STRATEGIC MANAGEMENT ACCOUNTING AND THE CONTRIBUTION OF ACTIVITY BASED COSTING

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STRATEGIC MANAGEMENT ACCOUNTING AND THE

CONTRIBUTION OF ACTIVITY BASED COSTING

By, Lars Perik

University of Groningen, Faculty of Economics and Business

Master thesis, MScBA, specialization Organizational & Management Control

August, 2011 Zonnelaan 363 9742 BJ Groningen +31 (0)649779729 L.J.M.Perik@student.rug.nl Student number: 1933795 Supervisor: Dr. W.J. van Elsacker

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ABSTRACT

This research paper is about the role of Activity Based Costing (ABC) in the concept of Strategic Management Accounting (SMA). SMA is an under defined concept about making management accounting more strategic, in this paper the recurring aspects of SMA are used to define the concept. ABC is a cost allocation technique which can provide more accurate overhead allocation information than traditional cost allocation techniques and could contribute to the SMA process. In prior literature there is however inconsistency about the contribution of ABC in the SMA process. This research will analyze this inconsistency and will thereby support managers and researchers in their handling of SMA and the role of ABC. On the basis of a literature review a framework will be developed to analyze eight empirical SMA cases on the use of their cost allocation method. In this qualitative research the contribution of ABC appears to be greatest in the customer profitability analysis of the SMA process. SMA does not need ABC necessarily, however ABC can provide insights that can provide a contribution to the SMA process.

Key words: Strategic management accounting; Activity based costing; Cost allocation; Strategy

Acknowledgements:

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INDEX

1. INTRODUCTION 6

1.1 Call to Connect Management Accounting and Strategy 6 1.2 Introduction of Strategic Management Accounting 7

1.3 Current Research 8

2. THEORY 10

2.1 Strategic Management Accounting 10

2.1.1 General 10

2.1.2 Concept and Information needs of SMA 10

2.1.3 External 11

2.1.4 Internal 12

2.1.5 Use of SMA 13

2.1.6 Strategy 14

2.1.7 Management Accounting Techniques of SMA 15

2.1.8 Strategic relation with Costs 15

2.1.9 SMA in this research 16

2.2 Activity Based Costing 17

2.1.1 ABC technique 17 2.1.2 Industries 17 2.1.3 Cost Allocation 17 2.1.4 Value Chain 18 2.1.5 Strategy 18 2.1.6 Insights by ABC 19 3. FRAMEWORK 20

3.1 Connection between ABC and SMA 20

3.2 Role of Strategy 21

3.3 Research method 21

4. CASE STUDY ANALYSIS 22

4.1 Dixon 22

4.1.1 Company 22

4.1.2 SMA 22

4.1.3 Found framework connections 22

4.1.4 Use of ABC information 24

4.1.5 Connections Compared to Strategy 24

4.2 Roslender & Hart 25

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4.2.2 SMA 25

4.3 Lord 27

4.3.1 Company 27

4.3.2 SMA 27

4.4 Tillmann & Goddard 29

4.4.1 Company 29

4.4.2 SMA 29

4.5 Rickwood, Coates and Stacey 31

4.5.1 Company 31

4.5.2 SMA 31

4.6 Wegemann 33

4.6.1 SMA 33

4.7 Company 1 33

4.8 Company 2 34

4.9 Seal 36

4.9.1 Company 36

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4.10 General remarks of the cases 38

4.10.1 Cost allocation method 38

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1. INTRODUCTION

In the current global marketplace companies must look ahead, have to anticipate to change and have to develop their strategy proactively (Lawlor, 2006). The strategy gives a company purpose and direction and management accounting provides techniques to control that.

1.1 Call to Connect Management Accounting and Strategy

Through increasing globalization about thirty years ago the pressure to change management accounting practices in companies rose. The management techniques used by western companies were based on a stable environment and due to the globalization the environment changed. It became necessary to intervene actively in the production process to improve quality, reduce set-up times and increase flexibility (Kaplan, 1983). Pinches (1982) concluded at that time that there was ample evidence that management accountants had taken a short-sighted view of the capital budgeting process and little attention had been given to strategic planning. The strategy produces long-term plans for the company, taking into consideration plans and possible actions of competitors, with the main objective to position the company so it has a competitive advantage (Lord, 2007).

Most traditional management accounting is backward-looking, only inward-looking and tends to be programmed or reactive and based on artificial short term accounting periods (Bromwich & Bhimani, 1994; Lord, 2007). The performance measures to assess management accountants were emphasizing on short-term performance. Strategic planning and management accounting have been considered as belonging to different parts of the management process, where strategy looks outwards and management accounting inwards the company (Cinquini & Tenucci, 2006). When downturns in the economy occurred, many companies were attempted to minimize the short-term negative impact and therefore reducing capital investments, product development and other long-term activities. To counter this destructive behavior there is a call for non-financial measures on quality and productivity and a challenge to deemphasize the short term and to focus more on the long term (Kaplan, 1983).

Several academics were noticing the problem with traditional management accounting and made suggestions to link management accounting and strategy.

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The way to link management accounting and strategy according to Simons (1990) lies in the use of the management systems. He makes the distinction between pure quantitative accounting (diagnostic control) and the more strategic, communication of control outcomes in the company (interactive control).

1.2 Introduction of Strategic Management Accounting

In search of a more strategic orientation in the field of management accounting, Simmonds (1981) introduced the term „Strategic Management Accounting‟ (SMA), where he stated that management accounting should focus on what competitors are doing, look at market share and competitors pricing, costs and volume. Later Bromwich (1990) goes further by stating it is not only important to compare the company with its competitors, but also to evaluate „the benefits of the company‟s products both from the customer‟s point of view and the company‟s perspective‟.

The angle SMA takes on management accounting is that of using the right information in a way it strengthens strategy.

SMA looks beyond traditional management accounting, it emphasizes on information that relates to external factors to the company, as well as non-financial information and internally generated information. SMA is a process that can support the strategy formulating and implementation in a company. SMA has a broad scope, is a pro-active approach and links internal generated information with the strategic decision process (Lord, 2007).

In the article of Langfield-Smith (2007), Shank recalls his excitement about the possibilities that the new strategic focus could bring to the management accounting discipline and to business in general. However after the theoretical introduction of SMA, the use in practice is not how the initial researchers expected it to be.

Practice. Many researchers have focused on the use of SMA in practice through the years

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1.3 Current Research

There is still much which can be learned in organizational practices and processes, from the underlying SMA principles and techniques (Langfield-Smith, 2007). Increasingly commercial and technological uncertainties are causing companies to operate both deliberate and emergent strategies in parallel (Burns & Nixon, 2009). The concept of SMA need to be further developed to show its role in emergent strategies and its benefits in strategy formulation (Lord, 2007).

The SMA concept encompasses a variety of management techniques to link management accounting and strategy. Activity Based Costing (ABC) is a management accounting technique which in the SMA process can be used to allocate overhead costs in a company. The strategic relevance for ABC could be found firstly in the potential for more accurate product cost information, which could for example lead to better pricing, product mix decisions and profitability. ABC could also be useful in customer and market profitability analyses. Another strategic element of ABC is the close connection with the re-engineering of the value chain, activities and processes of the company (Järvenpää, 1998).

In the literature there is however inconsistency about the contribution of ABC to SMA, were some researchers say ABC is not a SMA technique (Hoffjan & Wömpener, 2006; Guilding et al., 2000) and others say that ABC is (Chinquini & Tenucci, 2006; Anderson, 2006; Langfield-Smith, 2007). Guilding et al. (2000) felt that ABC is more concerned with costing accuracy than the adoption of a strategic-orientation. When the result of ABC suggests a change in strategy, they argue that this will be done immediate and after this initial strategic reaction, ABC won‟t have benefits over other costing systems. Their research is based on separate SMA techniques, but did not focus on the contribution ABC could have as a part of the SMA process as a whole.

Chinquini and Tenucci (2006) consider ABC as a SMA technique in their survey about SMA technique adoption. However, they stress that the use of ABC is important for giving the strategic character to the technique.

This research will support managers and researchers in their handling of SMA and the role of ABC.

With a literature review which is based on articles found in the purplesearch database searcher and books, there will be an elaboration on SMA and ABC. On the basis of the theory a framework of the expected connections between SMA and ABC will be made. This framework will be used to analyze eight empirical cases of SMA.

This thesis will search for an answer to the research question:

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2. THEORY

In this section there will be elaborated on Strategic Management Accounting and Activity Based Costing with a literature review.

2.1 Strategic Management Accounting

There is still no unified definition, or description of its contents of the concept SMA, despite the search for the concept by many researchers in recent years (Langfield-Smith, 2007). First a general description of the concept of SMA will be given. Thereafter a description of the aspects of SMA with their information needs will follow. The way that this information is used in the internal SMA process, diagnostic or interactive, is discussed. The strategic aspect with the strategic position of a company and the used techniques in SMA concludes the theory of SMA.

2.1.1 General

Management accounting provides vital roles in communication, motivation, and evaluation and in providing information for planning and control. Therefore, management accounting systems are necessary components in the companies‟ strategy to achieve competitive success (Johnson & Kaplan, 1987). SMA is restating this importance and sees the two-way relationship between strategy and management accounting (Simons, 1990; Kober et al., 2007).

SMA is focusing next to the financial information also on bringing non-financial information in the process (Lord, 1996). To bring management accounting back to be operation based, the measurements should be designed to support the management and not only to prepare financial statements. Johnson and Kaplan (1987) stipulate the importance of non-financial information in this process in for example the control of quality aspects.

2.1.2 Concept and Information needs of Strategic Management Accounting

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2.1.3 External

Competitors. Since the initial paper of Simmonds (1981) SMA is focusing on information

about competitors. Competitor information may be obtained through public, formal sources, such as published reports and the business press, or through informal channels, such as the company‟s sales force, its customers, and its suppliers (Lord, 1996).

Competitors influence prices, costs, investments and thereby profitability of a company (Lord, 2007). There can be rivalry among existing companies, threat of new entrants and threat of substitute products (Porter, 1985).

The relationship with competitors can be confrontational as well as cooperative, with the latter information sharing between competitors takes place. (Lord, 2007)

From this aspect of SMA the management accounting systems have to make sure several competitor information parts have to be incorporated in the internal SMA process. By focusing on competitor information their costs, prices, quality, technologies, products, and even strategic approach can be known and anticipated on by the company. With this knowledge a company can compare itself with competitors, through for example benchmarking. Management systems should also take threats and barriers to entry, in account (Lord, 2007).

Market. To make strategic decisions, a company should take in account the industry in which

it is operating. Researchers found that different characteristics of an industry have implications on the management accounting techniques used.

Another market aspect of SMA is the focus on desired attributes of products. To survive in the market, a company must continue to offer the cheapest way for consumers to obtain the desired bundle of attributes. The company‟s market share depends on the match between the attributes provided by its products, consumers‟ tastes and the supply of these attributes by competitors (Bromwich, 1990). In the continuing globalization, companies do not have much choice in balancing the mix of product attributes (including price), there are threshold levels to be achieved if they want to stay in business and these threshold levels keep changing (Tomkins & Carr, 1996). Companies need to focus attention on maintaining the appropriate product mix and on keeping up with the state of the art in delivering attributes at the right price (Cooper & Kaplan, 1988). Attribute mixes might differ between markets and can also change within markets, which might lead to new strategies.

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In the SMA process, a company needs to monitor and anticipate to the characteristics, like technologies and uncertainty, of the industry in which it is operating. The management accounting systems could need to change along with the changing market.

The product market and market share also needs to be monitored by management accounting systems in the SMA process, particularly with the information about the appropriate mix of product attributes, with the important price aspect.

Customers / Suppliers. The value chain is „the linked set of value-creating activities all the

way from basic raw material sources for component suppliers through to the ultimate end-use product‟ (Shank, 1989).

The company‟s value chain is joined to the value chains of suppliers and customers. Thus, linkages are not only to be found within the value chain of a company, but also between company and their suppliers and customers. In the process of SMA opportunities for optimizing have to be indentified and coordinated (Lord, 2007).

Next to the product costs also the costs of marketing and distribution have to be taken into account. The time and effort spend to deliver to different customers can differ and even make some customers unprofitable to deal with (Johnson & Kaplan, 1987). Suppliers might appear unprofitable when for example delivery costs are too high or quality levels are inconsistent.

It becomes more important to manage the whole supply chain, with suppliers expected not just to deliver components, but to address problems with their assembler customers and offer systems solutions to create improvements for the final goods market (Tomkins & Carr, 1996).

Management accounting systems should provide information about all costs and revenues of the activities in the value chain. An analysis of the processes to look for optimization of the relationship with the customers and suppliers should continually take place. Figures about sales volume and customer satisfaction need to be brought into the process. Also information about possible new customers and suppliers should be monitored by the management accounting systems.

2.1.4 Internal

Operations including Marketing. In the internal aspects of SMA the management accounting

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Marketing provides a link in the internal operations between the internal and external environment. Within the SMA process incorporation of the external information from marketing is used to determine what products or services may be of interest to customers and it generates the strategy that underlies sales techniques, business communication, and business developments (Kotler et al, 2009).

SMA seeks to integrate insights from management accounting and marketing management within a strategic management framework (Roslender & Hart, 2002). Campbell (2003) finds evidence of interactions between the cost and revenue function and highlights the dangers of accounting and marketing researchers working in isolation to understand the drivers of customer profitability.

The management accounting systems should give the company information about among others the direct and indirect costs of products, quality aspects, efficiency, revenues, and internal processes. The management accounting systems in the marketing aspect should incorporate the external aspects in the SMA process, including technological developments. The management accounting systems should also provide information about sales and product development.

FIGURE 1

Concept of Strategic Management Accounting

2.1.5 Use of SMA

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especially the use and communication of these systems and their information that makes management accounting more strategic (Simons, 2000).

Simons‟ (1990; 1995) defines management control systems as the formalized procedures and systems that use information to maintain or alter patterns in organizational activity. In his work he makes a distinction between several levers of control, including diagnostic and interactive control. Diagnostic control systems set targets and periodically managers measure the outcomes and compare these with the preset targets. With the feedback inputs and the processes can be steered so that future outcomes meet the targets more closely. Interactive control systems are formal information systems that managers use to involve themselves regularly and personally in the decisions of subordinates. Through these systems then, managers participate in the decisions of subordinates and focus organizational attention and learning on key strategic issues.

Interactive control systems help to motivate the company to be fully informed concerning the current and expected state of strategic uncertainties. By actively monitor and intervene in ongoing decision activities of subordinates, it provides an opportunity for management to debate and challenge underlying data, assumptions and action plans (Simons, 1990).

A diagnostic control can become interactive by investing time and attention in face to face meetings to review new information. Simons‟ analysis shows that interactive management control processes can be used to manage strategy: rather than focusing on what the company already understands and does well, these systems direct organizational attention on strategic issues.

Management accounting systems can be used on either a diagnostic or interactive way. For SMA the interactive use of management accounting is needed to operate in a strategic way.

2.1.6 Strategy

The results of the study of Kober et al. (2007) support that management control systems used in an interactive manner help to facilitate a change in strategy and, when a change in strategy occurs, the management control systems change to match. Taken together, these results show the two-way relationship between management control systems and strategy. The strategy is therefore an important aspect of the SMA process.

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Companies with product differentiation strategies emphasizing their strategic priorities often on satisfying customer needs for high quality products, specialized design features, fast and reliable delivery and effective post-sales support. Companies emphasizing low cost strategies will focus primarily on ensuring production processes are highly cost efficient (Chenhall & Langfield-Smith, 1998).

Cinquini and Tenucci (2008) noticed the debate and critique on the model of Porter through the years, but nevertheless it showed still to be a significant strategy classification in their SMA study. They found that differentiators would use extensively SMA techniques addressing customer, competitor and performance information, whereas cost leaders would use those SMA techniques addressing cost information.

2.1.7 Management Accounting Techniques of SMA

To provide the management accounting information needed in the aspects of the SMA process several management techniques are used in a company. These techniques provide through formal and informal systems, the information which has to be communicated. Several techniques have a clear strategic focus and are recurring in the SMA literature.

A range of techniques have been included under the umbrella of SMA, and some researchers define SMA in terms of its techniques. These techniques include among others, target costing, life-cycle costing, customer profitability analysis, competitor cost analysis, and for some researchers also activity based costing. However, as seen in the introduction, there is inconsistency in the literature about the contribution of ABC in the SMA process (Langfield-Smith, 2007).

2.1.8 Strategic relation with Costs

The management accounting system must report accurate product costs so that pricing decisions, introduction of new products, abandonment of obsolete products, and other strategic decisions can be made with the best possible information on product resource demands (Johnson & Kaplan, 1987).

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When overhead costs are seen as changeable over some reasonable time period, it becomes necessary to understand the sources of overhead costs and to trace them to the activities that drive these costs (Johnson & Kaplan, 1987). With this information changes can take place, like the optimization of processes.

2.1.9 SMA in this research

The content, usage and strategy parts of SMA which are important for the rest of this research will be summarized here.

Content

The different aspects of the SMA process, relevant in this research, have the following information needs:

- The importance of competitors‟ information is stipulated in the SMA literature. The analysis of competitors could include benchmarking, in which among others costs and quality are compared with competitors.

- Through difference in characteristics and the appropriate product mix, the focus of a company might change between markets. The profitability of operating in a certain market therefore has to be taken in an account in the SMA process. The product mix including price setting in a market is also important in the SMA process.

- In the analysis of the value chain opportunities for optimizing have to be identified in the SMA process. This process includes identifying the profitability of dealing with certain customers and suppliers, because dealing with some individual customers and suppliers might appear to be unprofitable.

- In the internal processes several management accounting systems are in place that should control among others the quality, costs and speed of operations. To be more efficient and optimize processes, knowledge about those processes is needed.

Usage

The way information from the used management techniques in the SMA process, diagnostic or interactive, will be analyzed in the cases.

Strategy

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2.2 Activity Based Costing

There is evidence that the product costs generated by traditional costing systems often seem to be widely at variance with prices and implicitly therefore with the costs of competitors (Bromwich, 1990). To analyse the internal costs of a company more accurately Activity Based Costing (ABC) can be used, as a linkage between costs in a company and their relation to the external environment. In the SMA literature there is however inconsistency about the question if ABC is an SMA technique.

2.1.1 ABC technique

The ABC management accounting technique is developed to provide a better allocation of the overhead (or indirect) costs in a company. ABC identifies activities in a company and assigns the costs of each activity to the products (or services) according to their actual use. In an ABC system, different cost pools are used and assigned with different allocation bases. Cooper and Kaplan (1988) saw in ABC, by the more accurate management information given, as much a tool of corporate strategy as it is a formal accounting system.

Activity Based Management is the application of ABC output to manage a company. This research is focusing on the costing technique ABC and sees Activity Based Management as incorporated in the SMA process.

2.1.2 Industries

ABC is initially developed for the manufacturing sector, characterized by high fixed costs, which is the same sector where Cadez (2006) found that SMA appears most often. A survey by Bettermanagement (2005) was completed by participants from companies across various industries, sizes, geographies. The manufacturing industry had the highest representation but also financial service, public sector, and the communication industry were represented. The use of ABC varied most by industry, were communications and financial services entities are more likely than other industries to have active ABC in place. Manufacturing companies seem to be lagging behind others in their adoption of ABC, however, many appear to be in the market for ABC, and a strong percentage are considering it. Companies in the public sector appear to be somewhat more tentative.

2.1.3 Cost Allocation

To provide accurate costs in the SMA process, traditional costing systems are seen as insufficient in the literature. Some researchers see in ABC a costing method which can provide more accurate cost information.

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techniques, through providing a better understanding of how overheads vary in relation to a range of cost drivers, and viewed statistical studies as supporting the notion that non-volume related activities may drive costs (Langfield-Smith, 2007).

In traditional costing systems only product overheads are normally allocated to cost objects, whereas both product and non-manufacturing overheads (selling and administrative expenses) are assigned in ABC systems (Dixon & Smith, 1993). The inclusion of non-manufacturing overheads in ABC is particularly useful for analyzing product profitability by distribution channel, customer or markets. Second, an ABC system usually has considerable more cost pools (based on activity centers) than a traditional system (based on production departments). In an ABC system, batch-level and product-sustaining activity costs are allocated to cost objects using cost drivers other than unit-level ones. ABC provides managers with more reliable information about overhead costs (Major, 2007).

2.1.4 Value Chain

By giving an accurate overview of the costs made, ABC can be used to analyze suppliers and customers. The Pareto (80/20) rule is an extreme observation of differences in costs, where 20% of the customers create 80% of the revenue. A more accurate allocation indirect overhead could lead, in these but also in less extreme cases, to new insights and strategic changes.

Suppliers. ABC can be used in the value chain, by analyzing linkages with suppliers. Here

ABC can be used to determine costs of batch activities to do with processing orders. Similarly, product-related costs and non-manufacturing costs (such as negotiating with suppliers) could be determined. Also costs incurred in relation to quality and reliability has to be taken into account. If these results are added to the purchase price, the analysis would reveal which suppliers are worth dealing with (Lord, 2007; Anderson, 2006).

Customers. The ABC technique could also be applied to activities between customers and the

company. The revenues from customers and the costs incurred in dealing with them could be calculated to determine whether particular customers are profitable or not (Lord, 2007). Product production costs have to be taken into account but for dealing with customers also non-manufacturing costs are incurred, on for example marketing and sales. With ABC some cost calculations can for example put in evidence a bad choice about customers and finally lead to a strategic change (Wegemann, 2010). When for example the analysis after ABC indicates that some customers are unprofitable, can be chosen to serve these customers at lower costs online.

2.1.5 Strategy

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The article of Chenhall and Langfield-Smith (1998) studied the use and performance of activity based techniques (including ABC) in the different strategic positions recognized by Porter. They, and likewise did Shank (1989), expect that ABC would play a more important role in a low cost strategy than in a differentiation strategy. The analysis is based on manufacturing companies operating in different industries. The results support the expectation that ABC would be associated with higher performance in the cases of a low cost strategy. In addition, ABC was also important for high performing companies emphasizing product differentiation strategies. The researchers expect that the latter is due to the usage of ABC to improve knowledge about which “value drivers” enhance product differentiation (Chenhall & Langfield-Smith, 1998).

Looking at Cinquini and Tenucci (2008) can be expected that differentiators use ABC for addressing customer, competitor and performance information. The results of low cost strategies of Cinquini and Tenucci (2008) are coherent with the above mentioned results and would be used for addressing cost information.

2.1.6 Insights by ABC

The insights of cost allocation which ABC can provide in the SMA process will be summarized and later analyzed in the cases.

- The results of ABC can give insights in the role of overhead costs in the cost structure of the company.

- ABC can provide more accurate insights in the costs of the products (or services) produced by the company.

- The overhead costs in relation to non-manufacturing costs, like selling and administrative expenses, get insightful.

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3. FRAMEWORK

On the basis of the above theory a framework will be developed to analyze the cases which can give insights in the contribution of ABC in SMA. In this framework the information needs of SMA will be linked to the insights ABC can give. A selection is made to present only SMA information needs in which a cost allocation technique could provide the information. Other management accounting systems should take care of the other SMA information needs like the registration of competitor information; there ABC can be of no help.

3.1 Connection between ABC and SMA

The content and use of ABC can provide information aspects which could contribute to the SMA process. On the basis of the theory, a framework will connect these possible relations of the identified information needs in the several parts of SMA and the information ABC can provide. This information should be used in a more strategic, interactive way and have a clear relationship with strategy of a company.

In the SMA process is benchmarking part of the competitor aspect and the information of the own cost structure provided by ABC, can facilitate in that process. Information of ABC about overhead costs of a product can contribute to the pricing attribute of a product. With the information of ABC about overhead costs of products and non-manufacturing, the costs per market, customer, and supplier could become clear and their profitability can be determined. The ABC insights in activities, processes and corresponding costs could be used to exploit the optimization of the efficiency and/or used to contribute to the control of processes in the SMA operations aspect.

TABLE 1

Where ABC insights can provide a contribution to SMA

SMA ABC insight in:

Content

Competitors a. Benchmarking

Market b. Attributes (incl. Price) 1. Companies‟ cost structure

c. Costs per market 2. Product costs

Customers/ d. Costs per customer 3. Non-manufacturing costs

Suppliers e. Costs per supplier 4. Activities and Processes

Operations f. Process optimization g. Process control

Use SMA

process

Diagnostic

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On the basis of the framework the cases will be analyzed. This analysis should reveal if ABC is indeed used in the SMA cases to provide these insights in the SMA process. From that analysis an answer should come to the, in the introduction mentioned, research question:

To what extent does Activity Based Costing contribute to the concept of Strategic Management Accounting?

3.2 Role of Strategy

Since different strategies in former research appeared to have different information needs, this will also be a subject of analysis. A distinction will be made between a differentiation strategy and a low cost strategy, in the connections expected to be found in a company.

Differentiation Strategy. Based on the work of Cinquini and Tenucci (2008) and Chenhall and

Langfield-Smith (1998) the expectations are that, in a company with a differentiation strategy, especially focus on the value chain, with customers, suppliers and market profitability (Connections c-2, 3, d-c-2, 3 and e-c-2, 3). The price setting aspect and competitor costs are also expected to get attention in the differentiation strategy (Connections a-1, b-2).

Low Cost Strategy. Also based on the work of Cinquini and Tenucci (2008) and Chenhall and

Langfield-Smith (1998), is in a low cost strategy expected to find that ABC is used for operations control and optimization (Connections f-4 and g-4). To stay competitive also value chain profitability of customers and suppliers are expected to play a role in a low cost strategy (Connections d-2, 3 and e-2, 3).

3.3 Research method

The framework outlined above, build on the theory of ABC and SMA, will be the basis for analysis of the selected cases. This qualitative research is used to gain insights in the relation between ABC and SMA. With a literature study several companies from studies in different years can be compared at the same time.

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4. CASE STUDY ANALYSIS

In this section, first a description of the case company including their strategy and used cost allocation method will be given. A short introduction of SMA in the case company will follow. Next the developed framework will be hold against the company and there will be elaborated on the found connections. Thereafter will be elaborated on the use of the cost allocation method in the company. Then an analysis of the connections in the case company will be compared with the expected connection in the followed strategy. The section ends with some general remarks about the cases.

4.1 Dixon 4.1.1 Company

Dixon (1998) performed a research on the principle of strategic management accounting and its application within a British company operating in the packaging industry. The company employs the very latest technology and its asset base is highly technical, flexible and efficient. The company follows a differentiation strategy and currently enjoys a competitive advantage over its nearest competition as a result of achieving a newly accredited industry standard. Due to the size of the asset base, which is seen as a significant barrier to entry and exit, the company finds itself with a high level of fixed costs. Tight cost control and the treatment of overheads have led the company to adopt ABC. Next to the manufacturing processes, is ABC most likely used in the company‟s important overheads of planning, quality and hygiene management.

4.1.2 SMA

The company displays characteristics of using the concepts associated with SMA. Management accountants become involved in strategic planning and general management. SMA changes the power culture in the organisation, not because of the profile of the management accounting function but through the importance of the analytical abilities which are necessary to analyse strategic alternatives. This led to the accounts function taking an essential role in the provision of strategic information. The company uses a number of non-financial measures and believes that a right balance between financial and non-financial monitoring is important. The company feels that SMA provided more strategic information and that it is another piece of the company‟s jigsaw.

4.1.3 Found framework connections

Connection a-1

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Connection b-2

The company views a product as a bundle of attributes and the management accountant has to cost the attributes. Next to the high demands on the incorporation of external aspects in the pricing strategy, the company uses knowledge of the product costs in that process.

Connections c-2, 3 and d-2, 3

In the company strategic cost analysis, including ABC increases the visibility of all value chain activities. Cost drivers could be analysed with respect to their contribution to the organisation's overall competitive position. The most important aspects of internal information in the company include figures about customer profitability and market profitability. Of these, customer profitability is deemed to be the key indicator of balance in the market place and a fair reflection on the elasticity of demand.

Connection g-4

On a daily, weekly, monthly or ad-hoc basis, the management information system aids the accounts function to produce information for management, be it on cost behaviour or investment appraisal. The monthly management reports that include figures as the profit and loss account, balance sheet, sales analysis and overheads analysis, inform the senior management in the company. Cost analysis was seen to be important as it allowed a greater level of understanding of the behaviour of direct and indirect costs.

TABLE 2

Found framework connections in the Dixon case (Bold)

Content

Competitors a. Benchmarking

Market b. Attributes (incl. Price) 1. Companies’ cost structure

c. Costs per market 2. Product costs

Customers/ d. Costs per customer 3. Non-manufacturing costs

Suppliers e. Costs per supplier 4. Activities and Processes

Operations f. Process optimization

g. Process control

Use SMA

process

Diagnostic

Use of ABC insights

Interactive

Strategy Company _{Strategic Position} Differentiation

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4.1.4 Use of ABC information

A computerised management information system is used to make the accounting numbers available for all managers, supervisors and operatives in the company. The outcomes of ABC will therefore be communicated throughout the company and several levels in the company make use of these outcomes. This will enhance the dialogue about those outcomes, with the management accountants which have a central role in the company.

The communication on several levels and the central role of the management accountants, indicates an interactive use of the ABC information.

4.1.5 Connections Compared to Strategy

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4.2 Roslender & Hart 4.2.1 Company

Roslender and Hart (2003) conducted a field study of company practices at the interface between management accounting and marketing management. One of the researched companies is a financial services company that merged with one of the major UK banking groups, to create the second largest provider of pensions and insurance products. The company appears to have a differentiation strategy which is common in the industry it is operating. The company is currently working with ABC and the activity based philosophy was well understood, but the company did not fully adopted ABC. With ABC to company gained knowledge to link costs of activities to products which weren‟t apparently obvious, like the costs of sales and marketing.

4.2.2 SMA

The company was started to implement SMA and was at the moment developing more SMA practices. The company uses management accounting techniques, which range from activity based costing, to the strongly marketing-oriented SMA practices identified, including attribute costing, strategic cost analysis and target costing. The company was positive about the benefits of exploring the potential of greater cooperation at the interface between management accounting and marketing management.

Connection a-1

The company practised a measure of competitor data analysis, for which the marketing department was primarily responsible. ABC was used to get better information on product costs, which is also used to support the comparability with competitors.

Connection d-2, 3

With ABC the company is able to get some quite good information and reasonable understanding of how the company assigns activities to products, also where it wasn‟t obvious. On the basis of these exercises, the company is working to conduct customer profitability analyses.

Connection f-4

(26)

TABLE 3

Found framework connections in the Roslender and Hart case (Bold)

Content

Market b. Attributes (incl. Price) 1. Companies’ cost structure

c. Costs per market 2. Product costs

Operations f. Process optimization

g. Process control

Use SMA

process

Diagnostic

Use of ABC insights Interactive

Low Cost

Although communication and dialogue appear to play an important role in the identification of activities in the cost reduction processes, no description is given about the use of ABC in the company.

(27)

4.3 Lord 4.3.1 Company

In the Cyclemakers case, Lord (1996) reports a change in the accounting systems towards SMA. The company consists of a group of cycle retailers which started to manufacture bicycles in competition with two dominant manufacturers. The company decided after a change in regulation to follow a

differentiation strategy and focus on the mid to high price, mountain and racing bike range,

differentiating its product on the basis of high quality, flexibility and satisfying consumer demand. For the calculation of the costs, a standard cost allocation system was installed.

4.3.2 SMA

The management accounting system at the time of repositioning was completely inadequate according to insiders. After a change many of the aspects ascribed to SMA could be found at the company. Examples are the collection of competitor information, exploitation of cost reduction opportunities in the value chain, and matching of accounting emphasis with strategic positioning.

In order to assess the use of the cost allocation method used in this company, ABC will be replaced in the framework by the standard cost allocation system. Although this system will not be able to provide all the insights ABC can give.

Connection 1-a

The management at company is diligent at collecting competitor information, and sales representatives regularly report competitor information to the managing director. The information about competitors‟ sales volumes and prices is mainly collected from conversations with retailers and observation of competitors‟ products in the retailers‟ shops. Competitors‟ costs are estimated from the company‟s knowledge of its own costs and observation of components of its competitors‟ products.

Connection b-2

(28)

TABLE 4

Found framework connections in the Lord case (Bold)

SMA Standard cost allocation

insight in:

Content

Use SMA

process

Diagnostic Use of standard cost allocation

insights Interactive

Low Cost

The standard cost system in the company is used to prepare monthly projections in a budget and those budgets get afterwards compared with the actual results. No detailed analysis follows in the company on the variance, which could have led to communication and dialogue about the results.

The comparison of outcomes with preset budgets indicates that the company is using the standard cost allocation insights in a diagnostic way.

(29)

4.4 Tillmann & Goddard 4.4.1 Company

Tillmann and Goddard (2008) investigated the use and perception of strategic management accounting in a large multinational company in Germany. The company follows a differentiation strategy and produces a widely diversified product portfolio of consumer and industrial chemicals. Some costing techniques used in the company, mainly in the production process, are based on cost drivers in an

ABC manner.

4.4.2 SMA

Accounting provides structure to the company by organising activities in relatively clearly defined ways, such as cost centres and accounting statements. Competitor accounting is an important part of the company‟s management accounting and marketing techniques. In the company it became apparent that the most important aspects related to understanding SMA in practice are how management accountants use accounting information to make sense of strategic situations and how this interrelates with other organisational actors.

Connection a-1

Competitor accounting in the company includes benchmarking. Here knowledge of the own costs play a role in the comparison with competitors and the company goes further by drawing on the cost information for analysing a potential acquisition of a competitor.

TABLE 5

Found framework connections in the Tillmann and Goddard case (Bold)

Content

Use SMA

process

Diagnostic

(30)

Decision-making in the company is an interactive and interdisciplinary process, involving people from different functions. The role of the ABC insights in this process is however not discussed in the case.

(31)

4.5 Rickwood, Coates and Stacey 4.5.1 Company

The company Stapylton Ltd. is subject in the research of Rickwood et al. (1990), which is operated as a wholly owned subsidiary of a large international group. The company‟s products, which are described as used in the hygiene and cleaning materials industry, are sold direct to retail outlets, principally to supermarket chains. The company follows a low cost strategy and concentrates on a small range of closely related products of a basic, rather than luxury nature, which it sells through its own sales force. The company does not use ABC and the cost system in the company can be qualified as a standard cost allocation system.

4.5.2 SMA

The SMA in the company is particularly based on the active role of the external market. The company analyses their competitors' performance regularly and has active mechanisms intended to collect the available relevant information. There is a strong internal connection in a team consisting of sales, marketing, finance, procurement, and production executives. The management accountants produce statements of alternative strategic courses in which the marketing department provides data about advertising and sales.

In order to assess the use of the cost allocation method used in this company, ABC will be replaced in the framework by the standard cost allocation system. Although this system will not be able to provide all the insights ABC can give.

Connection a-1

Knowledge of the cost structure in the production of one of the company‟s own products, let to understanding of the cost structure of the main competitor, which is known to make use of the same production process. This knowledge is gathered through the negotiations with retail chains concerning own-label production and from discussions with process machine manufacturers.

Connection b-2

Monthly reports prepared by a national market research agency, which quantified a number of aspects of consumer activity in this particular product market, are received by the management accounting function. This information gets supplemented by the companies' own figures, including product costs. For strategic decisions, emphasis is given to information on market share and the prices paid by consumers for their purchases.

Connection f-4

(32)

TABLE 6

Found framework connections in the Rickwood et al. case (Bold)

SMA Standard cost allocation

insight in:

Content

g. Process control

Use SMA

process

Diagnostic Use of standard cost allocation insights

Interactive

Strategy Company _{Strategic Position} Differentiation

Low Cost

4.5.4 Use of standard cost allocation information

The outcomes of the standard cost allocation appear to be the starting point for an analysis of the overhead costs. Informal systems are in place for discussion with appropriate operating and functional personnel at different levels of operations. This dialogue aids in the identification of what changes in overhead spending could increase efficiency.

These informal systems in place indicate that the company is using the standard cost allocation insights in an interactive way.

(33)

4.6 Wegemann

Wegemann (2010) performed a research in the information technology departments of two international companies. In both companies ABC is used in the information technology department for cost allocation in the SMA process. A distinction will be made between in the analysis of the two companies, since the companies operate in different industries and have different strategies.

4.6.1 SMA

Both companies have a SMA approach and both companies connect strategic and marketing decisions to operational ones. The companies imply a more participative approach of employees‟ activities concerning management accounting processes. The SMA process gets used in both companies to analyse strategic hypothesis.

4.7 Company 1

The first company is an industrial steel giant, the IT department where the research takes places sells computing services into and outside the company. The company follows a low cost strategy, which is common in the industry, and the IT department is set up as a cost centre with a limited catalogues.

Connection a-1

Next to the external benchmarking also internal benchmarking takes place in the company and ABC is used by the company to facilitate both forms benchmarking.

Connection c-2, 3 and d-2, 3

With the used ABC software in the company, the costs of the activities and cost objects can be determined. From the software figures about profitability of customers and markets can be extracted and these figures are used in the SMA process.

Connection f-4 and g-4

(34)

TABLE 7

Found framework connections in the Wegemann case company 1 (Bold)

Content

Operations f. Process optimization g. Process control

Use SMA

process

Diagnostic

Use of ABC insights

Interactive

Strategy Company _{Strategic Position} Differentiation

Low Cost

The identification of activities in the introduction of ABC was a participative process. The company wanted to stay close to the practical situation by using employee competencies and by combining experts and operational employees in a bottom-up approach. ABC is used to improve reporting and to communicate throughout the company via the intranet, and with a link to the balanced scorecard. Since the employees were involved in the introduction of ABC, this knowledge will lead to more dialogue in the company about the outcomes.

The participative introduction and communication throughout the company is indicating an interactive use of ABC insights.

The process control and optimization with the support of analysing the activities and processes is in line with the expectations of a low cost strategist. The support of ABC insights in the customer profitability is in line with a low cost strategy, but supplier profitability is not analysed with ABC. Although not expected with a low cost strategy, ABC also supports the competitor analysis and market aspects in the company.

4.8 Company 2

(35)

Connection b-2

The company uses ABC to strengthen the cost allocation process so that relevant costs of services could be assigned. The controllers calculate the costs, so that selling managers can decide the relevant price for the services they deliver.

Connection c-2, 3 and d-2, 3

With the used ABC software profitability of customers and markets can be determined and used in the SMA process. The company can also calculate the costs of services in progress, for saving files or of covering costs.

TABLE 8

Found framework connections in the Wegemann case company 2 (Bold)

Content

Market b. Attributes (incl. Price) 1. Companies‟ cost structure

Use SMA

process

Diagnostic

Low Cost

The introduction of ABC was a top-down process, without much participation of employees. ABC is used in the company as a refined analytical system for top management.

This less participative, on the top management oriented approach indicates a use of ABC insights in a diagnostic way.

(36)

4.9 Seal

4.9.1 Company

Seal (2001) performed a case study to analyse the strategic change at GEC/Marconi. Through a rapid series of disposals and acquisitions, the company has moved from operating in a wide range of often unrelated industries to focusing on one main industry (telecommunications), where it has staked its future on the attainment of technological and marketing excellence. The strategy can be classified as a

differentiation strategy since the company has enacted an identity based on globalization with a

distinct product market grouping and a science-driven emphasis on research and innovation. For cost allocation the company uses an activity base approach and although the company not fully adopted ABC, it can be classified as ABC. The company can isolate out costs of individual parts of the manufacturing process, which includes the costs of engineers and maintenance.

4.9.2 SMA

The management accounting agenda that accompanied the strategic refocus includes a whole range of issues embracing operational and strategic levels of the company. The company took a new supply chain strategy, where it changed the relation with suppliers. Instead of a greedy approach, now more long-term purchasing and product development relationships course was taken. There is a rising internal cooperation between management accounting, marketing and procurement.

Connection d-2, 3 and e-2, 3

The company uses cost allocation to analyse customers and suppliers, but does that with great caution. The danger of misrepresentation is acute for the company because if it wants to develop its intellectual capital, then procurement and marketing will become important locations for partnership with both customers and suppliers.

Connection f-4

(37)

TABLE 9

Found framework connections in the Seal case (Bold)

Content

Suppliers e. Costs per supplier 4. Activities and Processes

g. Process control

Use SMA

process

Diagnostic

Low Cost

After the strategic change the company did work in interdisciplinary teams, which enhances communication, however the use of ABC insights are not discussed in the case.

(38)

4.10 General remarks of the cases

On the basis of the findings in the individual analysis of the eight cases, here a general analysis of all cases will follow.

4.10.1 Cost allocation method

Two of the companies under research, which all follow a SMA approach, use a standard cost allocation system. The other companies did implement ABC in the company, however in most cases they did not fully adopted ABC throughout the company. In two cases where the research was only focussed on one department of the company, ABC was fully implemented at those departments.

4.10.2 SMA

All the companies showed characteristics from which a SMA approach could be inferred. The cooperation of different functions in the organization is an often seen indication of SMA and also competitor accounting is seen in most companies. In some of the cases the company was in a process towards a greater use of SMA.

4.10.3 Framework connections

The role of the cost allocation method in the SMA process of a company differ between companies, here some general remarks over the connections follow. The quantitative overview in this qualitative study however, needs to be addressed with caution.

Connection a-1

Competitor analysis appears to be important in almost all SMA cases. Benchmarking of costs is in most cases part of this process and ABC can provide an accurate overview of the own overhead costs. However, both ABC and the standard cost allocation methods appeared to be able to facilitate in this process by proving insights in the cost structure.

Connection b-2

Two of the cases use ABC to calculate product costs for the pricing attribute, where both of the cases which use a standard cost allocation method did. These companies see the pricing strategy as an important product attribute.

Connection c-2, 3

The overhead costs of the market get split with ABC in three of the cases to determine market profitability.

Connection d-2, 3

(39)

Connection e-2, 3

Only one of the companies uses ABC to determine costs of suppliers, and this is done in a cautious way, to retain a constructive relationship with the suppliers.

Connection f-4

Some companies use the knowledge and costs of activities and processes for process optimization. The initial insights of ABC are for a great deal responsible for the optimization, but also in one case is a standard cost allocation method used to enhance the dialogue about optimization.

Connection g-4

Two cases present to use ABC insights in activities, processes and corresponding costs to control the processes in the company.

TABLE 10

Found framework connections in the cases

SMA Found (#) ABC - Standard cost

allocation insight in:

Content Competitors a. Benchmarking (4-2) (2-2) (3) (5) (1) (3-1) (2)

Use SMA

process

Diagnostic (1-1) Use of ABC - Standard cost allocation insights

Interactive (2-1)

Strategy Company _{Strategic Position} Differentiation(6)

Low Cost (2)

4.10.4 Use

Some cases didn‟t provide a description about the use of the insights in costs of the company. Most cases did give an indication of the use of the cost allocation insights, however hard conclusion cannot be drawn on these indications.

In the cases which indicate an interactive use of the cost allocation system are characterised by the communication of the outcomes throughout the company and the participation of different functions. The cases which indicate a diagnostic use are less participative and there the results are directed toward the top of the company.

(40)

4.10.5 Strategy

The expectations of differences between a low cost and differentiation strategy were not confirmed in the cases. The use of ABC or standard cost allocation insights for price and benchmarking, were not only used in a differentiation strategy, and process optimization and control were not only used in a low cost strategy.

(41)

5. DISCUSSION

In the theory section of this paper the concept of SMA is presented by an overview of the different aspects. The elaboration on ABC and the combination with the SMA theory led to the framework in Table 1, which forms the basis for analysis of the cases. In this section a discussion and conclusion of the analyses will follow and limitations of the research will be mentioned.

All of the expected insights which ABC could provide in SMA were found in at least one of the cases, there are however differences between the case companies.

The provided insights by ABC in customer profitability analyses appeared to be the most used insight of ABC in the SMA processes. In the theory was already clear that in the process of SMA these opportunities for optimizing have to be identified and coordinated. The contribution of ABC by providing the costs of both products and non-manufacturing, led to more accurate calculation of the customer profitability.

The counterpart of customer profitability in the value chain, supplier profitability is only found, in a cautious way, in the Seal case. The exploitation of cost reduction with supplier will probably be less based on costs, because supplier relations are often long-term on the basis of specialization and quality. The Lord case indicates that the exploitation of cost reduction opportunities with suppliers is part of the ordinary business and mostly based on common sense. The relation with customers is in most cases naturally more variable, which makes the customer analysis process recurrently evident.

Competitor analysis was already the focus of Simmonds in 1981 when he introduced SMA and also most of the analyzed cases perform competitor analyses. The contribution of ABC over standard cost allocation was not found in the cases. The knowledge of the costs of competitors is probably not so precise that ABC has an advantage over standard cost allocation methods.

In the cases of Lord and Rickwood et al. there were no signs of the use of ABC in the company. Especially in manufacturing company of the Rickwood case was expected to find ABC. Both case companies were in the process towards greater incorporation of SMA. ABC therefore appears not to be seen as a requirement for SMA implementation.