Role of Management Accounting Information in Strategy Formulation

Management accounting can be defined as a process of providing appropriate information primarily intended to assist managers in making better decisions. In previous years, management accounting techniques like traditional budgeting, cost-volume-profit analysis, standard costing and variance analysis, were adaptable to the business environment when product varieties were few, competition was low, overhead costs were relatively low, automated processes were minimal and firms were mostly labor intensive. However, many businesses and environments began to evolve as a result of technological changes, globalization and changing customer mix. Authors identified inadequacies in these techniques, when used as tools in planning and control decisions. Awareness amongst companies on the need to achieve excellence in manufacturing/service delivery and use such an achievement as a strategy to compete effectively grew. Companies started linking their strategies with reduction in production and inventory costs, quality improvement and innovation, reduction in lead times and increased flexibility in meeting individual customer’s requirement. This paved the way for the introduction of contemporary accounting techniques like target costing, total quality management, Just In Time (JIT), Activity Based Costing (ABC), Balance Scorecard and Process re-engineering, which support organization in achieving their objectives.

Strategy is the process of establishing a profitable or sustainable position against the forces that determine industry competition. The objective is to position the firm so as to gain competitive advantage. This involves producing long term plans while possible plans and actions of competitors. For management accounting to play a role in strategic management, managers must provide both internal financial and non-financial information about the internal environment, and external financial and non-financial information, about the external environment in which the company operates.

Firms had developed an economic orientation in which external actors were considered as competitors that drive down profit levels. However, benefits can also come from partnering with competitors, customers and suppliers. The perception that competitors can be cooperative as well as confrontational has broadened the concept of strategic management accounting as a process of information sharing between competitors. Accounting information will be required at each phase of the strategic decision making process.

  1. Strategy Problem identification: This requires non-financial, qualitative information about issues of an internal and external nature. This will involve conducting a PESTEL analysis and analyzing Porter’s five forces industry structure.
  2. Strategic alternatives: To generate these alternatives, management requires both financial and non financial quantitative data produced from internal and external issues.
  3. Strategic actions: To select appropriate actions, management requires primarily quantitative, financial, internal information about costs, benefits and probabilities of courses of action.

The necessity of financial and non financial data as well as quantitative and qualitative data is what makes the prior management accounting information insufficient.

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