Management Accounting Tools for

Organizational Sustainability
Dr. MdSalimUddin
FCA, FCMA, MBA,CPFA(UK),CIFRS(UK),PhD

Professor
Department of Accounting
University of Chittagong, Chittagong, Bangladesh
and
Director, Rupali Bank Ltd
Email: salimtahia@yahoo.com
October, 2017
Management Accounting Tools for Organizational
Sustainability

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 Dr. MdSalimUddin
FCA, FCMA, MBA,CPFA(UK),CIFRS(UK),PhD

Professor
Department of Accounting
University of Chittagong, Chittagong, Bangladesh
and
Director, Rupali Bank Ltd
Email: salimtahia@yahoo.com

Organisation of the Paper

01. Introduction
02. Brief Review of Management Accounting Practice
03. Most Innovative Management Accounting Practices
Total Quality Management (TQM)
Just-In-Time (JIT)
Theory of Constraints
Lean Production and the Lean Enterprise
04. What is Organizational Sustainability?
05. Tools and Techniques of Management Accounting: Nature and Types
Comprehensive MA approaches
Management Accounting Techniques
Management processes
06. Brief Review of Selected Management Accounting Tools and Techniques
A. Governance and risk management
B. Strategic planning and execution
C. Performance management and measurement
D. Planning and forecasting
E. Product and service delivery
F. Value recognition
07. Some Empirical Results on the Use of Management Accounting Tools
08. Conclusion
References and Appendices

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 Management Accounting Tools for Organizational
Sustainability
Dr. MdSalimUddin
FCA, FCMA, MBA,CPFA(UK),CIFRS(UK),PhD

Professor
Department of Accounting
University of Chittagong, Chittagong, Bangladesh
and
Director, Rupali Bank Ltd

01. Introduction
As todays business environment becomes increasingly competitive, business organizations are
becoming more aggressive and dynamic in identifying strategies that will ensure profitable
existence. Competition may be attributed to business innovations, advancement in technology
and the changing demand of customers. Competition amongst business organizations may
compel the management to develop business techniques and strategies that would guide an
organization towards the maximization of profits. This may be achieved through increased sales
and reduced cost of production. The optimization of profits and minimization of costs may
enable an organization to create a competitive advantage in its industry. Certain management
accounting practices provide strategies that can influence a large number of customers to have a
lasting preference for a companys products. Thompson, Strickland and Gamble (2009) are of
the view that the adoption of management accounting techniques may provide an organization
with a sustainable competitive advantage over its rivals and ensure the sustainability.
Kiesler and Sproull, (1982) contend that management accounting skills are actively applied in
the business environment where both market intelligence is sought and evaluated, and strategic
decisions are made and competitive strategies put in place. These are factors which Ittner and
Larcker (2002) argue that they enable an organization to gain an advantage in the ever
demanding competitive business environment where innovative management accounting
practices need to be employed. The management accountants should therefore be at the forefront
in the search and development of innovative competitive strategies that may enable an

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organization to remain profitable, competitive and sustainable. These measures are particularly
very important for organizational sustainability where efficiency and cost effectiveness may be
used as a competitive tool for long term growth and profitability.In the 1980s management
accounting was criticisedin many literatures and forum for becoming too internallyfocused on
operational issues and was providing little help to managers makingstrategic decisions.
The main objective of this paper is to discuss the tools and techniques of the management
accounting for organizational sustainability. Toachieve this, concept of management accounting
practice, most innovative management accounting practice, concept of organizational
sustainability, selected categories and empirical evidence of management accounting tools and
techniques have been reviewed.

02.Brief Review of Management Accounting Practice

Organizations of different kinds: industrial, service , or commercial currently exercise of their
activities in an environment characterized by complex and constantly changing, where this
organizations became facing variable and complex environmental conditions, which required
from these organizations to use all the necessary means and tools to be able to survive and
maintain its market share and achieve success. Management accounting practice helps an
organization to survive in the competitive, ever-changing world, because it provides an important
competitive advantage for an organization that guides managerial action, motivates behaviors,
supports and creates the cultural values necessary to achieve an organizations strategic
objectives.
Ittner&Larcker (2002, p.788) defined management accounting practices as a variety of methods
specially considered for manufacturing businesses so as to support the organisations
infrastructure and management accounting processes. Management accounting practices can
include budgeting, performance evaluation, information for decision-making; and strategic
analyses are some of the methods used among many others. Ittner&Larcker (2001) has also
argued that due to the development of these new methods, it has changed the basic principles of
management accounting to a more superior one that adds value to various practices. The
literature has also indicated that some practices such as absorption costing and marginal costing
have not been highly favoured by most manufacturing businesses. For example, Dugdale and
Jones (2002) stressed that there is a limitation within these costing systems, since they do not

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provide an accurate method of recording costs to be exact in order to make sound management
decisions.
The reflections of strategic approach in management begun in the emergence of many methods
and techniques in cost accounting and management accounting which directed mainly to serve
the goals of the contemporary strategic management of business organizations, where it
developed many accounting methods and techniques in the field of strategic cost management
and strategic management accounting, such as ABC costing, Value chain, Benchmarking, BSC,
etc. which aims to assist modern strategic managements in achieving it functions and objectives
in the strategic-term. The use of these methods and techniques are no longer limited to industrial
organizations but exceeded to all organizations and all kinds and in different sectors, where it
became the adoption of strategic tools and ways one of the main characteristics of the modern
managements of business organizations in the contemporary world of business.

03. Most Innovative Management Accounting Practices

In addition to economic and technological trends, Caplan (2010)identified the following

innovations in the fields of strategy and operations management which influenced management
accounting systems and practices as well as regenerate some innovative management accounting
tools and techniques over the past several decades:

Total Quality Management (TQM): Quality programs go by several names, including TQM,
zero defect programs, and six sigma programs. The focus on quality has had a significant impact
on many organizations in all sectors of the economy, beginning with the automobile industry and
some other industries in the manufacturing sector of the economy about forty years ago.
Sophisticated quality programs are found today in many areas of government, education and
other not-for-profit organizations as well as in for-profit businesses.
The impetus for TQM programs is the assessment that the cost of defects is greater than the cost
of implementing the TQM program. Advocates of TQM claim that some costs of defects have
been underestimated historically, particularly the loss of customer goodwill and future sales
when a defective unit is sold. Some advocates of quality programs believe that the most cost-
effective approach to quality is to eliminate all defects at the point at which they occur. If
successful, these zero defect programs would not only result in higher levels of customer

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satisfaction, but would also eliminate costs associated with more conventional quality control
procedures, such as inspection costs that occur at the end of the production line, the cost of
reworking units identified as defective, and costs associated with processing customer returns.
The focus is on preventive controls to prevent the defect from occurring in the first place, as
opposed to detective controls to identify and correct the defect after it has occurred.
Just-In-Time (JIT): During the last two decades of the 20th century, many companies
implemented just-in-time programs designed to minimize the amount of inventory on hand.
These companies identified significant benefits from reducing all types of inventoriesraw
materials, work-in-process, and finished goodsto the lowest possible levels. These benefits
consist principally of reduced inventory holding costs (such as financing and warehousing costs),
reduced losses due to inventory obsolescence, and more effective quality control.
The challenge in a JIT environment is to avoid stock-outs. To meet this challenge, some
companies have found ways to decrease production lead times. Shorter production schedules
result in less work-in-process inventory, and also allows companies to maintain lower levels of
finished goods inventory while still maintaining high levels of customer satisfaction.
Early in the 21st century, acts of terrorism (such as the destruction of the World Trade Center in
New York City) and natural disasters (such as Hurricane Katrina) prompted some companies to
rethink the practice of maintaining extremely low levels of inventories. These companies are
concerned that future incidents could result in the disruption of inventory pipelines, particularly
for imported materials. Consequently, the advantage of maintaining safety stocks of inventory is
receiving renewed interest.
Theory of Constraints: The theory of constraints is an operations management technique that
decreases inventory levels and increase throughput in a manufacturing setting. EliyahuGoldratt, a
business consultant, is largely responsible for the development of the theory of constraints.
Goldratt popularized his ideas in a business novel that he coauthored with Jeff Cox called The
Goal: A Process of Ongoing Improvement. The basis of the theory is to identify bottlenecks in
the production process, and to focus all efforts on increasing the capacity of the bottleneck
operations. Typically, bottleneck operations are easy to identify, because large amounts of
inventory back up at these operations waiting to be processed. The theory of constraints also
advocates setting the speed of the entire production process at the speed of the bottleneck
operation, because otherwise excess work-in-process will inevitably build up. This pull system

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should replace traditional push systems, where every operation processes inventory at its
maximum capacity.
Like most new ideas, the theory of constraints has a basis in earlier techniques and ideas. As
early as the 1970s or 1980s, engineers and production managers used a tool called critical path
analysis to predict the time required to accomplish major new objectives, such as introducing a
new product or bringing a new facility on line. Critical path analysis involved identifying the
sequence in which various steps were required, and identifying at what point, and for how long,
the entire project would depend on the completion of any particular step.
Lean Production and the Lean Enterprise: In recent years, the term lean has been adopted
by some organizations to describe the organizations comprehensive effort to apply state-of-the-
art management practices to improve quality and customer satisfaction, reduce costs and
production lead-times, and increase value-creation. Lean is an umbrella term that includes such
techniques as JIT and TQM as component elements. Some accountants credit Toyota as the
originator of lean production. The term lean was originally applied to manufacturing settings,
such as in the phrases lean production or lean manufacturing. But the term is now used more
broadly, and sometimes describes lean initiatives in the distribution and support functions of a
manufacturing company, lean initiatives in service-sector companies, and even initiatives in
other types of organizations such as governmental entities. The term lean accounting has been
coined to describe accounting systems that either support lean production, or that are,
themselves, lean.

04. What is Organizational Sustainability?

Colbert and Kurucz (2007) identify the colloquial definition of sustainability as being to keep
the business going, whilst another frequently used term in this context refers to the future
proofing of organizations. Boudreau and Ramstad (2005), refer to achieving success today
without compromising the needs of the future.The Charter of the Sustainability Committee
created by the Board of Directors at Ford focuses on sustainable growth, which it defines as the
ability to meet the needs of present customers while taking into account the needs of future
generations (Ford, 2012).
Sustainable growth encompasses a business model that creates value consistent with the long-
term preservation and enhancement of financial, environmental and social capital. Organizational

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sustainability means as an rganisation's ability to achieve its goals and increase long-term
stakeholder value by integrating economic, environmental and social opportunities into its
strategies NYC (2011).
According to the Chartered Institute of Personnel and Development (CIPD, 2012), the essence of
sustainability in an organizational context is the principle of enhancing the societal,
environmental and economic systems within which a business operates. This introduces the
concept of a three-way focus for organizations striving for sustainability. This is reflected also by
Colbert and Kurucz (2007), who state that sustainability implies a simultaneous focus on
economic, social, and environmental performance. This notion may of course relate to the
growth of so called Triple bottom line accounting, where tools, techniques, methods, approach
and strategies of management accounting are essential to materialize the objective of sustainable
development.

05. Tools and Techniques of Management Accounting: Nature and Types

Since then several attempts have been made to identifya set of tools and techniques that can be
classified under the banner of Management Accounting. However, there has not been little
agreement within the academic and professional literatureon the associated techniques, nor is the
term widelyused by practising accountants (Nixon et al., 2011). In such a context, an attempt has
been made to review selected literatures for identifying the tools/techniques of management
accounting in practice.
Management accounting, or managerial accounting, is the use of accounting techniques for
business analysis to support strategy formation, business execution, decision making and risk
management. It includes both analysis of financial and non-financial measures. A management
accounting tool is a framework, approach, model, technique orprocess that enables management
accountants to: improve performance;facilitate decision-making; support strategic goals and
objectives; andotherwise add value.There is a huge array of practices and tools available, all
promisingto help define and manage the organisations strategy, resources, customersand costs;
and improve overall performance. In this context, managerscan often struggle to evaluate and
identify the most suitable tools tosupport their organisation and to implement and manage them
effectively.

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There are almost an infinite number of tools, methods, techniques, approaches, and other
concepts floating around; and managementaccountants must first ownup to their inability to
canvas the MA landscape exhaustively. In such a context, Clinton and Merwe(2006)segment the
Management Accounting-MA landscape into three categories such as: (1) comprehensive MA
approaches, (2) MA techniques, and (3) management processes.
Comprehensive MA approaches: Comprehensive MAapproaches attempt to offer enterprise-
wide capabilities in each of three areas:
Providing a monetary reflection of enterprise operations;
Accommodating the management processes of planning, control, and adaptive and
corrective actions with the aim of overallenterprise optimization; and
Contributing to key organizational processes such as performance measurement and the
reward system.
Five entries make up this category. Traditional approaches include standard costing and normal
costing. Reasonably new or advancedapproaches include ABC/M, GPK, and Resource
Consumption Accounting (RCA).
Comprehensive MA approaches also serve as the foundation or the enabling platform for a
number of MA techniques and managementprocesses.
Management Accounting Techniques: MA Technique addresses one, or at the most two, of the
three areas of MA approaches explained above and not necessarily comprehensively. Techniques
are predominantly MA-related but they donot offer the full spectrum of information of MA
approaches. Examples include lean, theory of constraints (TOC), and just-in-time (JIT). MA
techniques contribute to specific but limited purposes. Alternatively, they may address a
weakness of a less than stellar MAapproach such as a lack of integrated budgeting, which
attempts to facilitate the management process of planning. However,techniques cannot provide
the benefits of integration. Management and management accountants should therefore examine
thosespecific company goals that they cannot achieve without additional MA techniques.
Managers should be careful about being talkedinto adopting MA techniques.
Management processes:The broad management processes category includes methods that are
most confined to MA application. Examples of management processes include capital budgeting,
CVP analysis, incentive compensation, transfer pricing, and benchmarking. Some MA
approaches include beneficial tools that need not be replicated. The benefits of using tools that

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are not integrated into the MA approach must be weighed against the cost of bolting it on and
compromising important features of integration.
It should be noted that this categorization ignore the term MA system which is viewed as the
specific combination ofan approach, relevant techniques, and management processes required to
effectively manage a particular enterprise.
Spacey, John (2015)considered the following as fundamental techniques of management
accounting:
Table 5.1 Techniques of Management Accounting
Activity Based Costing Statistical Model
Cost Benefit Analysis Statistical Population
Data Dredging Probability Distribution
Data Mining Throughput Accounting
Demand Forecasting Theory Of Constraints
Forecasting Debottlenecking
Lifecycle Cost Analysis Bottleneck
Net Present Value Total Cost Of Ownership
Time Value Of Money Cost To Company
Rate Of Return Variance Analysis
Statistical Analysis Regression Analysis
Source: Spacey, John (2015)

Money Matters (2017) classified the management accounting tools used into the following
groups:
Table 5.2 Types of Management Accounting Tools
Types of Management Accounting Tools
1. Based on Financial Accounting Information
Analysis of Financial Statements through Ratio Analysis.
Analysis of Financial Statements through comparative
statements, trend, graph and diagram.
Fund flow and cash flow analysis.
Return on capital employed techniques.

2. Based on Cost Accounting Information

Marginal costing (including cost volume profit analysis).
Direct or incremental Costing and differential costing.
Standard Costing.
Analysis of Cost Variances.

3. Based on Mathematics
Operations Research.
Linear Programming.
Network analysis.

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 Queing theory and Games Theory.
Simulation Theory.

4. Based on Future Information

Budget and Budgeting.
Budgetary control: Analysis of Budget Variance / Revenue
Variance.
Business Forecasting.
Project Appraisal or Evaluation.

5. Miscellaneous Tools
Managerial Reporting.
Integrated Auditing.
Financial Planning.
Revaluation Accounting.
Decision making Accounting.
Management Information System.

Source: Money Matters (2017)

Gichaaga (2014) studied the effects of Management Accounting Practices on Financial

Performance of Manufacturing Companies in Kenya where the following management
accounting tools have been used to examine the practice.

Table 5.3: Use of Management Accounting Practices

Costing System
Separation of variable cost, incremental costs & fixed costs
Use of plant- wide overhead rate
Department or multiple plant-wide overhead rates
Activity- based costing (ABC)
Target costs
The cost of quality
Regression and /or learning curve techniques
Budgeting
Budgeting for planning
Budgeting for controlling costs
Activity- based budgeting
Budgeting with what if analysis
Flexible budgeting
Zero-based budgeting
Budgeting for long-term (strategic) plans
Performance evaluation

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Financial measures
Non-financial measure(s) related to customers
Non-financial measures(s) related to operation and
innovation
Non- financial measure(s) related to employees
Economic value added or residual income
Benchmarks
Information for decision making
Cost-volume-profit analysis (break-even analysis) for major
products
Product profitability analysis
Customer profitability analysis
Stock control models
Evaluation of major capital investment based on discounted
cash flow method(s)
Evaluation of major capital investments based on payback
period and/ or accounting rate of return
For the evaluation of major capital investments, non-
financial aspects are documented and reported
Evaluating the risk of major capital investment projects by
using profitability analysis or computer simulation
Performing sensitivity what if analysis when evaluating
major capital investments projects
Calculation and use of cost of capital in discounting cash
flow for major capital investment evaluation
Strategic analysis
Long-range forecasting
Shareholder value
Industry analysis
Analysis of competitive position
Value chain analysis
Product life cycle analysis
The possibilities of integration with suppliers and/or
customers value chains
Analysis of competitors strengths and weaknesses

(Source:Gichaaga 2014)

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06. Brief Review of Selected Management Accounting Tools and Techniques
An attempt has been takenin this section to review the selected most important tools and
techniques of management accounting in order to understand the basic concept and features of
the management accounting tools in used. In this regard, the Chartered Global Management
Accountant (CGMA,2013) conducted a diagnostics study on the management accounting tools
and identify the most important tools from this study. The study confirm that there is a huge
array of practices and tools available, all promisingto help define and manage the organisations
strategy, resources, customersand costs; and improve overall performance. In this context,
managerscan often struggle to evaluate and identify the most suitable tools tosupport their
organisation and to implement and manage them effectively.CGMA (2013) classify the
management accounting tools into the following groups and discuss these tools in brief:

Table:6.1 Category of Management Accounting Tools and Techniques

Category of Management Accounting Tools and Techniques
Governance and risk management
CIMA Strategic Scorecard
Enterprise Risk Management (ERM)
CGMA Ethical Management Reflection Checklist
Risk Heat Maps
Strategic planning and execution
Strategic Planning Tools (including mission/vision
statements, goals and objectives, SWOT, PEST)
Balanced Scorecard, including operational
dashboards
Strategy Mapping
Porters Five Forces of Competitive Position Analysis
Performance management and measurement
KPIs financial and non-financial
Benchmarking
The Performance Prism
Planning and forecasting
Rolling Plans and Forecasts
Activity-Based Budgeting (ABB)
Scenario and Contingency Planning
Cash Flow Modelling
Product and service delivery
Activity based costing (ABC)
Lean
Quality Management Tools Including
TQM, Six Sigma, Cost of Quality and EFQM
Value recognition
Value Chain Analysis
Customer Relationship Management (CRM)
(Source: CGMA,2013)

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A brief discussion about the basic concepts of the above tools has been made in the following
paras:

A: Governance and Risk Management

A1. The CIMA Strategic Scorecard

The CIMA Strategic Scorecard was developed in 2004. It was the result of research by CIMA, in
collaboration with the Professional Accountants in Business Committee (PAIB) of the
International Federation of Accountants (IFAC), into major corporate failures at the time such as
Enron and WorldCom. An important finding was that company boards had failed to oversee
strategy and risk effectively. The global financial crisis of 200809 reinforced these conclusions.
The scorecard aims to help boards of any organisation engage effectively in the strategic process.
It recognises that boards struggle to engage in strategy because of: lack of time and crowded
agendas; information overload; lack of robust, board level processes for dealing with strategy;
and greater complexity of business.

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 Figure:6.1The CIMA Strategic Scorecard

(Source: CIMA Executive CPD Academy)

A2. Enterprise Risk Management (ERM)
Enterprise risk management (ERM) is the process of identifying and addressing methodically the
potential events that represent risks to the achievement of strategic objectives, or to opportunities
to gain competitive advantage.Risk management is an essential element of the strategic
management of any organisation and should be embedded in the ongoing activities of the
business. Two widely referenced frameworks include the Committee of Sponsoring
Organizations of the Treadway Commission COSO ERM Integrated Framework; and the
guidance developed by Airmic and the Institute of Risk Management IRM A structured
approach to ERM and the requirements of ISO 31000.

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The fundamental elements of ERM are the assessment of significant risks and the
implementation of suitable risk responses. Risk responses include: acceptance or tolerance of a
risk; avoidance or termination of a risk; risk transfer or sharing via insurance, a joint venture or
other arrangement; and reduction or mitigation of risk via internal control procedures or other
risk prevention activities.
Other important ERM concepts include the risk philosophy or risk strategy, risk culture and risk
appetite. These are expressions of the attitude to risk in the organisation, and of the amount of
risk that the organisation is willing to take. These are important elements of governance
responsibility.Management responsibilities include the risk architecture or infrastructure,
documentation of procedures or risk management protocols, training, monitoring and reporting
on risks and risk management activities.
Figure6.2 :Enterprise Risk Management (ERM)

(Source: How to Communicate Risks Using Heat Maps, CGMA)

A3.Risk Heat Map

A risk heat map is a tool used to present the results of a risk assessment process visually and in a
meaningful and concise way.Whether conducted as part of a broad-based enterprise risk
management process or more narrowly focused internal control process, risk assessment is a

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critical step in risk management. It involves evaluating the likelihood and potential impact of
identified risks.Heat maps are a way of representing the resulting qualitative and quantitative
evaluations of the probability of risk occurrence and the impact on the organisation in the event
that a particular risk is experienced.
The development of an effective heat map has several critical elements a common
understanding of the risk appetite of the company, the level of impact that would be material to
the company, and a common language for assigning probabilities and potential impacts.The 5x5
heat map diagram below provides an illustration of how organisations can map probability
ranges to common qualitative characterisations of risk event likelihood, and a ranking scheme for
potential impacts. They can also rank impacts on the basis of what is material in financial terms,
or in relation to the achievement of strategic objectives. In this example, risks are prioritised
using a simple multiplication formula.Organisations generally map risks on a heat map using a
residual risk basis that considers the extent to which risks are mitigated or reduced by internal
controls or other risk response strategies.
Figure: 6.3Risk Heat Map

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(Source: Risk assessment for mid-sized companies: tools for developing a tailored approach to
risk management. Scott McKay, AICPA, 2011)

A4. Ethical Reflection Checklist

This checklist is designed to provide organisations and individuals with an overview of how well
ethical practices are embedded in the business. With the importance of ethics and non-financial
reporting rising on the global agenda, organisations not only need to be managing their business
responsibly, but increasingly, they are being required to demonstrate it too.Questions cover areas
such as ethical statements and codes of conduct, training, collection of ethical data and reporting
of ethical issues, and support when faced with ethical dilemmas.

B.Strategic Planning and Execution

B5. Strategic Planning Tools
Strategic planning is the process of developing the strategy or direction and action plan to
achieve the goals of an organisation.Key elements of any strategic planning process are (i)
developing an understanding of vision, mission and values(ii)a current-state assessment of the
most salient internal and external factors affecting the organisation that will contribute to an
informed selection from strategic alternatives.The vision, mission and values of the organisation
are foundational elements of the strategic planning process. Well-defined vision and mission
statements provide direction and focus for the organisation. The values of an organisation
provide the context for decisions.
Values are the shared set of beliefs that determine the culture of an organisation.
Vision statements are future oriented and describe the desired or ideal state of the organisation
or enterprise. They answer the question where do we want to be?
Mission statements describe the fundamental purpose of the organisation, why it exists and
what it is trying to do to achieve its vision. Mission statements answer the question what do we
do?
Common tools for performing an assessment of the internal and external factors impacting on
strategic decisions are SWOT, and PEST or PESTEL analysis.
SWOT (strength, weaknesses, opportunities, threats) analysis is a method for analysing the
internal strengths and weaknesses, and the external opportunities and threats facing the
enterprise.Strengths include a companys capabilities and resources that enable it to provide

18
value and generate competitive advantage.Weaknesses are issues that limit a companys ability
to exploit its strengths.Opportunities provide an organisation with the chance to improve its
competitive position.Threats may come from competitors, individuals, organisations, regulatory
bodies or other factors in the greater business environment.
PEST (political, economic, social, technology) analysis is a macro framework for expanding a
SWOT analysis to include political and regulatory issues, economic factors, social norms and
attitudes as well as demographics, and technological developments.
Some organisations expand the PEST analysis to include legal and environmental concerns
(PESTEL).
Figure: 6.4 SWOT analysis process

Source: Improving Finance Function Effectiveness Tool. CGMA

Strategic planning enables an organisation to set priorities, allocate resources and align
employees with its mission and vision. Effective mission and vision statements reduce ambiguity
and provide clarity and direction. Comprehensive SWOT and PEST analyses help an
organisation to understand how to exploit its strengths, neutralise its weaknesses and take
advantage of its opportunities.
B6. Balanced Scorecard
The Balanced Scorecard concept, popularised by Robert S Kaplan and David P Norton, is a
performance management tool that encompasses the financial measures of an organisation and
key non-financial measures relating to customers or clients, internal processes, and
organisational learning and growth needs. It places these into a concise scorecard that can be
used to monitor performance.Early implementations of the Balanced Scorecard tended to focus
on including a balance of measures in the four domains or perspectives rather than on execution
of strategy, but over time it has become a widely used strategic management tool. The Balanced

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Scorecard process attempts to identify important links between financial performance and the
underlying customer, internal processes and organisational metrics. This creates a mechanism for
translating the strategic vision into concrete actions necessary to achieve success.
This characteristic of the Balanced Scorecard places strategy at the core of management. When
implemented properly, it can be used to align measures, actions and rewards to create a proper
focus on the execution of strategic initiatives and achievement of strategic objectives, rather than
a sole focus on the annual budget.
The widespread adoption of the Balanced Scorecard is due in part to its flexibility. Many
companies have implemented their own variations to suit their strategic purposes. The Tesco
Steering Wheel, for example, includes five perspectives, capturing their commitment to the
community in addition to their financial, customer, operations and people aspects.
The Balanced Scorecard has also been successfully adapted for use by not-for-profit and public
sector organisations. While the top line financial objectives of for-profit organisations are
replaced by mission-related objectives, the process of identifying relevant stakeholder, internal
process and resource measures serves much the same purpose.
Figure: 6.5 The Balanced Scorecard

(Source:Adapted from Robert S Kaplan and David P Norton, Using the Balanced Scorecard as a
strategic management system, Harvard Business Review,1996)

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The Balance Scorecard provides a means to clarify, articulate and communicate strategy. It is a
shorthand way of putting all key measures into a dashboard that can be used to monitor results.
By including non-financial measures, it can be used to show how the non-financial aspects of
performance, such as customer satisfaction, drive financial performance.The Balanced Scorecard
is a useful tool for motivating employees and focusing their attention on factors that are deemed
to be critical to long-term performance rather than simply short-term financial results.
B7. Strategy Mapping
Strategy mapping is a tool created by Balanced Scorecard (BSC) pioneers Robert S Kaplan and
David P Norton. It allows organisations to describe and communicate their strategies. Strategy
maps also serve as an appropriate basis for the development of financial and non-financial
Balanced Scorecard (BSC) measures that can be used to monitor strategy execution and
performance.Strategy maps can be used as a standalone tool to depict an organisations strategy.
However, their real value is when they are used as part of a systematic strategic management
process that aligns organisational and individual targets and initiatives with a defined mission
and desired strategic outcomes. Strategy maps can be created for not-for-profit and public service
entities, as well as for- profit enterprises.
The original formulation of the strategy map is based on the four perspectives of the BSC
financial, customer, internal and learning and growth. The financial and customer perspectives
the outcome perspectives are developed in response to the basic question What do we want to
accomplish? The internal and learning and growth perspectives the input perspectives depict
How do we plan to accomplish it?
Figure: 6.6 Example of Strategy Mapping

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 (Source: CGMA Strategy Mapping Tool)

Strategy maps describe how organisations create value by building on strategic themes such as
growth or productivity. They provide a way for companies to tell the story of their strategy
to employees and other corporate stakeholders, thereby increasing engagement in the strategic
process.Strategy maps force organisations to place the onus first on the strategy, then on
measuring implementation, thus removing the problem of numerous, unfocused measures. They
form the appropriate basis for balanced scorecard performance measures, links to appropriate
management and validation techniques, and allocating resources to initiatives and strategies that
support an organisations value propositions and overriding objectives.

B8. Porters Five Forces of Competitive Position Analysis

Porter's Five Forces of Competitive Position Analysis were developed in 1979 by Michael E
Porter of Harvard Business School as a simple framework for assessing and evaluating the
competitive strength and position of a business organisation.This theory is based on the concept
that there are five forces that determine the competitive intensity and attractiveness of a market.
Porters five forces help to identify where power lies in a business situation. This is useful both

22
in understanding the strength of an organisations current competitive position, and the strength
of a position that an organisation may look to move into.
Strategic analysts often use Porters five forces to understand whether new products or services
are potentially profitable. By understanding where power lies, the theory can also be used to
identify areas of strength, to improve weaknesses and to avoid mistakes.
Figure: 6.7 Porters five forces of competitive position analysis:

The five forces are:

1. Supplier power: An assessment of how easy it is for suppliers to drive up prices. This is
driven by the: number of suppliers of each essential input; uniqueness of their product or service;
relative size and strength of the supplier; and cost of switching from one supplier to another.
2. Buyer power: An assessment of how easy it is for buyers to drive prices down. This is driven
by the: number of buyers in the market; importance of each individual buyer to the organisation;
and cost to the buyer of switching from one supplier to another. If a business has just a few
powerful buyers, they are often able to dictate terms.

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3. Competitive rivalry: The main driver is the number and capability of competitors in the
market. Many competitors, offering undifferentiated products and services, will reduce market
attractiveness.
4. Threat of substitution: Where close substitute products exist in a market, it increases the
likelihood of customers switching to alternatives in response to price increases. This reduces
both the power of suppliers and the attractiveness of the market.
5. Threat of new entry: Profitable markets attract new entrants, which erodes profitability.
Unless incumbents have strong and durable barriers to entry, for example, patents, economies of
scale, capital requirements or government policies, then profitability will decline to a competitive
rate.
Arguably, regulation, taxation and trade policies make government a sixth force for many
industries.Five forces analysis helps organisations to understand the factors affecting profitability
in a specific industry, and can help to inform decisions relating to: whether to enter a specific
industry; whether to increase capacity in a specific industry; and developing competitive
strategies.
C. Performance Management and Measurement
C9. KPIs Financial and Non-Financial
A key performance indicator (KPI) is a measure used to reflect organisational success or
progress in relation to a specified goal.The purpose of KPIs is to monitor progress towards
accomplishing the strategic objectives that are typically communicated in a strategy map.KPIs
are typically included in a reporting scorecard or dashboard that enables top management, the
board or other stakeholders to focus on the metrics deemed most critical to the success of an
organisation.
Financial KPIs are generally based on income statement or balance sheet components, and may
also report changes in sales growth (by product families, channel, customer segments) or in
expense categories. Non-financial KPIs are other measures used to assess the activities that an
organisation sees as important to the achievement of its strategic objectives. Typical non-
financial KPIs include measures that relate to customer relationships, employees, operations,
quality, cycle-time, and the organisations supply chain or its pipeline. Some prefer to use the
term extra-financial rather than non-financial, suggesting that all measures that contribute to
organisational success are ultimately financial. In addition to financial and non-financial, other

24
common categorisations of performance indicators are quantitative versus qualitative; leading or
lagging; near-term or long-term; input, output or process indicators etc.
The critical element in developing KPIs is determining what is important or key to the
organisation. Operational measures are also important they can be termed as just performance
indicators, or PIs, to distinguish them from KPIs.
Developing KPIs should be part of an overall strategic management process that connects the
overall mission, vision and strategy of an organisation, and its short- and long-term goals, to
specific strategic business objectives and their supporting projects or initiatives. Understanding
the organisations value drivers and the core activities and competencies that underpin its value
proposition is an important first step in this process.
Figure: 6.8 Value creation map template

(Source: Marr, B. (2008) Managing and delivering performance, Elsevier Ltd, Oxford)

KPIs can improve strategy execution by aligning business activities and individual actions with
strategic objectives. Well-designed KPIs can provide a means for management and the board to
monitor core activities of the business rather than simply outcome measures of financial success.

25
Integration of financial and non-financial KPIs can contribute to a greater focus on long-term
success rather than short-term financial performance.
C10. Benchmarking
CIMA Official Terminology defines benchmarking as the 'establishment, through data gathering,
of targets and comparators that permit relative levels of performance (and particularly areas of
underperformance) to be identified. Adoption of identified best practices should improve
performance.
Benchmarking exercises may involve either the whole organisation, or a part of it, but always
require the involvement of more than one party or partner. They may be classified as
either results-based, which compares performance metrics, or process-based, which looks behind
the metrics to analyse the processes that generate them.
Several different types of benchmarking can be used:
Internal Benchmarking compares one operating unit or function with another within the
same industry.
Functional Benchmarking (also known as operational or generic benchmarking)
compares internal functions with those of the best external practitioners, regardless of
their industry.
Competitive Benchmarking gathers information about direct competitors through
techniques such as reverse engineering.
Strategic Benchmarking is a type of competitive benchmarking aimed specifically at
strategic action and organisational change.
The development of benchmarking is most closely associated with Xerox, which introduced the
practice in 1983.
Benchmarking programmes comprise four steps:
Identification and/or calibration of performance gap
Clarification of the strategic impact of the benchmarked process
Identification and implementation of process improvements or strategic changes
Maintaining stimulus for continuous improvement.
Benchmarking can help organisations to: show that performance targets can be achieved;
accelerate and manage change; and enable process improvement. It can also help them to

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maintain focus on the external environment and generate an understanding of world-class
performance.
C11. The Performance Prism
The Performance Prism (PP) is referred to by its Cranfield University developers as a second
generation scorecard and management framework. The distinguishing characteristic of the
Performance Prism is that it uses as its starting point all of an organisations stakeholders,
including investors, customers and intermediaries, employees, suppliers, regulators and
communities, rather than strategy. According to PP proponents, strategy should follow from
stakeholder analysis. The PP framework also focuses on the reciprocal relationship between the
organisation and its stakeholders, as opposed to just stakeholder needs.
There are five facets to the Performance Prism which lead to key questions for strategy
formulation and measurement design:
Stakeholder Satisfaction: Who are our stakeholders and what do they want and need?
Strategies: What strategies do we need to satisfy these wants and needs?
Processes: What processes do we need to execute these strategies?
Capabilities: What capabilities do we need to operate our processes more effectively and
efficiently?
Stakeholder Contribution: What do we want and need from our stakeholders if we are to
develop and maintain these capabilities?
The Performance Prism is a management framework that reflects the complexities of
organisations and the multiplicity and reciprocity of stakeholder relationships. The
comprehensive nature and flexibility of the PP contribute to its applicability in a wide range of
organisations.
Figure: 6.9 The Performance Prism

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 (Source: Cranfield School of Management)
The Performance Prism allows organisations to develop strategies, business processes and
measures geared to the specific needs of all important stakeholder groups. By taking a broad
stakeholder perspective that includes regulators and business communities, the PP enables an
organisation to more directly address the risks and opportunities in its business environment.
Using the PP to develop measures for each relevant stakeholder facilitates the communication
and implementation of strategy.

D. Planning and Forecasting

D12.Rolling Plans and Forecasts
CIMA Official Terminology defines these as plans or budgets that are continuously updated by
adding a further accounting period when the earliest accounting period has expired. A rolling
forecast is continually updated, whereby each time actual results are reported, a further forecast
period is added and intermediate period forecasts are updated.Budgeting and forecasting can be
viewed as part of the planning process, which looks into the future beyond the immediate
timeframe. Planning is an attempt to shape the organisations future, while forecasting and

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budgeting aim to predict the value created and resources used in a specific period. Adopting a
rolling approach helps to inform a more realistic and timely planning process.
This approach reduces uncertainty in planning and forecasting. It allows flexibility where long-
term costs and/or activities cannot be forecast accurately.The rolling approach encourages a
regular reassessment of plans at all levels within the organisation. It also allows the business to
respond quickly to current events.
D13. Activity-Based Budgeting (ABB)
CIMA Official Terminology describes activity-based budgeting (ABB) as a method of budgeting
based on an activity framework, using cost driver data in the budget setting and variance
feedback processes.The most basic form of ABB uses cost drivers (identified through activity-
based costing, ABC) to help derive budgets. As its name suggests, ABB focuses on activities
rather than functions.In simple terms, ABB follows three stages:
Identify activities and their cost drivers
Forecast the number of units of cost driver for the required activity level
Calculate the cost driver rate (cost per unit of activity).
Like activity-based costing, activity-based budgeting draws attention to overhead activities and
their associated costs. It emphasises that activity costs may be controllable if activity volume is
controlled. Where traditional budgeting tends to focus on input costs, ABB takes an outputs-
based approach, recognising that activities drive costs. ABB views the business as a collection of
activities, a perspective that links well with organisational strategy.
D14.Scenario and Contingency Planning
Scenario planning provides a structured method for managers to evaluate alternative views of
what may happen in the future as an aid to strategic, operational, and financial planning.
Scenario planning focuses largely on answering three questions:
What could happen?
What would be the impact on our strategies, plans and budgets?
How should we respond?
Like many planning tools, such as strategic and tactical planning, scenario planning has its
origins in the military. The adoption of scenario planning in the commercial world started in the
oil and gas industry, notably at Royal Dutch Shell in the 1970s when it helped them to prepare

29
for the oil crisis. The use of scenario planning by both businesses and public sector entities has
expanded widely over the ensuing 40 years.
Four broad types of scenario questions include:
Political: How will the expansion of the European Union change the political power of
governments within the union?
Economic: How will the rapid economic growth of China and India change global markets?
Social: What are the implications of increasing obesity?
Technological: What will be the impact of increasing adoption of smart phones on desktop and
laptop computer usage?
Contingency planning is a risk mitigation process for developing back-up plans in anticipation of
events that might disrupt business as usual. Business continuity planning is an expanded
version of contingency planning that typically encompasses a more comprehensive and extended
response plan for getting back to business as usual.
Common types of scenario planning include:
Single variable sensitivity analysis This is possibly the most common and the logical starting
point for an organisation. Changing one variable at a time while holding others constant may not
necessarily fully reflect complex interdependencies, but sensitivity analysis can be very valuable
in understanding the potential impact of a key variable on business.
Multi-variable narrative-based analysis - This form of analysis takes the form of a plausible
theme that might play out in the economic, competitive, regulatory or social landscape, and
considers the impact of multiple variables and uncertainties occurring jointly.
Initiative-based scenario planning Scenarios that layer various combinations of initiatives on
top of a baseline enable an organisation to understand the incremental impact of growth or cost
containment initiatives and set priorities within the overall strategic goals of the organisation.
Three typical approaches to defining scenarios are:
Along a spectrum of possible outcomes, such as a plan with upside and downside
possibilities
A binary, either/or approach
A matrix of two variables with relatively high degrees of uncertainty that yield four
potential outcomes when plotted in the quadrants of a matrix.
Figure: 6.10 Scenario Plan work approach

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(Source: David AJ Axson. Scenario planning: navigating through today's uncertain
world. Journal of Accountancy. March 2011)

Scenario planning provides improved insight about the choices, opportunities and implications
that uncertainty presents. It brings better quality strategic plans, budgets and forecasts, and it
enables a clearer understanding of the sensitivity of the key drivers of the business and the
potential impact of future events.Scenario planning also provides a foundation for explaining
performance variations by reference back to drivers incorporated into the scenarios. It can be an
early warning system for potential threats and opportunities for the business.
D15. Cash Flow Modeling
Cash is king. Most businesses fail not because they dont make a profit but because they run out
of cash.Cash is the lifeblood of any business. Cash flow modeling is the practice of planning and
forecasting the sources and uses of cash. Its ultimate objective is to provide a framework that
enables the most effective, efficient and economic use of available cash and the maximisation of
free cash flow (the cash generated by operating cash flow less capital expenditure), which is
important as it enables a business to invest in growth-generating options.
Cash flow modeling enables companies to manage solvency more proactively. It improves the
sustainability of the organisation and it improves the understanding of the impact of drivers on
cash flow, leading to better decisions. Modeling facilitates cash driver target setting, and it
provides a basis for enhanced analysis and reporting of cash flow performance against targets as

31
well as earlier indicators of expected future cash flows. Cash flow modeling also improves
understanding of the cash impact of investment decisions, and it improves access to capital, as
capital providers have more confidence.

E. Product and Service Delivery

E16. Activity-Based Costing (ABC)
CIMA Official Terminology describes activity-based costing as an approach to the costing and
monitoring of activities, which involves tracing resource consumption and costing final outputs.
Resources are assigned to activities and activities to cost objects. The latter use cost drivers to
attach activity costs to outputs.
ABC was first defined in the late 1980s by Kaplan and Bruns. It can be considered as the modern
alternative to absorption costing, allowing managers to better understand product and customer
net profitability. This provides the business with better information to make value-based and
therefore more effective decisions.
ABC focuses attention on cost drivers, the activities that cause costs to increase. Traditional
absorption costing tends to focus on volume-related drivers, such as labour hours, while activity-
based costing also uses transaction-based drivers, such as number of orders received. In this way,
long-term variable overheads, traditionally considered fixed costs, can be traced to products.
Figure: 6.11 The activity-based costing process:

Activity-based costing provides a more accurate method of product/service costing, leading to

more accurate pricing decisions. It increases understanding of overheads and cost drivers; and
makes costly and non-value adding activities more visible, allowing managers to reduce or
eliminate them. ABC enables effective challenge of operating costs to find better ways of
allocating and eliminating overheads. It also enables improved product and customer profitability

32
analysis. It supports performance management techniques such as continuous improvement and
scorecards.
E17. Lean
Lean management is a system derived from Toyotas lean manufacturing methodology, which
systematically aims to reduce waste, improve workflows and eliminate non-value-adding
activities. This ultimately creates more value for customers, with fewer resources.
The benefits of lean management techniques are very similar to those of lean production. Any
activity that fails to add value can be considered waste, including wasted effort. Lean can result
in significant cost savings for the labour-intensive service industry, by reducing staffing levels
and eliminating errors. However, organisations must avoid compromising on quality.
The concept of doing more with less has significant appeal to the not-for-profit sector. The UKs
National Health Service has used lean management successfully to improve bottlenecks in
accident and emergency departments.

E18. Quality Management Tools including TQM, Six Sigma, Cost of Quality and EFQM
According to the UKs Chartered Quality Institute, the only true measure of acceptable quality is
customer satisfaction, which takes into account both objective and subjective interpretations of
the needs and expectations of customers.
Quality management involves planning and controlling activities to ensure that the product or
service is fit for purpose, and meets design specifications and the needs of customers, according
to a CIMA Official Study Text.
Traditionally, quality management focused on quality control, where finished goods were
inspected and tested, and substandard waste product disposed of or sold at a lower price.
However, contemporary thinking rejects this approach as inefficient and profit-draining. As a
result, several tools and philosophies have been developed that aim to focus on and eliminate
waste entirely.
Cost of Quality (CoQ)
According to CIMA Official Terminology, CoQ is the difference between the actual cost of
producing, selling and supporting products or services and the equivalent costs if there were no
failures during production or usage. The cost of quality can be analysed into:
cost of conformance cost of achieving specified quality standards

33
 cost of prevention costs incurred prior to or during production in order to prevent
substandard or defective products or services from being produced
cost of appraisal costs incurred in order to ensure that outputs produced meet required
quality standards
cost of non-conformance - cost of failure to deliver the required standard of quality
cost of internal failure costs arising from inadequate quality which are identified
before the transfer of ownership from supplier to purchaser
cost of external failure costs arising from inadequate quality discovered after the
transfer of ownership from supplier to purchaser.

Total Quality Management (TQM)

CIMA Official Terminology describes TQM as the integrated and comprehensive system of
planning and controlling all business functions so that products or services are produced which
meet or exceed customer expectations. TQM is a philosophy of business behaviour, embracing
principles such as employee involvement, continuous improvement at all levels and customer
focus. It is also a collection of related techniques aimed at improving quality such as full
documentation of activities, clear goal-setting and performance measures from the customer
perspective.
Originally developed in Japan in the 1950s, the aim of TQM is to get things right first time, an
approach that increases prevention costs, such as system design, but helps to prevent internal and
external failure costs. There is an emphasis on participation throughout the value chain, and a
commitment to continuous improvement through constant reassessment of processes.
Kaizen
CIMA Official Terminology describes Kaizen as a Japanese term for continuous improvement in
all aspects of an entitys performance, at every level.The philosophy of Kaizen seeks to involve
all levels of employees, encouraging suggestions for small incremental improvements across all
areas of the business which over time have a major impact. In a manufacturing context,
processes are standardised, assessed and then improved, with the ultimate result being decreased
waste and increased productivity.
Six Sigma

34
CIMA Official Terminology describes Six Sigma as a methodology based on TQM to achieve
very low defect rates. The sigma refers to the Greek letter used to denote standard deviation, so
six sigma means that the error rate lies beyond six standard deviations from the mean. To
achieve six sigma, an organisation must therefore produce not more than 3.4 defects per million
products.In practice, businesses use techniques such as statistical process control to monitor and
chart processes, identifying exceptions to the upper and lower limits and aiming to reduce the
number of faults.
EFQM Excellence Model
The EFQM model is a framework for management systems, developed by the European
Foundation for Quality Management. It aims to assess performance; integrate and align existing
tools, procedures and processes; introduce a way of thinking that encourages reflection and
stimulates continuous improvement; and identify the key actions that are driving results.
A key feature of the model is a diagnostic framework that allows organisations to grade
themselves against nine key criteria. These focus on the cause and effect relationship between
how an organisation carries out its actions (enablers), and what these achieve (results).
Figure: 6.12 The cause and effect relationship

An effective quality management programme leads to higher quality processes and outputs.
These in turn lead to greater customer satisfaction and improved profitability. Quality
management encourages a culture of team working at all levels of the organisation, which in turn
improves productivity. Human resources are recognised as a key organisational asset. Lower
costs of failure, combined with shorter processing times, will result in cost savings.

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 F. Value Recognition

F19. Value Chain Analysis

According to CIMA Official Terminology, the value chain is a sequence of business activities by
which, in the perspective of the end-user, value is added to (or costs incurred by) the products or
services produced by an entity.
Figure: 6.13 Example of Value Chain Analysis process

Value chain analysis is based on the principle that organisations exist to create value for their
customers. In the analysis, the organisations activities are divided into separate sets of activities
that add value.The organisation can more effectively evaluate its internal capabilities by
identifying and examining each of these activities. Each value-adding activity is considered to be
a potential source of competitive advantage.
The three steps for conducting a value chain analysis are:
1. Separate the organisations operations into primary and support activities:
Primary activities are those that physically create a product, as well as market the product,
deliver the product to the customer and provide after-sales support. Support activities are those
that facilitate the primary activities, for example, HR.
2. Allocate cost to each activity:

36
Activity cost information provides managers with valuable insight into the internal capabilities of
an organisation.
3. Identify the activities critical to customer satisfaction and market success:
There are three important considerations in evaluating the role of each activity in the value chain:
Company mission, influencing the choice of activities undertaken
Industry type, which influences the relative importance of activities. The value chain for
a service industry, for example, will look very different from that of a manufacturing
industry
Value system, including the value chains of an organisations upstream and downstream
partners in providing products to end-customers.
Value chain analysis can help organisations to gain better understanding of key capabilities and
identify areas for improvement. It can help them to understand how competitors create value;
and help organisations to decide whether to extend or outsource particular activities.
F20. Customer Relationship Management (CRM)
CIMA Official Terminology describes customer relationship management as a culture, possibly
supported by appropriate information systems, where an entity emphasises the interface between
itself and its customers. Knowledge is shared, within the entity, to ensure that the customer
receives a consistently high service level.Many of the principles of customer relationship
management can also be applied to supplier relationships.The focus on customer relationship
management has become increasingly core to all organisations. Companies have increasingly
recognised the significant costs related to the loss of customers and are trying to better
understand, measure, manage and improve customer retention. CRM helps organisations
examine how to measure and improve long-term customer lifetime value.
CRM software systems combine sales, marketing and customer service functions, with benefits
including better understanding of buying habits, better identification of prospective customers,
and increased customer satisfaction.Increasingly, they are integrated with e-commerce systems,
allowing businesses to build a detailed image of their customer or membership base. This leads
to improvements in marketing, sales processes, customer services, analysis and reporting.
A more recent development has seen businesses harnessing the power of social media. By
monitoring what customers and target markets are saying about their products or services on
their own or generic sites such as Twitter and Facebook, businesses can identify opportunities

37
and areas for improvement. It is essential for businesses to consider the global impact of
customer feedback.
Figure: 6.14 Diagram shows one approach to implementing CRM:

(Source: Adopted from the CRM Excellence Model, best Practices. 2001)

The following strategic management accounting techniques are considered in the some current
literatures of strategic management accounting (Ramljak and Rogosic, 2012; Shah et al., 2011
and Cinquini and Techucci, 2006).
Table:6.1 Strategic management accounting techniques
Strategic management accounting techniques
01. Attribute Costing: This is referred to as costing of specific product features attributes which
appeal to customers (Ramljak and Rogosic, 2012). These attributes are viewed as cost object
(Egbunike et al., 2014).
02.Activity Based Costing: Based on the identification of activities performed by the company
which are considered the causes of indirect costs in the company (Ramljak and Rogosic,
2012and Egbunike et al., 2014).
03. Benchmarking: This requires the comparison of company performance to that of an ideal
standard with the goal of improvement in organizational practices.
04. Competitive position monitoring: This requires obtaining information on competitors
performance such as sales, market share volume and unit costs and company performance with
these in order to control and formulate strategy (Cinquini and Techucci, 2006 cited in Egbunike
et al., 2014).
05. Competitor Cost Assessment: This relies solely on cost information from competitors
(Egbunike et al., 2014).
06. Competitor performance appraisal based on published financial statements: This
approach requires obtaining and analyzing competitor information from published financial
statement that is available for use (Egbunike et al., 2014)
07. Customer Accounting: This includes all the practices directed to appraise profit, sales or

38
costs deriving from customers or customer segments (Cinquini and Tenucci, 2010).
08. Integrated Performance Measurement Systems: The systems combine financial and non-
financial measures i.e. quantitative and qualitative factors in defining corporate performance
(Egbunike et al., 2014).
09. Quantity Costing: This technique classifies and monitors costs as deriving from quality
prevention, appraisal, internal and external failures, environmental and safety costs (Cinquini et
al., 2006).
10. Life Cycle Costing: The technique calculates costs associated with a product during its
entire life cycle. This corresponds to the market life of the product i.e. introduction, growth,
maturity and decline (Egbunike et al., 2014).
11.Strategic Pricing: The technique regards the use of competitor information such as
competitors reactions to price changes, price elasticity, economics of scale and experience in the
pricing process (Egbunike et al., 2014).
12. Strategic Costing: This technique involves relating cost accounting systems in the
organization to corporate strategy which leads to the development of strategic costing tools.
Moreover, at the heart of this system there is competitive advantage that can be achieved through
product positioning and market penetration (Egbunike et al., 2014).
13. Value Chain Costing: This involves all the activities performed from the design stage to the
distribution stage of the product. Also, it shows that accounting theory and information
technology.
14. Target Costing: This is determined by deducting from the selling price a desired profit
margin, the product design is then altered to contain the target cost.
15. Social Management Accounting: This approach facilitates the identification, recording and
measurement of social cost information for internal decision making.
16. Environmental Management Accounting: It is concerned with the identification,
compilation, estimation and analysis of environmental cost information for better decision
making within the organization.
(Source: Literature Survey)

07. Some Empirical Results on the Use of Management Accounting Tools

In this section, an attempt has been taken to highlight the some results of empirical studies as
regard use, and application of Management accounting tools and techniques in order to
understand the scenario of management accounting in practice.
The CIMA (2009) conducted a surveyabout current and intended usage of more than
100management accounting and related tools, and wascompleted by 439 respondents.The survey
covers techniques familiar to othermanagement disciplines, and includes generalapproaches as
well as the applied techniquessuggested by the term tools. The major findings of this study are
very useful to understand both the important tools and techniques of management accounting and
their features of application. Some findings of the survey have been highlighted below:

39
Most used Tools in the Whole Survey
The ten most used management accounting tools across the whole survey are shown in figure.

Figure 7.1 : Most used tools (percentage of respondents)

The Tools most likely to be Introduced soon

As an indication of how the management accounting discipline is developing in the short-term it
isparticularly interesting to look at those tools which respondents intend to adopt within the next
twoyears, as follows (figures in brackets are the number of respondents intending to introduce
that tool):
1. Balanced scorecard (50) the tool most likely to be adopted soon, and already very popular.
2. Customer profitability analysis (36).
3. Rolling forecasts (34) already very heavily used, and apparently to become even more
popular.
4. Activity based management (ABM) (31).
5. Environmental management accounting (29).
6. Product/service profitability analysis (28).
7. Activity based costing (ABC) (25) although evidence from other studies suggests many
users donot achieve full implementation.
8. Post completion audits (25).
9. Business process re-engineering (BPR) (24).
10. CIMA strategic scorecard (22).

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The Relative Popularity of Costing Tools
Following figure shows the relative popularity of costing tools. The more traditional tools of
variance analysisand overhead allocation remain the most popular.
Figure7.2 : Relative popularity of costing tools

Use of Pricing Tools by Organisation Size

Figure 7.3 shows that pricing tools are also generally used more heavily by larger organisations
thansmaller entities. On average, respondents use just over two pricing techniques from the six
surveyed.
Figure 7.3 : Use of pricing tools by organisation size

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Use of Budgeting Tools by Size of Organisation

Again the results show that organisations use a range of budgeting tools on average just over
four,from the nine surveyed.Figure 7.4 shows the relative popularity of budgeting tools, from
beyond budgeting (the least popular)to financial year forecasts (the most popular overall).

Figure 7.4: Use of budgeting tools by size of organisation

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Profitability Analysis Tools
Profitability analysis tools are another category where the pattern is observed of increasing use as
organisation size increases (figure7.5).

Figure 7.5: Use of profitability analysis tools by size of organization

43
Investment Decision Making Tools
On average, respondents use between three and four investment decision making tools of the ten
surveyed. The surprise apparent from figure 7.6 is the relative popularity of payback, which is
the leastsophisticated (one might even say, crudest) appraisal technique.
Figure 7.6: Relative popularity of investment decision making tools

Other Operational Tools

This is an interesting category, as organisation size does not seem to be such a strong influence
on tooluse. On average, respondents use just over two operational tools out of nine surveyed.
Figure 7.7 showsthat although all these tools are used more by the largest organisations, this
tendency is not as strongas for other tool categories.

44
 Figure 7.7: Use of operational tools by size of organisation

Performance Measurement Tools

Figure 7.8 showed that profit before tax is the second most widely used management accounting
tool overall. Figure 7.8 shows clearly that when it comes to the use of performance measurement
tools bysector, profit before tax is the most widely used measure. On average organisations use
between twoand three performance measurement tools out of the five surveyed, a relatively high
proportioncompared to other categories of tools.

Figure 7.8: Use of performance measurement tools by sector

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Performance Management Tools
The common pattern of increased popularity of tools by successively larger organisations is very
notablefor performance management tools (figure 7.9). On average organisations use just under
two out of eightperformance management tools. Large organisations use on average twice as
many performance management tools as small or medium ones.Figure 7.9 shows the balanced
scorecard is the most widely used measure in all organisations. Othersurveys confirm similar
results for the balanced scorecard, for example it is used by 60% of Fortune 1000(i.e. very large)
companies.
Figure 7.9: Use of performance management tools by size of organisation

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Tools for Reward Systems
Four tools were surveyed, including executive incentive schemes (for senior directors) and
managementincentive schemes (for managerial roles). On average, organisations use just under
two reward systems. Figure 7.10 shows that small organisations appear to behave more like large
organisations when itcomes to profit sharing schemes (i.e. they both use them much more than
medium sized organisations).

Figure 7.10: Use of reward systems by size of organisation

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Performance Reporting Tools
Respondents used a combination of measures to report performance, on average just under three
fromthe five surveyed. Gross margin after full cost of sales, net profit margin after allocation of
overhead andcontribution after variable costs are the most widely used tools.

Figure 7.11: Use of performance reporting by region

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Strategic Tools
This was one of the categories which offered the most tools (15), and on average, respondents
used justover five strategic tools. Figure 7.12 shows that strategic planning is the most popular
tool, used by 72%of all respondents, followed by SWOT analysis (64%) and risk management
(60%).
Figure 7.12: Relative popularity of strategic tools

Grosuet. al (2014) conducted a perceptions study on the current status of management

accounting tools usedand it is found that three tools out of nine such as budgets, actual costs and
ABC are used widely.The responses are tabulated below:
Table 7.1. The management accounting tools used R=Responses out of 114 Respondents
Tools R
Budgets 84
Actual costs 67
Activity based costing 57
Standard costs, variance analysis 34
Dashboards, balanced scorecard 31
Cost-volume-profit analysis 23

49
 Costs of quality 21
Life cycle costing 10
Environment costs 7
(Source: Grosu et. al., 2014)

08. Conclusion

From the above discussions, it is concluded that use of methods and techniques of cost
management accounting has become an urgent necessity for all organizations and at various
kinds in order to survive and grow in the light of the complex and changing environment. Every
organization should realize the importance of the use and application of management accounting
tools and techniques at the present time in order to achieve the strategic goals of the organization
and their success and survival and growth in the markets. From the different studies, it is evident
that there are many constraints and difficulties facing the process of application and use of
techniques of management accounting. It is also evident that there are benefits and features can
be achieved for the organizations in the case of the application and uses the techniques of
management accounting, which leading to the achievement of sustainability and competitive
advantage for the organization.

50
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