Strategic Management Accounting

Object Required:

Assignment on Strategic Management Accounting

Principle:

The purpose of this “Strategic Management Accounting” task is focused towards two questions. Accordingly this task is divided into two parts. In the first part critical evaluation is conducted with reference to the statement: “Both Return on Investment and Economic Value Added,when used as performance measures in an organisation, encourage managers to be short-term in their focus and decision making”. Further in the second part critically evaluated the three approaches to costing products or services in the forms of marginal or variable costing; full or absorption costing; and activity based costing.

Theory:

PART A:
Managers, shareholders and other stakeholders necessitate being attentive of a company’s performance to facilitate them to create informed decisions for the times to come. From this perspective, measuring the financial performance of a company is significant. Managers in a company has option to make use a range of performance measurements where the two most important measures are Return on Investment and Economic Value Added.The decision making about measure decided on by an organisation will be determined by what a business is trying to achieve and the performance being measured.

Economic Value Added- Economic Value Added is one of different measures presented to decide a company’s performance. This measurement model reflects the residual wealth measured by cost of capital deduction from the operating profit adjusted for taxes as regards a cash basis (Stewart, 1990). The real gains of the Economic Value Added measuring are attained whilst managers identify with what the profits of their company involves and they turn out to be motivated to get better such profits in relation to the results of the measure. The point is that the mission and goal of every company is to generate value for the shareholders, where when long-standing/. Economic Value Added is maximised, the company is all set to maximise its own value. It is argued that through utilising a comprehensive Economic Value Added oriented financial management and incentive compensation method, managers in a company will have opportunity get hold of superior information and more importantly would be more motivated to create decisions that tends to make the utmost shareholder wealth. Other advantages of Economic Value Added include integrating the interests of managers together with shareholders, first-rate estimation of managerial performance and conduct in the company’s best interest, making aware the managers that capital has cost hence helping out in decision of disposal of under utilised that do not cover up costs creating managers be cautious of managing assets together with income and assisting to evaluate trade-offs amid the two, and more importantly managers focus on the delivery of shareholder value.

Economic Value Added is inherently backward looking, as he faces added in the last period of the carrying amount and thus measures the success of past policy decisions and investments. It fails to consider in detail the current strategy pursued by the organisation, and does not try to assess whether the organisation takes steps to ensure it will build up and uphold a sustainable competitive advantage. One result of this is that the economic value added, it would seem, is of limited use for a young growing company. Use of economic Value Added can promote short-term solutions at the middle management and can lead to managers refuse to make investments that although they have a large positive net present value, would reduce the Economic Value Added in the short term. The main practical issue that arises when calculating the Economic Value Added, profit and capital must be defined. There are a number of common mistakes that are often made ​​in implementing or using economic value added. Most of them are associated with either a lack of understanding, or therefore the concept on the upper levels or training for all staff to use economic value added, and therefore not using the full potential of the concept. For measuring Economic Value Added properly all capital ought to be allocated to units. Typically, the Return on Investment is calculated so that only the capital affect able units counted. With the Economic Value Added is the equal mod us operand might be utilised..

Sharma and Kumar (2010) establish that the utilization of accounting adjustments to evaluate Economic Value Added and to assess performance at divisional point is not worthwhile. As a result, performance metrics might necessitate being free of adjustments and being proficient to determine performance at a divisional rank. Noticeable here researches have had been conducted on greater level as regards Economic Value Added, the giving of Economic Value Added in relation to the value for stakeholders and as well on the appropriateness of Economic Value Added for various economic sectors finds that companies and their consultants utilize Economic Value Added as the most thriving metric performance, wand more importantly financial theory validates the metric of Economic Value Added, which is steady with principles of valuation. These issues are vital to investors whilst analyzing the financial performance of companies. Economic Value Added might be differentiate from supplementary metrics of financial performance measures in the


Conclusion:

Managers in a company has option to make use a range of performance measurements where the two most important measures are Return on Investment and Economic Value Added.Economic Value Added measure has both plus and minuses, though it is a fact the metrics is turning out to be a popular and enviable tool for measuring financial performance of a company, where particularly the metrics encourage managers to be short-term in their focus and decision making. In order to offer a meaningful framework for business decisions Return on Investment is a useful and effective metrics of assessing financial performance focused towards the short-term decision making.The critical discussion clearly substantiate that both Return on Investment and Economic Value Added, when used as performance measures in an organisation, encourage managers to be short-term in their focus and decision making. Absorption costing is the foundation of the entire financial accounting systems implying that every cost is included allocated or divided into production and operation statements make no distinction between fixed and variable costs. Marginal costing is useful in determining the profitability of products, services, processes and cost centres. During the analysis of the profitability, marginal cost calculation interprets the cost on the basis of the nature of the charges. Marginal cost in other words is the variable costs. For a typical manufacturing the following elements of the costs are variable or marginal costs. However, traditional approaches often use flat rate or output as a base for overhead and evenly spread the overhead costs of services and products. Marginal and absorption costing can be different render as surplus figures because they differ in inventory valuation. Using activity based costing can improve costs in health care, and shed light on services under cost or cost in the past, using traditional costing methods.

Published Date:

2018-10-04 17:51:00

Lokesh kumar, BBA Program

                   

E: 405/2015-CO/L | M: 406/2015-CO/L

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