors. This company has four directors and they are very

experts in advertising sectors. As they intended to expand they need a better management in

accountant areas which helps making decision through analysis of costing and advice about

the effective method for activities which accounts their cost accurately.

As Jessup expand their business they need better management environment particularly in

accounting functions. So they will face new challenge to satisfied the customers and also

decide to the effective or relative cost. So the new management of accounting have to handle

this situation very carefully. Also as they expand they will face more competitors in this

business. This will become more dynamic because of globalization, privatization of

companies that controlled by governments, variation of customer satisfaction and change of

life cycle of products. Therefore, the accountants of the Jessup will have to concerns about

these factors and helps to directors to execute the business smoothly. Accountants have to

satisfy the customers and also reduce the cost by applying the techniques which are most

relevant for making decision.

As a result of these changes new management have to include in terms of development of

strategic Management Accounting. It helps to the directors of the Jessup in order to make

better decisions. It changes the process of working the methods of directors and it requires the

re-evaluation of the design and operation.

The new Management Accountant Approach:

Fig: Total value chain analysis (Bromwich, 1990).

Innovation: this is the main elements of the key success factors. This is the way to innovate

their service for gaining success. As Jessup is the service based company, they have to

consider other key success factors such as cost, time and quality.

Continuous improvement: when Jessup is trying to expand, they need to involve the process

which continuously reduces the cost and waste and it increases the quality of the service that

will eventually satisfied the customers.

Employee empowerment: this is the important factors for the company which are dealing

with public relations and advertising like Jessup. They have to share the information between

internal and external employees which leads the improvement as a fruitful process.

The value chain:

This is the process of coordinating the all important part of the diagram by working as a team

in order to improve the degree of the customer satisfaction.

Although this is the diagram for the customer satisfaction but the newly expanded company

such as Jessup, have to consider that as well. Then the new accountant has to consider all

others factors in order to make a healthy management for the accountant functions.

Question 2: what is meant by the terms relevant and irrelevant costs and revenues in

Strategic Management Accounting decision making? Include several small numerical

examples in your answer.

Relevant costs:

To identify and evaluating the relevant cost and benefits is the one of the main problem

which is faced by most of the company. It plays an important role in the decision making

process. In this case independent costs and benefits are avoided for decision making.

Irrelevant cost:

Irrelevant cost in the strategic management accounting is considered as the cost over some

activities on which managers have no control and as a result it increases the overall expenses

of the company. For example, rent and insurance are the irrelevant cost. In different situation

irrelevant cost becomes relevant.

Revenue: the income of a company which is generated from sales or utilization of others

capitals and resources of the company before deducting costs is called revenue. If all costs

and expenses are subtracted from the revenue it gives net income (Drury, 2005).

In order to make a decision, costs and revenues are categorized because they are relevant to

the decision making. Relevant cost and revenue can be considered as future costs and by

decision revenue can be changed. On the other hand, irrelevant cost and revenues are not

affected by the decision. For example, you have the choice of making journey by own car or

public transport, here car tax and insurance cost is irrelevant. If you choose public transport

they will remain the same. However, the cost of the petrol will be the relevant cost for the

decision making depending on the alternative chosen by you (Drury, 2005).

Elements of a decision

A quantitative decision problem involves six parts:

a) An quantified objective: it is sometime termed as 'choice criterion' or 'objective function’,

For example, maximisation of profit or minimisation of total costs may quantified objectives.

b) Constraints Many decision making process or problem have one or more constraints. For

example, limited raw materials, labour are two main constrains. So an objective will

maximize the profits and which is subject to define constraints.

c) A range of alternative: For example, the available alternatives in order to minimise costs

of a manufacturing operation may be:

1. continuing manufacturing as at present

2. changing the manufacturing method

3. Giving sub-contract to a third party.

d) Forecasting: it include the forecasting of the incremental costs and benefits of each

alternatives.

e) Implementation: it consist the application of the decision criteria or objective function.

f) Choice of preferred alternatives.

Relevant costs for decision making

The costs which should be used for decision making are often referred to as "relevant costs".

CIMA defines relevant costs as 'costs appropriate to aiding the making of specific

management decisions'.

To affect a decision a cost must be:

a) Future: Past costs are irrelevant, as we cannot affect them by current decisions and they are

common to all alternatives that we may choose.

b) Incremental: ' Meaning, expenditure which will be incurred or avoided as a result of

making a decision. Any costs which would be incurred whether or not the decision is made

are not said to be incremental to the decision.

c) Cash flow: Expenses such as depreciation are not cash flows and are therefore not relevant.

Similarly, the book value of existing equipment is irrelevant, but the disposal value is

relevant.

Other terms:

d) Common costs: Costs which will be identical for all alternatives are irrelevant, e.g. rent or

rates on a factory would be incurred whatever products are produced.

e) Sunk costs: Another name for past costs, which are always irrelevant, e.g. dedicated fixed

assets, development costs already incurred.

f) Committed costs: A future cash outflow that will be incurred anyway, whatever decision is

taken now, e.g. contracts already entered into which cannot be altered.

(www.fao.org/docrep)

For example, a few years ago a company purchases raw materials by £100 and it not possible

to sell it. One customer wants to buy these materials and interested to pay only £250 per

unit.it cost £200 to convert the raw material into required products. For £250 should company

accept the offer?

The material cost is £100

The conversion cost is £200

The overall cost for order £300

But the cost of the material is same if company reject or accept the order. So this cost is

irrelevant for the taking decision. The only cost is conversion cost and it is the relevant cost if

order is accept.

The relevant cost £200

The revenue £250

The following calculation helps to make decision.

Reject order(£) Accept order(£)

Materials 100 100

Conversion cost 200

Revenue 250

Net costs 100 50

The £50 is the net cost of the company. So if the company accept the order it make profit

£50 per unit which is calculated by relevant cost method.

Question 3: what is the benefit and problems of introducing activity based costing into

an organization such as Jessup?

Activity based costing a method of accounting which helps to collect all kinds of operating

cost’s data of the business. These costs might be for planning or manufacturing relating with

various kinds of products and services. It helps managers to decide operating activities by

giving information about which products or service will be profitable and which leads to

decrease profits. By these information managers are try to allocate the resources and produces

budget for required areas which helps to run the business smoothly (Henrick, 1999).

The problems for implementing activity costing will be that it takes so much time. Another

disadvantage is that it collects lots of information which can be more difficult to

interpretation by the decision makers. Therefore, the organization like Jessup will be faces

these types of demerits while introducing activity based costing.

It has been observed that large business organization is using activity based costing. Services

industries such as Jessup seem to be more successful as they are tried to expand their

business. Because some other types of service based organization, for example, banks,

hospitals and insurance companies applied activity based costing (ABC) and they had

success. Also, it has seemed that ABC is more successful when it is applied in large

organization. According to the Henrick (1999), business organization dealing with few

products and services are less benefited with the ABC. But it takes a less time to set up the

activity based costing for smaller projects.

Activity based costing can be used in the case of small business. The business organization

such as Jessup is trying to expand their service. Therefore, to implement the activity based

cost may be beneficial for the company. Hicks (1999), illustrate that the application of the

ABC in the medium automobile industry increases the sales and profits.

Another important benefit of activity based cost in the Jessup is that it does not demand lots

of financial resources and time. Not only these, it can be implemented without any kinds of

special software installation to the ledger (Hicks, 1999).

Recommendation:

it has found from the study that the objectives of the strategic management accounting is to

helps the managers to take decision making to run business to achieve the profits and

strategic goals and objectives. On the other hand, traditional management accounting has less

attention to achieve the business objectives. So it found that strategic management accounting

is more outgoing and competitive. The second major findings of this report are that all costs

are not relevant in the process of decision making. Only relevant cost are considered for the

decision making and the information of past expenses are useful but it is uncommitted. Only

relevant cost are controllable and the cost which are irrelevant may help to aware the future

situation but not affected in the decision making process. Managers should focus only

relevant cost to make decision. Cokins (1999), explained that with the minimum amount of

the detail information and figures of estimated costs, activity based costing can be successful.

He also added that at the begging of the application of activity based costing accountants

strive for a degree of exactness and it is time consuming which sometimes leads the project

unsuccessful.

But , the evidence from the study suggest that a small business can consider a simple test

program to determine whether it is right for them although that is unsure about the

effectiveness of activity based costing.

Conclusion:

It is very difficult for strategic management accountant when it try to provide more services

such as Jessup. But it is recognized that to be strategically effective of an

On-going strategic plan requires a logical and structured approach. In this case strategic

accountant play an important role by helping managers. The most obvious finding to emerge

from this report is that in this case control is required. It already proved that in different

circumstance irrelevant cost becomes relevant and only relevant affected on the making

decision. The most important factor for fix a business is time. Some company observed their

results while implementing activity based cost. But research suggested that it takes some

times for most of the business depending on product and business cycle, to enjoy the

advantages of the activity based costing.

References:

1. Berliner C. and Brimson JA (1988) Cost Management for Today’s Advanced

Manufacturing, Harvard Business School Press

2. Bromwich, M. (1990) The case for strategic management accounting: the role of

accounting information for strategy in competitive markets, Accounting, Organisation

and Society 1.27-46

3. Evolution and Revolution, Chartered Institute of Management Accountants.

4. Kaplan, RS (1994) Management accounting (1984-1994): development of new

practice and theory, Management Accounting Research, September and December

247-60.

5. Drury,C.(2005)” Management Accounting For Business”, 3rd ed., Thomson.

6. Cokins, Gary. "Learning to Love ABC." Journal of Accountancy. August 1999.

7. Cokins, Gary. "Overcoming the Obstacles to Implementing Activity-Based

Costing." Bank Accounting and Finance. Fall 2000.

8. Henricks, Mark. "Beneath the Surface." Entrepreneur. October 1999.

9. Hicks, Douglas T. "Yes, ABC Is for Small Business, Too." Journal of Accountancy .

August 1999.

10. http://www.fao.org/docrep/W4343E/w4343e06.htm[last cited: 30/09/2012]