Strategic Management Accounting Framework and Cost Information for Decision Making
What this domain tests
Strategic management accounting (SMA) shifts the focus from internal record-keeping to external, forward-looking analysis. The exam tests whether you can select relevant cost information for decisions such as special orders, make-or-buy and discontinuation, and whether you understand Shank and Govindarajan's framework: value chain analysis, strategic positioning and cost driver analysis.
Core rules
- Relevant costs are future, incremental and cash-based. Sunk costs, committed costs, allocated common fixed overhead and notional or apportioned costs are irrelevant.
- Opportunity cost must be included when a scarce resource is diverted from its best alternative use.
- SMA is externally oriented, competitor-focused and long-term; traditional management accounting is internal, historical and short-term.
- Cost drivers split into structural (scale, scope, experience, technology, complexity) and executional (workforce commitment, TQM, capacity utilisation, plant layout, supplier relationships).
- Better cost information itself has a cost; the criterion is whether the decision improvement exceeds the cost of the information.
Worked example
A factory with spare capacity receives a one-off order for 2,000 units at Rs. 850 each. Variable cost is Rs. 620 per unit, including Rs. 40 of allocated fixed overhead absorbed per unit. Extra tooling costs Rs. 90,000 and a supervisor would be hired at Rs. 60,000. Existing fixed overhead of Rs. 1.2m is unaffected. Relevant cost per unit = 620 − 40 = Rs. 580. Contribution = 2,000 × (850 − 580) = Rs. 540,000. Less tooling Rs. 90,000 and supervisor Rs. 60,000 gives an incremental benefit of Rs. 390,000. Accept. If the 2,000 units used a constrained machine that otherwise earns Rs. 200,000 contribution, deduct that opportunity cost and the benefit falls to Rs. 190,000 - still accept.
Traps
Absorbing fixed overhead into the "variable" cost; ignoring opportunity cost when capacity is not truly spare; treating a committed lease as avoidable; confusing notional interest with a relevant cost.