This report will attempt to explain what Strategic Management Accounting (SMA) is, how it developed, why Traditional Management Accounting (TMA) is not sufficient to provide information for strategic decisions and the difference between SMA and TMA. It will further outline some of the essential analytical tools or techniques in SMA such as Activity Based Costing (ABC) and the Balanced Scorecard (BSC). SMA is an extremely broad concept, so in order to give a bird’s eye view of the subject this report mainly focus on comparing SMA to TMA and finally describes the importance and criticisms of SMA.
What is Strategic Management Accounting?
“A form of management accounting in which emphasis is placed on information which relates to factors external to the firm, as well as non-financial information and internally generated information.” (CIMA Official Terminology) “Strategic management accounting is a crucially important activity because it is outward-looking. It focuses specifically on the market, hence its common description as market-driven accounting. The main data it produces is on customers, products and competitors. This is softer in form than the hard numbers associated with financial reporting, but it forms a part of the inclusive strategy process that is linked to the pursuit of competitive advantage.” (Roslender and Hart, 2006)
As mentioned above, SMA emphasis on information external to the firm, such as information about competitors and customers, and non-financial information such as product quality and customer satisfaction, along with emphasising on firm’s internal factors such as information regarding company’s overheads and management of raw materials. The professional strategic management accountant engages with the organization’s top management team and contributes to strategy development and implementation with the aim of creating customer value and a strong competitive position for the organisation. The business environment has undergone significant changes due to globalisation and developments in information and production technologies (Burgstahler et al. 2007). Trading on a global stage with exponentially advancement in technology has indirectly and radically affected the traditional management system. These sudden changes have generated the need for Traditional Management Accounting, which is preoccupied with numbers and accounting measures to shift to the next level, which is to focus on value addition and integration within a company.
Strategic Management Accounting VS Traditional Management Accounting The three main limitations of Traditional Management Accounting (TMA) are, first, TMA information was acquired from the existing financial accounting information systems. As a result the focus generally remained on annual periodical targets and internal accounting systems thus failing in providing accurate and holistic information that mirrors the technology, products, and complexity of the operational processes on the one hand and on the other hand failing in integrating these for operating in a highly competitive environment (Baines and Langfield-Smith, 2003). Second, its aggregated form renders it less useful for a manager who wants information to be customised according to the specific managerial needs. Third, the window dressing applied by financial accountants to make it look good to the external users makes it less reliable for managerial decision making. Just as TMA was developed and introduced as a recipe for the shortcomings of the traditional cost accounting textbooks, SMA has, arguably, been launched by the accounting scholars as the new state of the art discipline. It has been claimed that the development of the field of SMA would render the old fashioned TMA extinct as the newer version focuses not only on the internal financial information, but also upon the external aspects of the business operations (Smith 2005). Simmonds (1981), who is...