An overview of strategic management accounting

The concept of strategic management accounting has been around since the 1980s and was mostly the domain of large corporations. Now smaller companies are adopting it. Here’s everything you need to know.

The Chartered Institute of Management Accountants (CIMA) defines strategic management accounting as “the provision and analysis of management accounting data about a business and its competitors, for use in developing and monitoring business strategy”.

The purpose of strategic management accounting

Robin Roslender and Susan Hart, part of the Accountancy Research Group at Heriot Watt University, conducted a review of literature relating to strategic management accounting. They identified three distinct conceptions of strategic management accounting:

  • Taking generic strategy tools and looking at how management accounting information can be used to better support strategy.
  • Aligning management accounting with marketing for better strategic positioning. Essentially this means using management accounting within the company’s marketing tools.
  • A catch-all term for a number of modern management accounting techniques, which have a strategic element to them. This generally includes any element of management accounting that involves external and market-oriented information.

The strategic management process

The strategic management process can be broken into several steps, based on Keith Ward’s 1992 book on the subject, Strategic Management Accounting:

Vision, mission, and objectives – the senior management accounting and management accounting team set an overall goal and a series of objectives that relate to that central mission. This will form the basis of the activity of the management accounting team and give them a series of questions to answer.

Information gathering and analysis – the strategic management accountants gather data from a number of sources within the internal environment of the business and the external market. This is then appraised and analysed so that it can feed into the next stage.

Strategy formulation – the data collected and analysed is used to inform a strategic plan for the business, with the creation of several options for review. At the end of this step, some strategic choices will have been made to steer the business towards its ultimate goal. 

Implementation – the choices made by the management team are then implemented across the organisation.

Monitoring and evaluation – the results of implementing those choices are reviewed to determine how successful they’ve been in relation to meeting company goals and objectives. 

The final three stages will all feed back into the information gathering stage, perpetuating a constant cycle of learning and applying new knowledge to strategic decisions. This can occur at a holistic level, or within a specific department within the organisation – finance business partners are essentially involved in strategic management accounting work. 

As you might expect, strategic management accounting involves a lot of work out and about within the business, working directly with non-finance managers and teams. 

Strategic decision making

According to research conducted by CIMA and Nottingham Trent University, the strategic decisions made through management accounting tend to be grouped into four main categories:

  • Pricing
  • Business/market development
  • Product development
  • Merger and acquisition activity

When it comes to pricing, strategic management accountants tend to look at margins, particularly by market sector, according to the research. When it comes to business development, management accounting is used to provide assurance.

Typical strategic management accounting techniques

Activity-based costing

Costing and monitoring of activities by tracing resources consumption and costing the final outputs. Resources are assigned to activities and activities to cost objects based on consumption estimates.

Benchmarking

By using data gathering, targets, and comparators, the strategic management accountant identifies relative levels of performance and underperformance. It helps to determine best practices to improve performance.

Costing

More specifically, strategic management accountants will complete costing based on activity, product attributes, life-cycles, quality, targets, and value chains. All of which work to determine whether an investment in a new or improved product or service is worth it.

Budgeting

Strategic management accountants look at brand value budgeting, and monitoring and capital budgeting. The former involves assigning a financial value to the equity created by the name or image of the brand – it can be represented as the net present value of future cash flow estimates associated with the brand. The latter is all about selecting long-term capital investments.

Competitive position monitoring

Pretty much what it says on the tin – reviewing the company’s performance in the context of its market position, and the market position of key competitors. A strategic management accountant will also estimate competitor costs per unit based on available data and will look at competitor financial statements to determine their strengths and weaknesses.

Customer profitability analysis

The strategic management accountant looks at the revenue streams and service costs involved with different customer groups. 

Further reading:

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