In-Depth Notes on Strategic Cost Management Techniques & Value Creation

Overview of the Course

• Course Code: BS3517
• Subject: Management Accounting & Control
• Semester: 2
• Focus: Shift from technical control aspects to contemporary developments and strategic management accounting techniques.

Semester Topics

• Week 1: Strategic Cost Management & Value Creation I
• Week 2: Strategic Cost Management & Value Creation II
• Week 3: Risk Management & Management Accounting
• Week 4: Sustainability, Management Accounting & Responsible Decision Making I
• Week 5: Sustainability, Management Accounting & Responsible Decision Making II
• Week 7: Interorganizational Relationships & Management Control
• Week 8: Information Systems, Digitalisation & Management Accounting I
• Week 9: Information Systems, Digitalisation & Management Accounting II
• Week 10: Current Issues in Management Accounting & Control

Assessment Structure

• Total Marks: 50% of the module
• Exam Duration: 2 hours
• Section A (40%): Compulsory question on Strategic Cost Management (Numerical and Discursive)
• Section B (60%): Choose any two from four essay-style or short discursive case questions.

Learning Outcomes

• Understand the emergence of Strategic Management Accounting.
• Evaluate the Strategic Cost Management (SCM) techniques that add value to organizations, including:
  • Activity Based Management (ABM)
  • Customer Profitability Analysis (CPA)
• Discuss and evaluate product Life Cycle Costing (LCC) and Target Costing (TC).

Strategic Management Accounting

• Definition: A form of management accounting focusing on external and non-financial information alongside internal data (CIMA, 2005).
• Importance: Requires a robust performance measurement system to track business strategy implementation, emphasizing adaptability.

Implications for Strategic Management Accounting

• Increased focus on strategic elements such as vision, mission, and corporate objectives.
• Emphasis on sustained competitive advantage through strategic market positioning.
• Greater attention to learning, change, and flexibility within organizations.

Differences Between Traditional and Strategic Management Accounting

• Traditional Management Accounting (MA):
  • Focus: Budgeting, cost determination, historical data.
  • Scope: Narrow and reactive; historical context.
• Strategic Management Accounting (SMA):
  • Focus: Value-driven, strategic cost management, forward-looking.
  • Scope: Broad and proactive; identifying potential opportunities.

Strategic Cost Management Techniques

• Include:
  • Activity-Based Costing (ABC)
  • Life-cycle costing
  • Quality costing
  • Target costing
  • Benchmarking
  • Economic Value Analysis (EVA)
  • Customer profitability analysis

Understanding Value Creation in Management Accounting

• Cost Management: Involves not just cost reduction but evaluating the costs against value produced (Burns et al., 2013).
• Differentiation between value-adding and non-value adding activities is crucial for operational success.
• Value Chain Perspective: Shifts focus from internal value-adding to value added across the entire value chain, involving all activities in the framework.

Activity-Based Management (ABM)

• Expands on ABC; shifts to management practices focusing on linked activities to add value.
• Key steps include:
  1. Identify activities.
  2. Determine cost drivers.
  3. Create cost pools.
  4. Measure activity consumption.
  5. Assign costs accordingly.
• Aids in decision-making, pricing strategies, and highlighting key value-added activities.

Customer Profitability Analysis (CPA)

• Definition: Analyzes revenues and service costs related to specific customers or groups (CIMA, 2005).
• Focus on identifying valuable customers based on revenue streams.
• Implementation involves:
  • Identifying customer groups and variations in service costs.
  • Along with applying ABC to assess costs effectively.

Shortcomings of CPA

• Challenges in data capturing, calculations, and dynamic customer value.
• The importance of ongoing evaluation of customer lifetime value (CLV).

Conclusion and Future Directions

• Ongoing exploration of SCM will continue in subsequent lectures.
• Techniques discussed emphasize strategic decision-making and competitive advantage based on value-adding activities.
• Importance of understanding both core and non-core activities along with customer profitability for overall value creation.