CPA PROGRAM Strategic Management Accounting PDF

CPA PROGRAM Strategic Management Accounting THIRD EDITION (ENHANCED) Published by Deakin University, Geelong, Victoria 3217, on behalf of CPA Australia Ltd, ABN 64 008 392 452 First edition published January 2010, reprinted with amendments July 2010, updated January 2011, reprinted Jul...

CPA PROGRAM Strategic Management Accounting THIRD EDITION (ENHANCED) Published by Deakin University, Geelong, Victoria 3217, on behalf of CPA Australia Ltd, ABN 64 008 392 452 First edition published January 2010, reprinted with amendments July 2010, updated January 2011, reprinted July 2011, updated January 2012, reprinted July 2012, updated January 2013, July 2013, January 2014, revised edition January 2015, updated January 2016 Second edition published January 2019 Third edition published June 2019 Third edition (enhanced) published November 2020 © 2010–2019 CPA Australia Ltd (ABN 64 008 392 452). All rights reserved. This material is owned or licensed by CPA Australia and is protected under Australian and international law. Except for personal and educational use in the CPA Program, this material may not be reproduced or used in any other manner whatsoever without the express written permission of CPA Australia. All reproduction requests should be made in writing and addressed to: Legal, CPA Australia, Level 20, 28 Freshwater Place, Southbank, VIC 3006, or [email protected]. Edited by DeakinCo. Designed by John Wiley & Sons Australia Printed by IVE Group ISBN 978 0 6487512 2 9 Authors Brian Clarke Consultant Paul Collier Consultant Rahat Munir Head of Department and Professor, Department of Accounting and Corporate Governance, Macquarie University Gary Oliver Senior Lecturer, University of Sydney Business School, University of Sydney Peter Robinson Senior Lecturer, UWA Business School, University of Western Australia Natasja Steenkamp Senior Lecturer in Accounting, School of Business and Law, CQUniversity Ofer Zwikael Associate Professor, College of Business and Economics, Australian National University 2019 updates Brian Clarke Consultant Paul Collier Consultant Rahat Munir Head of Department and Professor, Department of Accounting and Corporate Governance, Macquarie University Gary Oliver Senior Lecturer, University of Sydney Business School, University of Sydney Paul Shantapriyan Consultant Natasja Steenkamp Senior Lecturer in Accounting, School of Business and Law, CQUniversity Ofer Zwikael Associate Professor, College of Business and Economics, Australian National University Acknowledgments Karen Drutman Consultant Vladimir Malcik Praxtra Pty Ltd Ann Sardesai Senior Lecturer in Accounting, School of Business and Law, CQUniversity CPA Australia acknowledges the contributions of David Brown, Courtney Clowes and Teemu Malmi to previous versions of this Study guide. Advisory panel Assoc. Prof. Albie Brooks University of Melbourne Nicolas Diss CPA Australia Assoc. Prof. Ralph Kober Monash University Vladimir Malcik Praxtra Pty Ltd Alastair Mckenzie Devondale Murray Goulburn Sarah Scoble Solution Underwriting Prof. Naomi Soderstrom University of Melbourne Dr Gillian Vesty RMIT CPA Program team Yvette Absalom Yani Gouw Alex Lawrence Alana Penny Helen Willoughby David Baird Kristy Grady Elise Literski Shari Serjeant Joyce Wong Shubala Barclay Mandy Herbet Neal Logan Alisa Stephens Emily Wu James Cole Alex Huang Julie McArthur Tiffany Tan Luke Xu Jeannette Dyet Jordan Irving Christel O’Connor Seng Thiam Teh Belinda Zohrab-McConnell Learning designer Jan Williams DeakinCo. ACKNOWLEDGEMENTS All legislative material is reproduced by permission of the Office of Parliamentary Counsel, but is not the official or authorised version. It is subject to Commonwealth of Australia copyright. The Copyright Act 1968 permits certain reproduction and publication of Commonwealth legislation. In particular, s. 182A of the Act enables a complete copy to be made by or on behalf of a particular person. For reproduction or publication beyond that permission by the Act, permission should be sought. IFAC extracts are from the 2017 Handbook of International Education Pronouncements of the IAESB, published by the International Federation of Accountants (IFAC) in February 2017; the 2018 Handbook of the International Code of Ethics for Professional Accountants (including International Independence Standards) of the IESBA, published by the International Federation of Accountants (IFAC) in April 2018; and the International Guidance Document: Environmental Management Accounting (“Excerpts”), published by the International Federation of Accountants (IFAC) in July 2005. All extracts are used with permission of IFAC. Contact [email protected] for permission to reproduce, store or transmit, or to make other similar uses of this document. This publication contains copyright material from the ASX Corporate Governance Council. © Copyright 2018 ASX Corporate Governance Council. Association of Superannuation Funds of Australia Ltd, ACN 002 786 290, Australian Council of Superannuation Investors, Australian Financial Markets Associ- ation Limited ACN 119 827 904, Australian Institute of Company Directors ACN 008 484 197, Australian Institute of Superannuation Trustees ACN 123 284 275, Australasian Investor Relations Association Limited ACN 095 554 153, Australian Shareholders’ Association Limited ACN 000 625 669, ASX Limited ABN 98 008 624 691 trading as Australian Securities Exchange, Business Council of Australia ACN 008 483 216, Chartered Accountants Australia and New Zealand, CPA Australia Ltd ACN 008 392 452, Financial Services Institute of Australasia ACN 066 027 389, Group of 100 Inc, The Institute of Actuaries of Australia ACN 000 423 656, ABN 50 084 642 571,The Institute of Internal Auditors – Australia ACN 001 797 557, Financial Services Council ACN 080 744 163, Governance Institute of Australia Ltd ACN 008 615 950, Law Council of Australia Limited ACN 005 260 622, National Institute of Accountants ACN 004 130 643, Property Council of Australia Limited ACN 008 474 422, Stockbrokers Association of Australia ACN 089 767 706. All rights reserved 2015. This publication contains copyright material from the International Integrated Reporting Council (IIRC). Copyright © December 2013 by the International Integrated Reporting Council (‘the IIRC’). All rights reserved. Used with permission of the IIRC. Contact the IIRC ([email protected]) for permission to reproduce, store, transmit or make other uses of this document. These materials have been designed and prepared for the purpose of individual study and should not be used as a substitute for professional advice. The materials are not, and are not intended to be, professional advice. The materials may be updated and amended from time to time. Care has been taken in compiling these materials, but they may not reflect the most recent developments and have been compiled to give a general overview only. CPA Australia Ltd and Deakin University and the author(s) of the material expressly exclude themselves from any contractual, tortious or any other form of liability on whatever basis to any person, whether a participant in this subject or not, for any loss or damage sustained or for any consequence that may be thought to arise either directly or indirectly from reliance on statements made in these materials. Any opinions expressed in the study materials for this subject are those of the author(s) and not necessarily those of their affiliated organisations, CPA Australia Ltd or its members. ACKNOWLEDGEMENTS iii BRIEF CONTENTS Subject Outline x 1. Introduction to Strategic Management Accounting 1 2. Information for Decision-Making 45 3. Planning, Budgeting and Forecasting 99 4. Project Management 145 5. Performance Management 219 6. Tools for Creating and Managing Value 299 Case Study 385 Suggested Answers 403 Index 475 CONTENTS Subject Outline x Identifying users with different information needs 47 MODULE 1 Corporate social responsibility/integrated reporting 49 Introduction to Strategic Stakeholder management 50 Management Stakeholder risk management 52 Accounting 1 Part B: Information, information systems and their effect on organisational Preview 1 decision-making and performance 55 Introduction 1 Impact of information systems on strategy Objectives 2 formulation and implementation 56 Subject map 2 Different types of information Part A: Value 3 systems 57 Shareholder value 3 Transaction processing systems 57 Customer value 4 Management accounting systems 57 Stakeholder value 4 Production planning and control Which viewpoint should be taken when systems 58 determining ‘value’? 4 Customer relationship management Part B: The strategic management process 6 systems 58 Part C: The role of management accountants Enterprise resource planning in strategic management 11 systems 59 The role of management Decision support systems 59 accountants 11 Knowledge management systems 59 Analyst, business adviser, partner 12 Sourcing, aggregating and integrating Contemporary skills and techniques 13 information 60 Part D: The key challenges facing Source or domain of information—external management accountants 15 versus internal 60 Challenges 15 Methods of aggregation and integration of Causes of change in the business information 61 environment 17 Characteristics and limitations of different The global economy 17 kinds of information 63 Technology 23 Dimensions of information 63 Sustainability 25 Limitations of different kinds of Part E: Analytical techniques available information 64 to management accountants 31 Security of information and ethics of Value analysis 32 information 64 Strengths, weaknesses, opportunities and Characteristics of information 65 threats 34 Quality of information 66 Internal analysis 35 Effects and challenges of new information External analysis 38 systems and platforms 69 Porter’s five forces model 39 Data warehousing and data mining 69 Review 42 Big data 69 References 43 Business intelligence 70 Part C: The role of management accountants MODULE 2 in influencing stakeholder decision-making 71 Information for Balancing stakeholder requirements and Decision-Making 45 information delivery 71 Preview 45 Differing levels of information in the Introduction 45 organisation 72 Objectives 47 Strategic information 72 Part A: Types of information needed for Tactical information 73 stakeholder decision‐making 47 Operational information 74 The information needs of Importance of linking information to stakeholders 47 strategy 76 CONTENTS v  Using information strategically 77 Step 3: Direct materials cost Roles of the management budget 112 accountant 78 Step 4: Direct manufacturing labour costs Trusted business partner 78 budget 113 Custodian of information 79 Step 5: Manufacturing overhead costs Part D: Upgrading or replacing information budget 113 systems 83 Step 6: Finished goods inventory Stimulus for a new or updated budget 113 system 83 Step 7: Cost of goods sold Making a preliminary assessment 83 budget 113 Initially establishing the systems information Step 8: Period costs budgets 114 needs of stakeholders 84 Preparing budgets in non-manufacturing Other methods of obtaining information organisations 114 needs 89 Preparing financial budgets 114 The life cycle of systems 89 Budgeted income statement 114 Pitfalls in evaluating major information Cash budget 115 needs 90 Budgeted balance sheet 115 Analysing new and existing information Capital expenditure budget 115 systems 91 Preparing budgets for various Feasibility and criteria for a new information departments 115 system 91 Preparing flexible budgets 116 Making changes to an existing Part C: Variance analyses and control 117 system 92 Static versus flexible budgets 118 Evaluating a suggested information Profit- and revenue-related solution 93 variances 120 Comparing costs, benefits and key Direct material analysis 122 risks 94 Direct labour analysis 124 Review 95 Variable manufacturing overhead References 96 analysis 125 Fixed manufacturing overhead MODULE 3 analysis 127 Part D: Behavioural aspects of budgets 132 Planning, Budgeting and Participative budgeting 132 Forecasting 99 The top-down approach 133 Preview 99 The bottom-up approach 133 Introduction 99 Setting realistic and achievable Objectives 100 targets 135 Part A: Introduction to plans, budgets and Monetary and non-monetary incentive forecasts 100 schemes 136 Relationship between budgets and Part E: Alternative approaches to budgeting strategic planning 101 137 Roles of operational plans, budgets Shortcomings of traditional and forecasts 101 budgets 137 Purposes of a budget 103 Incremental budgeting 138 Relationship with responsibility Zero-based budgeting 138 accounting 105 Activity-based budgeting 139 Revenue centres 106 Beyond budgeting: Managing without Cost centres 106 budgets 141 Profit centres 106 Review 142 Investment centres 106 References 142 Responsibility accounting 106 Planning and control 107 MODULE 4 Part B: Developing master budgets 108 Impact of external and internal factors Project Management 145 on budgets 108 Preview 145 Preparing operational budgets in Introduction 145 manufacturing organisations 110 Objectives 146 Step 1: Sales budget 111 Part A: Project management defined 146 Step 2: Production budget 111 What is a project? 146 vi CONTENTS  What is project management? 148 Gantt charts 185 The project management process 149 PERT: Program evaluation and review Stage 1: Project selection 149 technique 186 Stage 2: Project planning 150 Critical path method—crashing Stage 3: Project implementation and projects 190 control 150 Project budgeting 192 Stage 4: Project completion and Project management software 193 review 150 Supplier contracts 193 Organisational structures for Part E: The management accountant’s role in projects 151 project implementation and control 193 Project organisations 151 Monitoring progress 194 Internal projects 152 Monitoring costs 194 Joint ventures 152 The earned value method: Time versus Collaborations 152 cost 195 Public private partnerships 153 Monitoring specification and quality 197 Virtual projects 153 Quality costs 199 International projects 153 Measuring performance 199 Part B: Roles in project management 154 The importance of probity in Project sponsor 154 projects 200 Project manager 155 Risk management 200 Project leadership and the management Stakeholder management 202 accountant 157 Part F: The management accountant’s role The project team 158 in project completion and review 203 International project teams 160 The completion decision 203 Project management roles in international Checklist 203 project teams 161 Specification satisfaction Virtual project teams 161 consensus 204 Challenges for virtual project teams 162 Strategic fit assessment 204 Part C: The management accountant’s role in Stakeholder satisfaction project selection 162 assessment 205 Developing a business case for Financial closure 205 projects 163 Final costs 205 Strategic fit 164 Closing the cost records 205 Stakeholder identification and Post-project expenditure 205 assessment 166 Resource dispersion 206 Ethically informed decision-making and its Final report 206 impact on stakeholders 168 Knowledge management 206 Risk assessment 169 Review 207 Risk identification 169 Appendices 208 Risk classification 170 Appendix 4.1 208 Risk mitigation 171 Appendix 4.2 212 Financial analysis—single project 172 References 216 Net present value 172 Optional reading 217 Internal rate of return 178 Profitability index 179 MODULE 5 Payback 179 Return on investment 179 Performance Residual income 180 Management 219 Deficiencies in accounting-based Preview 219 measures 181 Introduction 219 Sensitivity and scenario analysis 181 Objectives 220 Financial analysis—multiple Teaching materials 220 projects 182 Part A: The role of performance management Equivalent annual cash flow (equivalent 220 annual annuity) 182 What is ‘performance’ and ‘performance Part D: The management accountant’s role in management’? 221 project planning 184 Performance management and its links to Project scheduling 185 strategy 222 CONTENTS vii  Financial performance Performance management for performance management 223 improvement 279 Non-financial performance The importance of performance management 225 improvement 279 The measurability and reporting of Targets 280 performance 225 Trends 281 The multiple roles of performance Benchmarking 281 management 227 Organisational learning and performance Performance—a process of value improvement 283 creation 227 Behavioural consequences of performance Performance and sustainability 230 management 285 Integrated reporting 232 Performance measures and performance Signalling 233 targets 285 Governance, risk and performance The role of incentives and rewards in management 236 performance management 286 Ethics and performance Review 288 management 238 Appendix 290 Theories related to performance Appendix 5.1 290 management 240 References 295 Part B: Strategy, management control and performance management 242 MODULE 6 Performance management and control—their role in strategy 243 Tools for Creating and Limitations of traditional controls 247 Managing Value 299 Models of performance Preview 299 management 249 Introduction 299 Operational and strategic Objectives 300 performance 249 Part A: The value chain 301 Leading and lagging measures of Part B: Strategic product costing 303 performance 251 Introduction 303 Frameworks for performance Product costing 303 management 252 Activity-based costing 305 The Business Model Canvas 253 Value engineering 306 The balanced scorecard 254 Cost drivers 306 Designing a balanced scorecard 256 Steps in activity-based costing 308 Public sector and not-for-profit performance Benefits of the activity-based costing management 259 system 314 Designing a strategy map for performance Time-driven activity-based costing 316 management 260 Adjusting time-driven activity-based costing Cascading performance measures 263 for more complex activities 317 The role of information systems in Part C: Strategic revenue management 323 performance management 265 Major influences on pricing The role of performance management in decisions 323 implementing and monitoring strategy 266 Hard and soft functions 323 Part C: Determining performance measures Surplus value 324 and setting performance targets 269 Pricing strategies 325 Designing performance measures 269 Rapid skimming strategy 326 Measuring efficiency, effectiveness and Rapid penetration strategy 326 equity 272 Slow skimming strategy 327 Designing SMART performance Slow penetration strategy 327 targets 272 Legal implications of price setting 328 Characteristics of performance measures Part D: Strategic cost management 328 and targets 274 Increasing efficiency without reducing costs: Costs and benefits of performance The spare capacity dilemma 329 management 276 Life cycle, target and kaizen Performance management, power and costing 330 culture 278 End of economic life: Reverse flows in the value chain 341 viii CONTENTS  Activity-based management and continuous Total quality management 362 improvement 343 Outsourcing and offshoring 367 Social and environmental value chain Part F: Strategic profit management— analysis 352 downstream activities 370 Part E: Strategic profit management— Customer profitability analysis 370 upstream activities 352 Review 381 Supplier management 354 References 382 Global suppliers 354 Supplier codes of conduct 355 Minimising inventory levels 356 Case Study 385 Supply chain disruptions 356 Suggested Answers 403 Index 475 Vendor or supplier selection 357 CONTENTS ix SUBJECT OUTLINE INTRODUCTION The purpose of this subject outline is to: provide important information to assist you in your studies define the aims, content and structure of the subject outline the learning materials and resources provided to support learning provide information about the exam and its structure. The CPA Program is designed around five overarching learning objectives to produce future CPAs who will: be technically skilled and solution driven be strategic leaders and business partners in a global environment be aware of the social impacts of accounting be adaptable to change be able to communicate and collaborate effectively. BEFORE YOU BEGIN Important Information Please refer to the CPA Australia website for dates, fees, rules and regulations, and additional learning support at cpaaustralia.com.au/cpaprogram SUBJECT DESCRIPTION Strategic Management Accounting Strategic management accounting is a key component of the overall skills base of today’s professional accountant. This subject examines the management accountant’s role in dynamic organisations operating in the global business environment. In this role, the professional accountant engages with the organisation’s management team and contributes to strategy development and implementation, with the aim of creating customer and shareholder value and a strong competitive position for the organisation. The subject high- lights the management accounting tools and techniques of value chain analysis and project management that have become increasingly important in contemporary operating environments. The subject includes discussions on the professional accountant’s responsibilities and judgment as introduced in Ethics and Governance. Also discussed are investment evaluation and strategic business analysis in the context of assessing and responding to risk, as covered in the Financial Risk Management and Advanced Audit and Assurance subjects. Candidates are introduced to strategic management concepts that are expanded on in Global Strategy and Leadership. SUBJECT OVERVIEW General Objectives On completion of this subject, you should be able to: apply the strategic management process and organisational and industry value analysis to understand value drivers, cost drivers and the reconfiguring of value chains explain the role of the management accountant as a trusted adviser and a business partner in supporting strategy development and the day-to-day operations of an organisation understand stakeholders’ various decision-making needs and provide adaptive information solutions design an effective budgeting system that incorporates uncertainty to assist in strategy implementation discuss the role of project selection, planning, monitoring and completion in strategy implementation explain the role of performance measurement and control systems in value creation, strategy implemen- tation and monitoring performance to improve strategies apply strategic management accounting tools and techniques to improve the contribution and sustain- ability of value-creating activities. x SUBJECT OUTLINE Module Weightings and Study Time Requirements Total hours of study for this subject will vary depending on your prior knowledge and experience of the course content, your individual learning pace and style, and the degree to which your work commitments will allow you to work intensively or intermittently on the materials. You will need to work systematically through the study guide, attempt all the questions, and revise the learning materials for the exam. The workload for this subject is the equivalent of that for a one-semester postgraduate unit. An estimated 15 hours of study per week through the semester will be required for an average candidate. Additional time may be required for revision. The ‘Weighting’ column in the following table provides an indication of the emphasis placed on each module in the exam, while the ‘Recommended proportion of study time’ column is a guide for you to allocate your study time for each module. Do not underestimate the amount of time it will take to complete the subject. TABLE 1 Module weightings and study time Recommended proportion of study time Weighting Module (%) (%) 1. Introduction to strategic management accounting 10 10 2. Information for decision-making 14 15 3. Planning, budgeting and forecasting 20 22 4. Project management 13 13 5. Performance management 21 23 6. Tools for creating and managing value 17 17 Case study 5 0 LEARNING MATERIALS Module Structure The study guide is your primary examinable resource and contains all the knowledge you need to learn and apply to pass the exam. The Strategic Management Accounting study guide includes a number of features to help support your learning. These include the following. Learning Objectives A set of learning objectives is included for each module in the study guide. These objectives provide a framework for the learning materials and identify the main focus of the module. The objectives also describe what candidates should be able to do after completing the module. Examples Examples are included throughout the study materials to demonstrate how concepts are applied to real- world scenarios. Questions (and suggested answers) Questions provide you with an opportunity to assess your understanding of the key learning points. These questions are an integral part of your study and should be fully utilised to support your learning of the module content. Case Studies (and suggested answers) Case studies help you apply theoretical knowledge to real-life scenarios, requiring a deep understanding of the module content. Teaching Materials This section of your Study guide will inform you of any additional resources and readings to be referred to in conjunction with the module. Any material that is listed under ‘Readings’ in this section will be examinable. Any readings that are listed as ‘optional’ will not be examined; they are provided if you wish to explore a particular topic in more detail. SUBJECT OUTLINE xi Case Study The Case study consolidates your understanding of strategic management accounting through completion of various tasks that require you to apply the concepts, tools and techniques covered in Modules 1 to 6. The Case study is not weighted for assessment purposes (i.e. it is not examinable). However, in order to gain the most benefit from your study of Strategic Management Accounting, it is important that you allocate time to complete the Case study, including attempting the Case study tasks and reviewing the suggested answers. Completing the Case study and Case study tasks will help you prepare for the written section of the Strategic Management Accounting exam. My Online Learning and your eBook My Online Learning is CPA Australia’s online learning platform, which provides you with access to a variety of resources to help you with your study. You can access My Online Learning from the CPA Australia website: www.cpaaustralia.com.au/myonlinelearning. Help Desk For help when accessing My Online Learning either: email [email protected], or telephone 1300 73 73 73 (Australia) or +613 9606 9677 (International) between 8.30 am and 5.00 pm AEST Monday to Friday during the semester. eBook An interactive eBook version of the study guide will be available through My Online Learning. The eBook contains the full study guide and features instructional media and interactive questions embedded at the point of learning. The media content includes animations of key diagrams from the study guide. GENERAL EXAM INFORMATION All information regarding the Strategic Management Accounting exam can be found on My Online Learning. The study guide is your central examinable resource. Where advised, relevant sections of the CPA Australia Members’ Handbook and legislation are also examinable. xii SUBJECT OUTLINE MODULE 1 INTRODUCTION TO STRATEGIC MANAGEMENT ACCOUNTING PREVIEW INTRODUCTION Contemporary organisations face significant internal and external challenges that must be addressed in order to operate and function effectively. It is essential for them to create value for multiple stakeholders, including customers, employees, management, regulators and their shareholders or owners. This must be achieved in a global environment that is continuously changing and becoming more competitive. This subject focuses on the role strategic management accounting plays in creating, managing and protecting value. For the purposes of this subject, strategic management accounting is defined as follows: Creating sustainable value by: supporting the formation, selection, implementation and evaluation of organisational strategy synthesising information that captures financial and non-financial perspectives for both the internal and external environments, to enable effective resource allocation. Strategic management accounting requires that management accountants embrace new skills that extend beyond their traditional practices. They must collaborate with general management (operational departments), corporate strategists (senior management team) and product development, in creating, managing and protecting value. Fostering organisational capabilities leads to value creation. Value creation is essential in contemporary organisations. One way of thinking about commercial organisations, government bodies and not-for-profit entities is as ‘linked chains’ of resources and activities. These chains produce products and services of value to consumers and end users. The essential requirements for successful performance are: to generate products and services with value that consumers are willing to pay for to constantly develop and improve the resources, activities and processes used to generate that value (Anderson and Narus 1998). This module first considers management accounting and its role in supporting management. It then describes the key changes that have led to the development of strategic management accounting. The module also identifies the challenges that management accountants face and describes the skills required to perform their role, at present and in the future. The ability to support managers at a strategic level has become critically important for organisational survival, and management accountants must broaden their role from traditional scorekeeping tasks to business advisory positions. Advances in technology and information systems now help with capturing and processing the routine events within an organisation. This allows management accountants to spend more time understanding the organisation’s external environment and work on non-routine, complex decisions. This module concludes with an examination of the various analytical techniques available to manage- ment accountants that will assist them to support management in their decisions about strategic direction. OBJECTIVES After completing this module, you should be able to: Explain what is involved in a strategic management process and its various stages. Identify the role of management accounting in strategic management and the mindset and values required to transit from a management accountant to a competent business partner. Assess the key challenges facing management accountants in today’s business environment. Identify various analysis techniques used in strategic management and their functions. SUBJECT MAP Figure 1.1 provides an overview of the important concepts in this subject and how they link together. The highlighted sections show the concepts that are the focus of Module 1. FIGURE 1.1 Subject map highlighting Module 1 rnal environment Exte VISION VALUE INFORMATION STRATEGY STRATEGY MANAGEMENT ACCOUNTANT VALUE INFORMATION OPERATIONS E xte r nal environment Source: CPA Australia 2019. An organisation decides on a strategic direction, where it believes value can be created. This value may be shareholder value, customer value or broader stakeholder value—depending on the type of organisation involved. Creating value for organisations helps sell products and services, increases the share price, and ensures the future availability of capital to fund operations. For value creation to occur there must be a clear strategy, based on a vision and mission that combine resources (including people, technology and time) and their effective use to achieve goals and objectives. The day-to-day activities and projects that are performed must be linked to the organisation’s overall strategy to drive towards its desired outcomes. It is important to perform the work required, but it is also necessary to continuously review, monitor and improve activities and processes. As shown in Figure 1.1, while there must be an information flow from the strategic level to the operational level, there must also be clear feedback and reporting from the operational level. This can be used as a control mechanism to ensure the organisation’s day‐to‐day activities stay in agreement with its vision and mission. The organisation must also be aware of the external environment in which it operates. Competi- tor activity, the broader economic and regulatory environment, technological advancements, alliances, management capabilities, employee and customer relations, and social changes may all affect the organi- sation. So, monitoring these influences and adapting to change are critical activities. 2 Strategic Management Accounting  The management accountant is at the centre of all these activities. Understanding what creates value helps management accountants focus capital and talent on the most profitable opportunities for survival and growth of an organisation. PART A: VALUE The main theme of this part of the module is value. The analysis and activities, the tools and techniques, the reporting and evaluation—all of these take place in the pursuit of value. Value is a broad concept and has a major influence on an organisation’s behaviour and drive to achieve its vision, mission and goals. It can be described as combining resources in a manner that creates desirable outcomes. Examples of value creation include growing food, generating energy, providing health care and building new machines, software programs and infrastructure. The role of management accountants is to support management in creating, managing and protecting value. Value is usually described as increasing shareholder wealth. However, this is both narrow and simplistic because it ignores other important and interested parties or stakeholders, as shown in Figure 1.2. FIGURE 1.2 A broad range of stakeholders Shareholders Community Lenders groups Stakeholders Regulators Customers Employees Suppliers Source: CPA Australia 2019. Each group has its own interests and desires and therefore its own definition of the ‘value’ it wishes to receive from an organisation. Failure to consider stakeholder needs and desires will make it difficult to maintain and increase shareholder wealth. Value creation is just as relevant in the not-for-profit and public sectors. For example, national infrastructure, education, health and social welfare need to be managed just as effectively as privately run organisations. In the not-for-profit and public sectors, value is created for the members, citizens or residents (or taxpayers) of the nation, instead of wealth being increased for shareholders. Value creation in contemporary organisations is based on creativity and innovation. This includes the innovative ways that management adapt to take advantage of new materials, technologies and processes, as compared to value creation in the past, which was based on economies of scale and mass production. SHAREHOLDER VALUE The ultimate outcome for many organisations is to generate wealth for the owners. The owners have either started or invested in the organisation to obtain appropriate returns for the risk involved. As such, many measures of value focus on shareholder value. However, pursuit of shareholder value while ignoring other areas of value creation is not sustainable. To ensure that an organisation is able to create shareholder value MODULE 1 Introduction to Strategic Management Accounting 3 over a prolonged period, its actions and use of resources need to be sustainable. For example, if the impact on the natural environment is not acknowledged or minimised, long-term sustainable shareholder value is unlikely to be achieved. CUSTOMER VALUE The primary task for an organisation is to create an output that has customer value. A key requirement is to produce this output at a cost that is lower than the price the customer is willing to pay, which leads to profitability and creates shareholder value. Figure 1.3 shows a simple version of the organisational value chain. This provides an overview of how the organisation performs a sequence of activities to provide outputs or outcomes to create customer value. FIGURE 1.3 Organisational value chain Business cycle Operations (obtaining/producing goods or services) Sales Distribution After-sales service These activities are supported by a variety of business functions. Support activities Research and development, accounting, human resources, information technology and infrastructure Source: CPA Australia 2019. For a further explanation of and practice in the concept of value chains, please access the ‘Value chain’ learning task on My Online Learning. STAKEHOLDER VALUE Shareholder wealth is a by-product of generating value in other areas. To create products or services, an organisation will require community permission to operate, infrastructure, customers and employees— who will only supply their effort if the wages and conditions are adequate. So, consideration of stakeholders is critical to organisational success. WHICH VIEWPOINT SHOULD BE TAKEN WHEN DETERMINING ‘VALUE’? A significant philosophical issue that must be considered with regard to value is: ‘From which perspective should value be determined’? The most obvious perspective is from the organisation itself. Value is linked to the concept of ‘anything that is good for the business or organisation’. However, other perspectives also exist, including that of society. Some actions may bring value to the organisation as well as to other groups at the same time—for example, more efficient farming practices may lead to higher yields, lower prices and more nutritional food. However, other actions may benefit the organisation while causing significant harm to others, as shown by the examples in Figure 1.4. The development of corporate social responsibility (CSR) indicates that people are interested in more than just the pure economic value that organisations create. They are also interested in ‘how’ that economic value is created, and they assess the impact of those actions (or inactions). CSR reporting has increased to help people understand the sustainable value or effect of an organisation’s activities from a social and environmental perspective. Such reporting aims to increase the level of ethics and accountability demonstrated by organisations when making value-based decisions. Value is either created or destroyed by management through the business model they use. The business model is highly dependent on a broad range of relationships and activities that take place in the market, in a societal and environmental context within which the organisation operates. Therefore, to be truly valuable, something must offer economic value to the organisation and provide sustainable value to other stakeholders within society. 4 Strategic Management Accounting  FIGURE 1.4 Organisational value and potential impact Organisational viewpoint Society’s viewpoint Unemployment, Cost cutting—reducing financial pressure on the number of staff communities and additional by 10% to increase stress for employees who profitability remain employed Switching production Local unemployment, to cheaper offshore environmental degradation, locations with lower and an increase in injuries standards of employee and incidents among employees and environmental who receive little protection protections Massive price A small price reduction discounting of key items for individual consumers by supermarkets to gain but at the expense of market share, forcing producers who are suppliers to reduce prices unable to remain viable Selling addictive Social issues in products or services communities and an including gambling, increase in health- alcohol and cigarettes related costs Source: CPA Australia 2019. Strategic management and strategic management accounting While some areas of accounting, such as financial reporting and auditing, may have a regulatory compliance focus to inform and protect external stakeholders, strategic management accounting is aimed specifically at improving organisational outcomes. Strategic management describes the process by which an organisation decides: the direction it will take the industry it will operate within the types of products or services it will provide its structure, systems and processes its goals and objectives. It also includes the development of specific approaches or strategies as well as implementation plans and performance measurement that support this process. Strategic management accounting aims to provide forward-looking information to assist management in decision-making. Unlike typical cost or/and management accounting, which focuses on internal accounting information, strategic management accounting evaluates external information—for example, trends in costs, prices, market share, competitors, suppliers and technologies—and their impacts on resources. Strategic management accounting uses a wide range of tools and techniques that support each stage of the strategic management process. So, strategic management accounting becomes an enabler, or a catalyst, that helps initiate and drive strategic management activity. Strategic management accounting helps organisations in their desire to create long-term, sustainable value that is of benefit to all stakeholders. MODULE 1 Introduction to Strategic Management Accounting 5 PART B: THE STRATEGIC MANAGEMENT PROCESS The main theme of this part of the module is to explain the strategic management process—the role of strategic management accounting in supporting managers. The strategic management accounting process involves defining the organisation’s strategy and the process by which managers make a choice of a set of strategies for the organisation that will assist managers in value creation. Throughout Part B, the strategic management process is presented as a continuous process that evaluates the business and the environment within which the organisation operates, evaluates/re‐evaluates its competitors, and defines its objectives and strategy. Strategic management accounting—supporting managers Management activities can be classified into the broad categories of: strategic management, which focuses on determining the direction and structure of the organisation and developing plans and objectives for achieving this operational management, which can be considered as the implementation phase of strategic management—turning the strategy into reality. Strategic management accounting provides a supporting role to managers in both categories. This section examines the activities that managers are involved in and the types of support management accountants can provide to help managers perform these activities better. Strategic management The strategic management process involves: addressing key issues, including determining the vision, mission and purpose of an organisation setting specific objectives creating and implementing the strategies to achieve these objectives. Important phases in the strategic management process are shown in Figure 1.5. FIGURE 1.5 The strategic management process Strategic analysis— both internal and external Strategy evaluation— performance Strategy planning measurement, and choice feedback and review Strategy implementation Source: CPA Australia 2019. This strategic management process shown in Figure 1.5 is continuous, and the phases are closely interwoven rather than being clearly separate events. The stages are critically useful in evaluating an organisation’s planning systems and processes and for indicating ways of improving their effectiveness. Significant amounts of information are required to successfully complete each of the stages. The stages in the process are briefly discussed below. Strategic analysis The strategic management process begins with strategic analysis, which is undertaken through scanning the internal and external organisational environment. It is important for the organisation to know itself and its competitors. 6 Strategic Management Accounting  Organisations must continuously analyse the external environment to understand trends and changes that affect the industry and the economy. For instance, Apple redefined the smartphone technology, and its decision to create the iPhone shows its ability to analyse the traditional industry and create a product that distinguished Apple in the mobile phone industry. Organisations must also analyse their own resources and capabilities to understand how they might react to changes in the environment. For instance, changes in the global economic environment have influenced the development of business models where intellectual property (IP) has become an important resource for many contemporary organisations, such as Google, Apple, Louis Vuitton and Mercedes-Benz, for establishing value and potential growth. Organisations use various management tools and techniques to scan the organisational environment. A well-established tool that captures the idea of scanning the environment both external and internal to the organisation is strengths, weaknesses, opportunities and threats (SWOT) analysis (discussed later in this module) (Saylor 2012). Strategy planning and choice Strategy formulation is the next step in the strategic management process. This includes developing specific strategies, actions and measures. For instance, part of Apple’s success is due to the unique features of products it offers, and how these features and products complement each other—for example, an iPod that plays music from iTunes, which can be stored on Apple’s Mac computer. Strategy implementation The next step of the strategic management process is strategy implementation, which entails crafting an effective organisational structure, organisational processes and culture. For example, the rate of Amazon’s innovations in supply chain management (SCM) has been significant, with investment in supply chain automation lessening the overall product delivery time, and increasing the number of warehouses. Its unique supply chain strategies and continuous technological innovations have changed the way SCM works. This helped Amazon to successfully implement its Amazon Prime service in 2005 providing guaranteed two-day shipping of products. Strategy evaluation The final stage of the process is strategy evaluation. This involves measuring performance, providing feedback and undertaking continuous review for improvement. The focus of every organisation is to lead strategically in order to attain long-term goals. Consequently, how managers understand and interpret the performance of their organisations is critical to evaluating strategy. Operational management The relationship between senior strategic managers and operational managers is usually drawn as a pyramid. The senior management team is at the top and focuses on strategic tasks. Underneath this are the operational managers who focus on the medium- to short-term tasks of running an organisation. There should be a strong link between these levels via the strategic implementation phase. However, strategy often fails at the implementation phase due to poor integration of the strategic and operational levels. Formal strategies are often ignored or postponed as day-to-day issues receive all the attention. Managers need to produce short-term operational objectives and implementation plans to achieve long- term strategies. Strategic management accounting supports operational planning with tools including budgeting, costing systems and variance analysis. Constant feedback is required for an organisation to achieve short-term plans. If there is a deviation from the plan, the objective may need to be adjusted or controls put in place to correct the situation. Management accountants provide support for this controlling function by giving feedback with financial and non-financial information. There is a direct and impactful relationship between strategic and operations management. The success of an organisation depends on both the strategic and operational elements. As described earlier, strategic management is the process of understanding the business environment and developing and implementing strategies, while operational management involves executing those strategies on a day-to-day basis to achieve the outcomes in the long run. Table 1.1 summarises the broad difference between strategic management and operational management. MODULE 1 Introduction to Strategic Management Accounting 7  TABLE 1.1 Broad differences between strategic and operational management Strategic management Operational management Directly linked to survival of an organisation Not directly related, but indirectly influences organisational survival Organisation-wide phenomenon Relates to specific operations of the organisation Long-term process Focused on short and medium terms Involves non-routine activities Involves routine day-to-day activities Sometimes very ambiguous Does not involve any ambiguity Requires high-level strategic management orientation Requires tactical management orientation and focus on doing, implementing and achieving operational excellence Manages critical success factors (CSFs) Performs activities on a day-to-day basis of the organisation Source: CPA Australia 2019. QUESTION 1.1 Will the role of strategic management accounting change if the roles and functions of management identified so far in part B of this module change in any way? Example 1.1 highlights how strategic management accounting information can support operational management. EXAMPLE 1.1 Supporting operational management with management accounting information Planning Alpha Pty Ltd (Alpha) sells educational toys for children aged one to four years. One of its products is an electronic reading support toy that is expected to have good sales before the start of the school year at the end of January. The budget for the next quarter (January–March) is set in mid December—it includes a sales revenue target of $165 000 for January. A bonus will be paid to sales staff in mid April if both revenue and profit targets are achieved for this product. Plan Sales target The planning phase is supported by the use of previous sales figures, consumer confidence in the economy and required profit targets to achieve a minimum return above the cost of capital. The plan and expected levels of performance are then communicated to staff. Evaluating On 5 February, the results for January are reported, and actual sales for the toy are $130 000. Not only are January’s figures short of the target, but there is also doubt about achieving the sales target for the whole quarter. The cost of producing each unit has risen because of raw material price increases caused by unfavourable foreign exchange fluctuations. It appears that there will be no bonuses for the sales staff for quite some time. Evaluation occurs continuously, and in this situation, it was supported by the use of actual versus budgeted figures to identify current performance and establish whether bonus criteria were being achieved. 8 Strategic Management Accounting  Actual result Sales target Analysing An analysis of the sales revenue variance uncovers two major issues: 1. An external issue was caused by Alpha’s main competitor, Zeta Pty Ltd (Zeta). During the Christmas period, Zeta heavily discounted a similar toy to successfully attract market share away from Alpha. This had a flow-on effect on January’s sales. 2. An internal problem was caused by a delay in the product being delivered to several large retailers who had sold out. Several days’ worth of sales was lost as a result. Analysis of the causes of the variance indicates that coordination within the organisation needs to be examined and decisions must be made about how to take control of the situation. Control Alpha decides to reduce the selling price by 15 per cent and increase advertising to generate additional sales. Sales estimates for February and March are also slightly reduced. A series of meetings are arranged between sales, purchasing and logistics personnel to ensure that the company has enough stock and that it is being distributed to retailers on time. 1 January 31 January 31 March Sales target decreased Planned result Variance to be controlled Actual result The company is off target. Several approaches to control the situation are made: changing the target—reduced sales target changing the course to the target—reduced sales price and increased target sales volumes attempting to improve coordination within the company. In Example 1.1, the decisions made at each stage needed to be based on rigorous financial and qualitative analysis. This required an understanding of different cost concepts, as well as various tools and techniques to support the analysis. For example, the original variances would have been identified by variance analysis, and the decision to reduce the price by 15 per cent and increase advertising to increase market share could have been modelled using cost-volume-profit (CVP) analysis. A range of operational support techniques are regarded as assumed knowledge for this subject, including: cost classifications CVP analysis product costing marginal costing working capital management. If you are unsure about your knowledge in these areas, you can find resources through our Guided Learning offer on My Online Learning. Strategic management accounting and line managers Organisations have become leaner with fewer employees and have had their hierarchies flattened with reduced levels of management. As a result, greater levels of authority and decision-making power have been delegated to lower-level employees. This has been essential to improve flexibility and responsiveness within organisations. Management accountants were once the providers of all management accounting information, but the tasks of collecting and communicating key performance information are now often delegated to line managers and employees. MODULE 1 Introduction to Strategic Management Accounting 9  Instead of merely recording and providing the information, management accountants are required to provide support and training to assist line managers and employees to undertake these tasks. An advantage of this approach is that it transfers routine tasks to other employees to allow time to be devoted to more complex, non-routine and strategic-level tasks. Strategic management accounting and service industries Many management accounting examples involve the manufacture of products. These products are tangible, easy to visualise, and often produced systematically, so costs can be easily identified and allocated to each element of the product. However, service industries also require the support of management accounting tools and techniques. The detailed Case study at the end of this subject demonstrates this by considering the Australian domestic airline industry. The same approaches and tools are used to analyse services, but the main characteristics of services can make this analysis more difficult. Services differ from products in the following ways: A service is intangible, so it can be more difficult to define or measure systematically. Once a service is provided, it cannot be consumed or used again in the same way as a product. This means there is no ability to store a service as inventory, which makes it more difficult to manage supply and demand levels. A service is more of a unique offering than a product. So providing it in a systematic and identical way is much more difficult. Unused capacity is lost forever. It cannot be used to create something that is stored for later—that is, inventory cannot be created. An important issue in a service environment is the proper management of excess capacity. For example, an airline provides a service by flying passengers from one city to another. But, if half of the seats on the flight are empty, that ‘excess capacity’ can never be recovered once the service is provided. Similarly, managing customer call centres is an area in which employees must be available to answer queries even if there are no customers using the service at a particular time. In these situations, the idle resources can cause significant costs. Other important issues include measuring and maintaining quality, which can be difficult because providing a service can be more individual or unique than producing identical products. Therefore, accurately costing the provision of services to different customers is challenging. Strategic management accounting and the public sector The main difference between the public and private sectors is that many (but not all) public sector organisations do not use profit as their primary measure. An example of this different focus is shown in Question 1.2, in which important themes for local government are well planned urban growth and fostering liveability—an enjoyable place to live. From a strategic management accounting viewpoint, there is still the need to support both the strategic and operational processes. The key questions to consider are: what decisions do public sector managers need to make and how does strategic management accounting support these choices? For instance, in performance assessment, strategic management accounting can help establish metrics for measuring: economy—the extent to which resources of a given quality were acquired at the lowest cost efficiency—the maximisation of outputs for a given set of inputs effectiveness—the extent to which an organisation achieved its objectives. QUESTION 1.2 Read this extract from a local government planning document. STRATEGIC OBJECTIVES STRONG LEADERSHIP Council will lead our changing city using strategic foresight, innovation, transparent decision making and well-planned, effective collaboration HEALTHY AND INCLUSIVE COMMUNITIES Council will provide and advocate for services and facilities that support people’s wellbeing, healthy and safe living, connection to community, cultural engagement and whole of life learning 10 Strategic Management Accounting  QUALITY PLACES AND SPACES Council will lead the development of integrated built and natural environments that are well main- tained, accessible and respectful of the community and neighbourhoods GROWTH AND PROSPERITY Council will support diverse, well-planned neighbourhoods and a strong local economy MOBILE AND CONNECTED CITY Council will plan and advocate for a safe, sustainable and effective transport network and a smart and innovative city CLEAN AND GREEN Council will strive for a clean, healthy city for people to access open spaces, cleaner air and water and respond to climate change challenges Source: Maribyrnong City Council 2018, Council Plan 2017–21, Maribyrnong, Victoria, Australia, p. 1, accessed June 2018, https://www.maribyrnong.vic.gov.au/About-us/Our-plans-and-performance/Council-plan. What strategic management accounting information may be used to support these objectives? Goal Strategic management accounting information Strong leadership Healthy and inclusive communities Quality places and spaces Growth and prosperity Mobile and connected city Clean and green PART C: THE ROLE OF MANAGEMENT ACCOUNTANTS IN STRATEGIC MANAGEMENT The objective of this part of the module is to highlight the role of management accountants in the strategic management process. Management accountants are seen as information providers for business processes, organisational planning and control, resource management and utilisation, and creation of value through effective use of financial and non-financial resources. As a trusted business partner, new challenges facing management accountants mean they must constantly advance their knowledge in diverse areas, and improve their soft skills to effectively communicate with internal and external stakeholders. THE ROLE OF MANAGEMENT ACCOUNTANTS The accounting profession has witnessed significant changes due to globalisation, digital transformation, regulations and competition. Accountants have to adapt to changing circumstances. The role of man- agement accounting has expanded to include a focus on helping managers solve problems and improve their competitive position. For example, management accountants now conduct product life cycle costing and customer profitability analysis, and prepare balanced scorecards (BSCs); with these contemporary management accounting tools, dissemination of information has become easier and hence led to faster customer response times. This is coupled with technological advances that enable electronic data capture, MODULE 1 Introduction to Strategic Management Accounting 11 computer-aided design and computer-aided manufacturing and automatic system updates. These provide management accountants with the opportunity to focus on non-routine and strategic decisions. The term ‘strategic management accounting’ captures this new and broader role. The focus is now on assisting the formation, selection and operational implementation of strategies. This has led to operational management being viewed as strategic implementation, rather than something that is separate from the strategic process. A key part of the strategic management accounting concept is its focus on the organisation’s internal and external environments. By collecting information on internal operations, as well as competitors, customers and suppliers, and gaining an appreciation for the broader economic environment—including political, social and environmental factors— an organisation is assisted to respond more quickly to change. The emphasis on the external environment can be seen in many ways. For example, internal information (e.g. product costing) is more useful when it is compared with industry and competitor information. Likewise, evaluating the operating efficiency and profitability of an organisation can no longer be limited to internal results, but must be compared to external benchmarks. Therefore, management accountants must focus on obtaining and using this external information, which is not always easily available. This approach brings the strategic management accounting function in much closer alignment with both the marketing function—with its focus on customers—and the strategic planning function of the organisation. This places greater pressure on people working in these roles to increase their levels of skill. A variety of techniques have been linked together under the banner of strategic management accounting. These include target costing, life cycle costing, competitor cost analysis, activity-based costing and management, and strategic performance measurement systems (Langfield-Smith 2008). These techniques are discussed in detail in Modules 5 and 6. Table 1.2 provides a summary of the expanded level of work and responsibility that is expected from management accountants for strategic management accounting compared to traditional manage- ment accounting. TABLE 1.2 Traditional management accounting compared to strategic management accounting Traditional management accounting Strategic management accounting Job costing and process costing Product costing and activity-based costing and management Budgets Life cycle analysis (including social and environmental costs and benefits) Variance analysis Value chain analysis Financial data Financial, operational and qualitative data Competitor cost structures analysis Industry and broader economy analysis ANALYST, BUSINESS ADVISER, PARTNER Advertised job descriptions for management accountants use a wide range of job titles including business analyst, commercial analyst, decision support, commercial manager, finance business partner, business adviser and business support. Regardless of the description, these positions generally include some or all of the traditional roles of costing, variance analysis and budgeting. Reconciliations, maintaining fixed asset registers, inventory management, accounts receivable (AR) and accounts payable (AP) management, and reporting on key performance indicators are also common tasks. The ability to use enterprise resource planning (ERP) systems, databases and spreadsheets is often essential. Most roles are split into several areas including technical tasks, working with internal stakeholders such as sales and marketing teams, and project or team management. This will include managerial work such as supervision, running meetings and ensuring timelines are met. The move to providing strategic support is combined with the traditional cost management services that management accountants have always provided. Management accountants are often placed in different areas of the organisation or within project teams, to provide other employees with greater access to their capabilities. This also helps management accountants develop a much greater understanding of the organisation’s products, services, customers and suppliers, as well as the issues faced by different parts of the organisation. 12 Strategic Management Accounting  Risk management and mitigation is another important part of enhancing overall performance. In addition to financial risk management, operational risk throughout the organisation needs to be assessed and managed effectively. The effective use of controls to manage risk is a valuable role that is often performed by management accountants (Cooper 2002). Design and management of information systems and development of effective reporting methods are often incorporated into the management accounting role. This will typically involve showing others how to access information themselves rather than being an information gatekeeper. This is highlighted in Example 1.2. Providing information for stakeholders is discussed in detail in Module 2. EXAMPLE 1.2 Business partner or objective overseer? The business partner This approach suggests that accountants should act as engaged business partners. Rather than being seen as number-crunchers or as impartial spectators in the game of business, they are involved throughout the organisation to help improve results and pursue value. No longer just scorekeepers of past performance, accountants are information facilitators who help and guide management actions, instead of just evaluating and controlling them. Accountants bring unique skills to the business adviser role. They are traditional information providers, understand financial information and are disciplined in the use of control mechanisms. This brings a seriousness and an analytical approach that can help control risk during the pursuit of new opportunities. Accountants are also perceived to bring an independent, objective and credible approach. To maintain this advisory position, accountants must provide a valuable service in areas such as strategic business planning, customer profitability management, revenue generation strategies, cost man- agement, information management, competitive intelligence, forecasting, decision analysis, productivity improvements and cash flow maximisation. When possible, accountants should move away from their own department and join project teams and other business units to work closely on specific activities and issues. An opposing viewpoint—the overseer There are several risks that arise when accountants start acting in a performance-focused advisory role. The first risk is the loss of independence when an accountant becomes closely engaged in guiding and setting strategy and making decisions. Another risk is the possible tension that arises in the ability to switch between encouraging and pursuing new opportunities, and also ensuring that effective controls and oversight are put in place. Having the same person attempt to perform both these roles may lead to difficulty, hence, could adversely impact the quality of the task performed and/or the product. Providing oversight on top of deep involvement may involve conflicts of interest or time pressures that make it difficult to perform either role effectively. It may, therefore, be worth considering whether specific and different roles are developed within an organisation for different accountants—some with a focus on compliance and control, and others who are more engaged in performance improvement and strategy. Increased pressure and perceived or actual loss of objectivity are some of the biggest issues facing accountants as they become more heavily involved in the decision-making process (Chartered Institute of Management Accountants (CIMA) 2010). Do you agree with the arguments presented for the business partner or the overseer in relation to the role of accountants within an organisation? At more senior levels within the accounting function, accountants must do more than just be familiar with the numbers. Financial skills need to be coupled with: detailed knowledge of the specific business and industry the ability to manage team members and the accounting function the ability to negotiate and communicate with other executives and external stakeholders. CONTEMPORARY SKILLS AND TECHNIQUES Accountants are often in high demand, but many senior accounting roles are left unfilled for a considerable amount of time. This is sometimes because potential employees are missing ‘soft skills’—including negotiation, presentation, teamwork and communication skills. The ability to analyse information, present arguments and influence people, and speak and give presentations to the board, senior managers or employees is very important. Written communication skills, such as writing concise and understandable reports, and sending appropriate emails and letters, are essential. For these reasons, traditional skills must be supplemented with better personal and behavioural skills. MODULE 1 Introduction to Strategic Management Accounting 13  A matrix of skills has been prepared by the International Accounting Education Standards Board (IAESB). It details what is required of today’s professional accountant in business. The main categories include: intellectual skills interpersonal and communication skills personal skills organisational skills (IAESB 2017). A report by the International Federation of Accountants (IFAC 2011) looked at how management accountants drive sustainable organisational success. It identified four specific ways in which management accountants support an organisation: 1. creators of value—developing the plans and strategies that set the direction of the organisation 2. enablers of value—supporting management decision-making and implementation 3. preservers of value—protecting value through effective risk management, controls and compliance 4. reporters of value—providing clear and detailed reporting. A summary of some of the specific types of skill required within each category is presented in Table 1.3. TABLE 1.3 Professional skills to be achieved by professional accountants Competence Area (Level of proficiency) Learning Outcomes (a) Intellectual (i) Evaluate information from a variety of sources and perspectives through (Intermediate) research, analysis, and integration. (ii) Apply professional judgment, including identification and evaluation of alternatives, to reach well-reasoned conclusions based on all relevant facts and circumstances. (iii) Identify when it is appropriate to consult with specialists to solve problems and reach conclusions. (iv) Apply reasoning, critical analysis, and innovative thinking to solve problems. (v) Recommend solutions to unstructured, multifaceted problems. (b) Interpersonal and (i) Display cooperation and teamwork when working towards organizational goals. communication (ii) Communicate clearly and concisely when presenting, discussing and reporting (Intermediate) informal and informal situations, both in writing and orally. (iii) Demonstrate awareness of cultural and language differences in all communication. (iv) Apply active listening and effective interviewing techniques. (v) Apply negotiation skills to reach solutions and agreements. (vi) Apply consultative skills to minimize or resolve conflict, solve problems, and maximize opportunities. (c) Personal (i) Demonstrate a commitment to lifelong learning. (Intermediate) (ii) Apply professional skepticism through questioning and critically assessing all information. (iii) Set high personal standards of delivery and monitor personal performance, through feedback from others and through reflection. (iv) Manage time and resources to achieve professional commitments. (v) Anticipate challenges and plan potential solutions. (vi) Apply an open mind to new opportunities. (d) Organizational (i) Undertake assignments in accordance with established practices to meet (Intermediate) prescribed deadlines. (ii) Review own work and that of others to determine whether it complies with the organization’s quality standards. (iii) Apply people management skills to motivate and develop others. (iv) Apply delegation skills to deliver assignments. (v) Apply leadership skills to influence others to work towards organizational goals. (vi) Apply appropriate tools and technology to increase efficiency and effectiveness. Source: IAESB 2017, 2017 Handbook of International Education Pronouncements, ‘Table A: Learning outcomes for professional skills’, accessed June 2018, https://www.ifac.org/publications-resources/2017- handbook-international-education-pronouncements. Strategic management accounting requires an extension of the traditional skills to incorporate many of the following tools and techniques, which will be examined in later modules of this subject: competitor analysis, customer cost and profitability analysis, supplier analysis and external benchmarking—including sustainability perspectives 14 Strategic Management Accounting  industry- and organisation-level value analysis strategic costing, life cycle costing and target costing for strategy formulation activity-based costing and management for implementing strategic plans cost driver analysis, value analysis, benchmarking of operational processes and various forms of budget variance analysis for managing and controlling the implementation process applying strategic management accounting techniques to the management, selection, planning and implementation of projects strategic performance measurement systems (e.g. the BSC) for managing and controlling the implemen- tation process—and for supporting strategy formulation. PART D: THE KEY CHALLENGES FACING MANAGEMENT ACCOUNTANTS This part of the module aims to provide an overview of the key challenges facing management accountants. As discussed earlier in this module, in the rapidly changing business environment, management accoun- tants are experiencing significant changes in their role and responsibilities. Therefore, to be competent, management accountants should adapt to the changes, to remain relevant in the future. Generally, factors such as globalisation, advancements in technology, and competition have impacted organisational structures, inventory costs and the value chain. This part of the module also highlights how these changes have prompted the introduction of various management accounting tools. CHALLENGES Some of the key challenges facing management accountants include: using technology effectively while guiding others to effectively use management accounting systems (MASs) managing resources promoting innovation. All this is occurring at a time when globalisation and technological advances are changing the structure and culture of organisations, with many roles now being outsourced. With an increasing focus on environmental and social outcomes, management accountants are facing challenges from other information providers who are skilled in capturing and reporting physical information, including engineers, who will be competing to provide this type of service to organisations. Technology There are technology-linked challenges at both the day-to-day operational level and the strategic level. These include keeping information secure and maintaining customer privacy (Gelinas and Sutton 2002; Munir et al. 2013). Establishing new and secure sales and distribution channels to customers over the internet are opportunities that must be managed carefully. Maintaining records and audit trails for data verification in a computerised environment is also a significant issue. Effective implementation of major information system projects presents both a challenge and an opportunity. Technology has allowed the automation of traditional number-crunching activities and provides the tools to improve the quality of information provided to management. This, in turn, has increased management’s expectations of management accountants. Viewed from a broader perspective, technology is transforming how people compete within an industry, which is forcing rapid change and innovation—this is highlighted in Example 1.3. EXAMPLE 1.3 Disruption in the music industry … the evolution of the music industry is heavily shaped by media technologies. This was equally true in 1999, when the global recorded music industry had experienced two decades of continuous growth largely driven by the rapid transition from vinyl records to Compact Discs. The transition encouraged avid music listeners to purchase much of their music collections all over again in order to listen to their favourite music with ‘digital sound’. As a consequence of this successful product innovation, recorded music sales (unit measure) more than doubled between the early 1980s and the end of the 1990s. It was with this MODULE 1 Introduction to Strategic Management Accounting 15  backdrop that the first peer-to-peer file sharing service was developed and released to the mainstream music market in 1999 by the college student Shawn Fanning. The service was named Napster and it marks the beginning of an era that is now a classic example of how an innovation is able to disrupt an entire industry and make large swathes of existing industry competences obsolete. File sharing services such as Napster, followed by a range of similar services in its path, reduced physical unit sales in the music industry to levels that had not been seen since the 1970s. The severe impact of the internet on physical sales shocked many music industry executives who spent much of the 2000s vigorously trying to reverse the decline and make the disruptive technologies go away. At the end, they learned that their efforts were to no avail and the impact on the music industry proved to be transformative, irreversible and, too many music industry professionals, also devastating. But as always during periods of disruption, the past 15 years have also been very innovative, spurring a plethora of new music business models. These new business models have mainly emerged outside the music industry and the innovators have been often been required to be both persuasive and persistent in order to get acceptance from the risk-averse and cash-poor music industry establishment. Apple was one such change agent that in 2003 was the first company to open up a functioning and legal market for online music. iTunes Music Store was the first online retail outlet that was able to offer the music catalogues from all the major music companies; it used an entirely novel pricing model, and it allowed consumers to debundle the music album and only buy the songs that they actually liked. Songs had previously been bundled by physical necessity as discs or cassettes, but with iTunes Music Store, the institutionalized album bundle slowly started to fall apart. The consequences had an immediate impact on music retailing and within just a few years, many brick and mortar record stores were forced out of business in markets across the world. The transformation also had disruptive consequences beyond music retailing and redefined music companies’ organizational structures, work processes and routines, as well as professional roles. iTunes Music Store in one sense was a disruptive innovation, but it was at the same time relatively incremental, since the major labels’ positions and power structures remained largely unscathed. The rights holders still controlled their intellectual properties and the structures that guided the royalties paid per song that was sold were predictable, transparent and in line with established music industry practices. Source: Wikström, P. & DeFillippi, R. 2016, ‘Introduction’, Business Innovation and Disruption in the Music Industry, Edward Elgar, Cheltenham, pp. 1–2. Reproduced with permission of the Licensor through PLSclear. Managing resources Effective use and control of assets are required for superior results. Mastering areas such as cash flow management and SCM is essential. Using forecasting and scheduling tools, achieving reductions in inventory levels and maintaining effective links with suppliers are necessary. In addition to the tangible assets base, it is important to improve in the areas of recognising, developing and managing intangible assets, including knowledge (Massingham 2014). It is more difficult to deal with organisational knowledge, customer and employee loyalty, and brand management than to focus on traditional cash flow and inventory issues. However, with such intangibles being a significant contributor to the value of organisations, their management is an essential task for protecting and improving business value (EY 2018). Innovation One factor that leads to strong performance is innovation. It drives competitiveness by creating efficiencies and new and better products. Innovation is both an outcome—that is, a new product or service—and a process—a combination of decisions, structures, resources and skills that produce outputs and outcomes. In a more competitive environment, constant innovation is required to achieve objectives. This can often be incremental innovation—small, minor improvements—but it may also involve radical changes (Dodgson 2004). Consistently generating new and improved products, services and processes (e.g. Apple) is essential to creating customer value. Investment in research and development (R&D) requires significant cash outlays, but is necessary to maintain superior performance as shown in Example 1.4. EXAMPLE 1.4 Innovation helps improve