Introduction

Jessup ltd is a fast growing company expertise in advertising and public relations. Strategic decisions making is very important in order to bring the company to new heights. Henceforth, strategic management accounting is introduced to the business with an aim to bring out the best value of every cost incurred in the business.

Besides that, it is very important to look into various ways of increase the efficiency and effectiveness of processes in order to cut costs for activities which are inefficient and at the meanwhile, analyze those activities that need extra effort to expand and improve. Subsequently, the profitability for the organization is increased and the stability of the firm in the market place is confirmed.

In this writing, definition of strategic management accounting is discussed in the first section. After that, we will look into the key role of a strategic management account, relevant and irrelevant costs and revenues in the strategic management accounting decision making and lastly, benefits and problems of introducing activity based costing. The last part of this writing is a short conclusion on how Jessup could go to another hike with the applicant of strategic management accounting.

Definition of Strategic Management Accounting

Strategic Management Accounting is a type of management accounting that emphasized on the information which relates to external factors of the organisation. The information could be included the non-financial information and the internal factors of the firm (Cadez & Guilding, 2008).

However, Professor Hassan Yazdifar (2003) had categorised the strategic management accounting role into two major directions. Firstly, every cost in the business should be integrated into analysis of strategic cost. As a consequence, the costs should be aligned with the company strategy. Secondly, the managers of the company should monitor the cost strategies of competitors from time to time.

Strategic management accountants are able to help enhance the quality of the company services. They are able to do timely product deliveries by recording and reporting a company’s current quality and timeliness levels as well as cost and benefits analysis or evaluation. Nonetheless, they will impose the new quality initiatives such as total quality management (TQM) and provide better customer service to the clients of Jessup ltd.

Key Role of a Strategic Management Accountant

Strategic management accountant is very important in playing a role to make powerful decisions for the company. He or she will commence a special study to verify whether there would be any changes in the accounting report. (Kim Langfield-Smith., 2008). This study includes five steps.

First, he shall check and find out the problems and uncertainties in the company as well as outside the company. Second, he should gather the information of all the problems and uncertainties. Afterwards, he or she should identify the alternatives and possible solutions to the problem and uncertainties. At the same time, he or she will eliminate the not feasible alternatives. Third, he should try to forecast some possible future situation for the company. At the mean time, the strategic management accountant will identify the predicted costs and benefits associated with each possible solution. Nonetheless, he will eliminate the costs and benefits that are not relevant to the strategic decision making. Fourth, he should be able to list out several solutions and alternatives before make a decision by choosing among those selections. He will check and compare those alternatives in terms of the relevant costs and benefits for each alternative. Subsequently, he should be able to relate the cost and benefits of each alternative to the strategic goal of the company. Last but not least, he should appraise the outcome and learn on how to improve in future. The most profitable and beneficial goal to the company will be chosen after thorough evaluation of all the possible alternatives. (Tillmann & Goddard, 2008).

On the other hand, strategic management accountant will make decisions base on tactical cost analysis. Tactical cost analysis will sort out the relevant costs and benefits in the accounting report. As such, the strategic management accountant would be able to make proper decision base on the result of the analysis. (Al-Hazmi, 2010).

Relevant and Irrelevant Costs and Revenues in Strategic Management Accounting Decision Making

Cost and revenue are very relevant to the firm performance especially the future of the company. However, all past costs are sunk and not relevant. Henceforth, the strategic management accountant will not take the irrelevant cost and revenue into consideration when make decisions. Nevertheless, the past costs can be useful for future decision making as it would provides a proper estimation on accounting reports. (Parker., 2008).

Accounting information is very important to tell the various abilities of the company. Strategic management accountant can use this information to make strategic decision which will bring the company to another hike. However, the financial information itself will not make decision until the accountant make it useful. The strategic management accountant will check on the accounting information and identify the cost that is used effectively and efficiently. (Parker., 2008).

In the case of Jessup, the relevant cost would be the cost incurred to produce an advertisement despite any media. In other words, the cost of production is relevant to the business and must be taken into consideration when do strategic decision making. The irrelevant cost for the advertising production or public relations could be the cost incurred to hire more people. For example, a production crew of four people could make a two minute advertisement in the television whereby the company uses a production crew of six people for the same advertisement. As such, the overhead of two people is the additional cost that should be eliminated in the production. This cost of overhead is considered irrelevant.

Nevertheless, the strategic decision making could be affected by the relevant cost and revenue. For instance, the overhead cost of the additional headcount in the production crew could affect the strategic management accountant to decide on retrenchment in order to save more cost. Yet, the efficiency and effectiveness of the cost would be relevant to the strategic management accounting in term of the profit incurred. (Seal., 2001).

On the other point, strategic management accountant should find out the opportunity cost that is not easy to measure and quantify. First of all, the strategic management accountant should measure the ability of Jessup whether can take the special order to do special event or advertisement within a limited timeframe. If yes, all other variable manufacturing costs of the advertisement production will be relevant. (If the advertisement has already been produced, the production costs are sunk costs, therefore irrelevant.) Thus, the company is making more profit. (Parker., 2008).

Secondly, strategic management accountant should check out the normal selling price of the advertisement or the event that might be avoided when working on the special order. If the avoidable selling price is irrelevant to the decision making and not affect any profit of the company, Jessup should take the special order. Nonetheless, if the special order will affect the fixed cost and impacted on the other ongoing advertisement or event production, strategic management accountant should be more careful in making decision to take the special order. Otherwise, there will be additional fixed production costs incurred and cause the profit margin of the company become lesser. Besides, Jessup should give priority to their regular customer on the special order arrangement. This would make the regular customer to have a sense of belonging and will go back to them for more business deal. This is especially important because if Jessup cannot make special order for their regular customers, the lost revenue of the regular customers will be affected and opportunity to gain more profit would be reduced. Henceforth, Jessup should not worry to input more opportunity cost for the special order because this cost is very relevant to the company growth and therefore relevant to make strategic decision.

Sunk cost is a cost that incurred in the past of the business. Strategic management accountant cannot do anything on this cost (Clarke & Tagoe, 2002). For instance, Jessup bought a new studio for photo shooting at price $ 20,000. Jessup will use the studio for its advertisement purposes and decide whether to sell the studio or buy a new studio for special order. The fact that Jessup spent for $20,000 should not affect the strategic decision making now and then. Yet, if Jessup can use the said studio for special order, the company is making more profit by adding in some opportunity cost.

The relevant cost of buying an alternative for the company is to purchase price of the item. In the said case, the relevant cost of buying a new studio for special order is the relevant cost that will impact on the strategic decision making. Besides that, the relevant costs of the alternative could include the variable production cost and any other avoidable fixed production costs. ( since this decision will have a long term impact, some of the fixed manufacturing costs are quite relevant to the business as they can be avoided and the company may not necessary to produce the special order ). (Tillmann & Goddard, 2008).

The opportunity cost of making the special order is the value of the best option use for the resources committed. This opportunity costs are important to determine a strategic decision. If Jessup does not produce the special order, the existing productive space will has more other usage. This qualitative factor will affect the strategic decision making and consequently, impact the company growth. (Tillmann & Goddard, 2008).

In the case of Jessup, the constant availability and reliance on the same supplier is considered. The quality of the supplier’s goods and services must be equally good or better than what Jessup produce to their customers. If something does not satisfy the customer of Jessup, Jessup will lose their trust of their customers and consequently, impact on the company’s reputation and profit margin.

Outsourcing is a popular trend in doing business nowadays. Jessup could consider outsourcing certain business functions to certain bodies. However, the quality of the services may not be controlled by Jessup and may impact on the reputation of the company. The cost of service may be varied after the contract is end which the cost may go higher and the quality is lower. As such, regular customer may not happy with their products and services. Subsequently, Jessup may not have chance to get special order from their customers. Therefore, this decision to help Jessup in saving more money will be relevant to the strategic decision making.

Example: Jessup needs 10 studios for advertising production. It can set up the studios at cost $10,000 each. The supplier is Linx. Jessup plan to produce the advertising as per following cost:

Direct material $ 500

Direct production crew $ 250

Variable production overhead $ 200

Fixed production overhead $ 350

Total $ 1,300

If Jessup set up the studio with the supply from Linx, 70% of the fixed production overhead applied will be eliminated. As such, Jessup should set up the additional studio and get the supply from Linx.

Benefits and Problems of Introducing Activity Based Costing

Activity Based Costing

Activity based costing consists of two steps. The first step is to find out the major activities and the appropriate overhead costs of each activity in the business. The overhead costs that are assigned to each activity will become an activity cost pool. After the assignment of overhead costs is completed, strategic management accountant will be able to identify the cost driver that relevant to each cost pool ensues. (Cadez, 2006). The second step of activity based costing system is the division of overhead cost from each cost pool to each product or service line in the business. Strategic management accountant is the person in charge to determine the cost driver that consumed by each product or service line. (Cadez, 2006)

Benefits of Introducing Activity Based Costing (ABC)

Activity based costing is introduced to manage the cost efficiently and effectively. There are several advantages of taking activity based costing in practise. First of all, the method will help the company to sort out the overheads caused by the similar type of activities. This is especially important for a company like Jessup ltd. For instance, they can find out the solution to cut down the overhead cost in the advertising production. (Kim Langfield-Smith., 2008).

Secondly, the managers can easily check out the cost drivers of each activity. As a result, they can manage the cost in a more effective manner. For example, they can find out the redundant cost in the advertising production. Each of the cost must bring relation to an objective and whether making value to the production. As such, they can save more money. (Cadez, 2006)

Thirdly, the directors of the company can easily make decision on pricing, product and service mix, as well as design of the business. This is because they can identify the most valuable products or services of the company, most effective processes in the business and segmentation of consumers in a more detail picture with the application of activity based costing. For Jessup, the directors can identify the most profitable activity in their company and do more on the activity whereby will cut down those non profitable activity in the company. Besides that, they can charge highly on those profitable services and products because the price is not an issue as the customer segment is fixed. (Clarke & Tagoe, 2002)

Last but not least, the application of activity based costing will enhance a company’s constant improvement. This is especially important when the company is looking for sustainable growth. If Jessup is looking for long term growth, they should apply the activity based accounting and check on the possible way to improve the relevant cost and revenue. (Clarke & Tagoe, 2002)

Problems of Introducing Activity Based Costing (ABC)

There are researchers argue that in activity based costing, some overhead costs are hard to be assigned to the respective products and clients, for example: the chief executive’s salary. The researchers argued that such a cost is called ‘business sustaining’ and are not assigned to products and clients because there is no meaningful approach. However, the total amount of such unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed. (Naranjo-Gil, & Hartmann., 2007)

Although some may argue that costs untraceable to activities should be “arbitrarily allocated” to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner. Besides, if Jessup would like to take special order from their regular customers and consequently, more and more costs would incurred and not easy to trace. Therefore, the strategic management accountant will have to figure out the additional opportunity cost by close monitor to the business. (Cadez, 2006)

Conclusion

Strategic management accounting (SMA) is a fast growing trend in the recent decades. There is a wide range of techniques that can be used in this SMA. The techniques include capital budgeting, quality costing and competitor performance appraisal, valuation of customers as assets, lifetime customer profitability analysis and life cycle costing. Strategic management accountings emphasize on planning and control in regards to the operation of the business and the strategic issues related to the integration of customers, suppliers, human resource management and financial ability of the company. The strategic management accountant will make decision base on the overall consideration of all the mentioned area. (Roslender & Hart, 2003)

Cost and revenue in the business of Jessup Ltd can be enhanced further in terms of better management in financial power and the strategic decision making. The strategic management accountant should make the strategic decision base on the five steps approach in order to make sure the benefit of Jessup Ltd is guaranteed.

On the other hand, activity base accounting (ABC) is imposed into the business of Jessup. ABC allows the strategic management accountant to manage across the value chain of the company and enable the company to achieve another hike at lower cost. This is because ABC allow the strategic management accountant to find out the most effective cost in each activity and reduce the cost that not bring in any effectiveness or efficiency. (Roslender & Hart, 2003)

Besides, ABC allow the strategic management accountant to make assessment of the resource usage across the value chain inclusive of the products and services, customers and other object cost in the business. In addition, ABC allows the strategic management accountant to find out the strategic issues that related to the growth of Jessup. The strategic issues include the supplier relation, product design, advertising package, customer mix, customer relations and the market segmentation. Base on all the mentioned issues, the strategic management accountant should make a decision on the pricing, order size, design of advertising or public relation activity and delivery methods to the customer of Jessup. (Clarke & Tagoe, 2002)

In short, with the application of ABC, the cost that occurred in the strategic management accounting would benefit to the cost of company’s products and services. Thus, enhance the value given to the consumers of Jessup. Nevertheless, the strategic management accountant will be able to effectively and efficiently manage the cost of business. He or she is able to manage the business with the complete knowledge and understanding of all the activities and process in Jessup and subsequently, create value in the cost management. As a result, Jessup can achieve another hike in the company growth.

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