Strategic Management Accounting and Performance Measurement
Strategic Management Accounting and Performance Measurement tests how managers use cost, pricing and performance data to make decisions and align behaviour. Expect calculations plus critique of metrics and transfer pricing.
Core rules
- Balanced scorecard: financial, customer, internal process, learning and growth; lagging and leading measures; strategy map.
- ABC and TDABC: assign overheads using cost drivers; TDABC uses capacity cost rates and time equations.
- Target costing: price-led cost planning; life-cycle costing includes design, production and disposal.
- Throughput accounting: throughput = sales − material cost; bottleneck management; throughput per bottleneck minute.
- Divisional metrics: ROI = profit/invested capital; RI = profit − imputed interest; EVA = NOPAT − WACC × capital employed.
- Transfer pricing: market, cost-plus, negotiated, dual; goal congruence and autonomy.
Worked example: Division profit ₦3m, capital ₦15m, cost of capital 12%. ROI = 20%; RI = ₦3m − ₦1.8m = ₦1.2m. A new project needs ₦5m and earns ₦500k. ROI becomes ₦3.5m/₦20m = 17.5%, so an ROI-managed manager rejects it. RI becomes ₦3.5m − ₦2.4m = ₦1.1m, still positive, so the manager accepts. RI better supports goal congruence when projects earn above the cost of capital but below current ROI.
Traps: using book values for ROI; forgetting imputed interest in RI; comparing EVA with unadjusted profit; ignoring capacity in ABC; assuming transfer price has no behavioural effect.