STRATEGIC MANAGEMENT ACCOUNTING Study Guide Questions and Answers 2022

The not-for-profit sector often provides services for less than they cost. Funding to provide these services is often difficult to obtain and can come from the government, grants, donations or membership subscriptions. It is essential that these organisations demonstrate accountability for resources employed and the successful attainment of objectives for their operations to remain sustainable in the long term. Strategic management accounting supports this through developing effective performance measures, as well as detailed accounting of resource allocation, consumption and outcomes. The public sector has a responsibility to provide services and be accountable to citizens (taxpayers). This requires the allocation of resources (billions of dollars annually for the public sector and hundreds of thousands of employees), which need to be measured, controlled and allocated. Both cost and effectiveness must be considered, and it is essential that detailed performance measurement systems are in place to ensure plans are implemented successfully. The information required to support strategic management and operational processes is similar across most sectors. Examples of this include the traditional tasks of implementing and monitoring internal controls, as well as working capital management (e.g. cash flows, receivables, payables). These are essential in any organisation to enable both accountability and effective performance. The public and not-for-profit sectors often have a broader role as a result of their service objectives, which are often difficult to quantify in financial terms. For management accountants, this requires an even greater level of effort to effectively combine non-financial information and performance measures. Strategic management accounting is much more than just product costing and overhead allocation. For organisations to be successful (i.e. meet their goals and objectives), they require resources, strategies, action and control. Strategic management accounting provides useful information in each of these areas to enable organisations to achieve their goals and objectives. Even though they are not focused on making profits, the public sector and not-for-profit sectors must still work hard to achieve their strategic outcomes with the resources they have available. This requires financial discipline and clever and sound decision-making. Services also need to be costed to ensure resources are being allocated and used appropriately. Often, it is more difficult to cost services because they are intangible compared to physical products made from combinations of raw materials. 2 | STRATEGIC MANAGEMENT ACCOUNTING Question 1.2 Identify three competitor-related issues that an organisation faces as a result of changing foreign currency levels. There is a wide range of competitor-related issues to consider as a result of changing foreign currency levels. This answer provides some examples based on a scenario where the local currency becomes stronger. 1. An organisation will be able to purchase imported raw materials, or manufacturing parts at a lower cost, because its currency is able to purchase more foreign currency than before. Having lower costs may enable the organisation to pass on price cuts that solely domestic competitors might not be able to match. If the price cuts are not passed on to customers, then profits will increase. 2. If an organisation exports products or services, the price for foreign-based buyers will be higher than it was previously. This may make prices higher relative to foreign-based competitors, which may make it difficult to remain competitive. 3. Some organisations believe they are not affected by changes in currency rates because they do not import or export their products or services. This is not always correct, because even in this situation problems may arise. Costs or prices may not change, but the local prices of foreign competitors’ imported products will be lower than they were previously. This might also encourage new foreign competitors to enter the marketplace. The opposite is typically true if the local currency becomes weaker. Note that other issues may also exist. STUDY GUIDE QUESTIONS AND ANSWERS | 3 Question 1.3 Consider your organisation or one that you are familiar with and list how this organisation has been affected by globalisation. The answer to this question will depend on the organisation chosen. To provide a simple example of the impact of globalisation, imagine a manufacturer of packaged soup noodles, with a good standing in its national market. Perhaps growth has now slowed because the local market is becoming full of low-priced competitors. Meanwhile, its customers are becoming attracted to new imported brands of soup noodles from another country. Restrictions on trade and transport costs are no longer an impediment, as both road and air freight have improved considerably. In addition, just as the company’s customers are becoming interested in foreign brands, the resistance of overseas customers to the company’s brand of soup noodles is likely to be replaced with receptiveness, as television and online advertising conveys the brand’s distinctive qualities. People in neighbouring countries may have more disposable income to try out new products and are developing the curiosity to do this. As international competition is consolidating in the region, the choice is to join this regional competition or remain a smaller domestic brand facing erosion of local market share by overseas competitors. 4 | STRATEGIC MANAGEMENT ACCOUNTING Question 1.4 Discuss the impact that technological developments have had on management accounting. Some examples of changes to management accounting as a result of technological developments include the following: • Capital intensive. Investment in technology often requires significant amounts of cash. As a result, accurate cash flow planning and management is essential to ensure stability. • Shorter product life cycles. Products exist for a much shorter period than in the past, as they are superseded by technological developments. At the same time, greater investments in technology are required to keep up with the competition and ensure that returns on investment are recouped in the shortest time possible. Appropriate pricing, product characteristics and life cycle costing are essential to ensure an appropriate return. • Automated sales, production and farming methods. Technologies are reducing the amount of manual labour required, which changes the nature of costs from variable to fixed. This is because labour is usually a variable cost that is linked to sales volume or production levels. Automating a process by implementing new technology (e.g. self-scanning of shopping by customers in supermarkets) or purchasing a large piece of machinery at a fixed price and removing the manual labour element shifts a greater proportion of a business’s costs to fixed costs. It also changes when costs are committed to and incurred very early in the development stages as opposed to during production. Project estimations and evaluations must be more accurate, and effective allocation of overhead is essential. • Information. Vast amounts of information may now be stored, tracked, analysed and communicated across multiple locations in a short time. Management accountants have had to give up their role as information gatekeepers and transfer the power to access this information to other employees throughout the organisation. STUDY GUIDE QUESTIONS AND ANSWERS | 5 Question 1.5 List three advantages and three disadvantages of outsourcing business operations. Possible advantages of outsourcing business operations include the following: 1. risks may be shared with, or transferred to, another organisation; 2. using outside specialists may be more efficient and more cost-effective; and 3. managers no longer have to spend time directly managing the parts of the organisation that have been outsourced—this will give them more time to focus on generating value in the areas where they are most competent and comfortable. Possible disadvantages of outsourcing business operations include the following: 1. anticipated cost savings are often not realised—this can occur because of the extra time and cost required to manage the outsourcing relationship and because of inaccurate estimates; 2. the organisation that the operations have been outsourced to may not be able to provide an acceptable level of service or performance; and 3. the organisation may lose core business knowledge, intellectual capital or property or control of its value-generating activitie