Strategic management accounting: formula sheet

Key formulas

Traditional vs strategic management accounting

Traditional = internal + historic + financial; Strategic = external + forward-looking + financial and non-financial

Use as a comparison frame. Present it as a difference in emphasis, not a strict split, because SMA also uses internal financial data.

Role of SMA in the strategy cycle

Formulation → Implementation → Control (and feedback)

Structure answers around the three stages and give one example of information for each.

Types of information SMA uses

External + Forward-looking + Non-financial

These three labels are the core of the topic. Add an example from the scenario for each.

PESTEL factors

Political, Economic, Social, Technological, Environmental, Legal

External macro-environment. Always say what each factor means for this business, not just list it.

Porter's Five Forces

New entrants, Substitutes, Buyer power, Supplier power, Rivalry

Industry-level analysis. Rate each force as high, medium or low and justify it from the scenario.

Value chain primary activities

Inbound logistics, Operations, Outbound logistics, Marketing and sales, Service

Activities that directly create and deliver the product.

Value chain support activities

Procurement, Technology development, Human resource management, Firm infrastructure

Support all primary activities. Often where cost or capability gaps are hidden.

Value chain margin

Margin = Total value created − Total cost of value activities

A conceptual idea. Competitive advantage comes from lower cost or higher differentiation.

SWOT

Strengths and Weaknesses (internal); Opportunities and Threats (external)

Place each point in one box only. Internal means within management's control.

Economic value added (EVA)

EVA = NOPAT − (WACC × capital employed)

NOPAT is net operating profit after tax, adjusted for items such as R&D treated as investment. Positive EVA means value is created in the period.

Market value added (MVA)

MVA = market value of the firm's capital (equity + debt) − capital invested

Capital invested is the adjusted book capital (equity + debt), with the same adjustments as used for EVA. MVA shows the total value created over the firm's life, not one year. The market value of the firm's capital needs a market price, so MVA is practical only for listed firms.

Total shareholder return (TSR)

TSR = (closing share price − opening share price + dividends) ÷ opening share price

Measured over a period. Compare with peers or an index to judge relative performance.

Shareholder value analysis (SVA) – Rappaport

Corporate value = PV of free cash flows over the forecast period + PV of residual value (+ marketable securities). Shareholder value = corporate value − debt.

Cash flows are discounted at WACC. Shareholder value is a level, measured at a point in time. The change in that value between two periods is the value created. Residual value is usually estimated as a perpetuity of the operating cash flow after the forecast period, discounted at WACC. Value drivers feed the forecast cash flows. Change a driver and you can see the effect on value.

Free cash flow to the firm (FCFF)

FCFF = NOPAT + depreciation − capital expenditure − increase in working capital

This is before financing. Definitions of free cash flow vary, so state the one you use. Depreciation is added back because it is non-cash. In Rappaport's model, the cash flow is operating profit after tax less incremental fixed capital investment and incremental working capital investment.

Target cost

Target cost = Target selling price − Target profit

Target profit may be a margin on price or a required return. Read the wording.

Cost gap

Cost gap = Estimated current cost − Target cost

A positive gap means costs must fall. Value engineering and redesign aim to close it.

Lifecycle cost

Lifecycle cost = Design and development + Production + Marketing and distribution + Service and warranty + Disposal costs

Include all stages. Discounting may be required if timing differs materially.

Lifecycle cost per unit

Cost per unit = Total lifecycle cost ÷ Total lifetime units

Use lifetime volume, not annual volume.

Benchmark gap

Gap = Own measure − Benchmark measure

Compare like with like. Define the measure the same way for both parties.

The 4 Vs of big data

Volume + Velocity + Variety + Veracity

Some texts add value as a fifth V. Use the 4 Vs unless the question points elsewhere.

Qualities of good information

Relevant, accurate, complete, timely, understandable, trusted, cost-effective

Use as a checklist when asked to evaluate a report or system.

Types of analytics

Descriptive → Diagnostic → Predictive → Prescriptive

Each step adds insight and usually needs more skill and better data.

Value test for information

Benefit of better decisions > Cost of producing the information

A cost-benefit test applies to any new system or analytics project.

Quick revision

• SMA looks outward and forward, using external, non-financial and long-term information.
• Traditional management accounting focuses on internal, financial, short-term control.
• Use analysis tools to understand the environment before recommending a strategy.
• Positioning tools show where the business stands against rivals and markets.
• Value creation means decisions that raise long-term returns, not just short-term profit.
• Link shareholder value to stakeholders and sustainability, not only to profit.
• Competitive advantage must be specific to the business and hard for rivals to copy.
• Every technique has limits. State them in evaluation answers.
• Big data helps with analysis and decisions but raises cost, quality and data-protection issues.
• Information systems should match the strategy and the decisions managers must make.
• Apply every point to the scenario. Generic answers score poorly.
• End each answer with a clear, justified recommendation.

Common mistakes

• Describing SMA as just 'more detailed costing'. Fix: Stress the external, forward-looking and non-financial emphasis, and the link to strategy.
• Giving a generic list of benefits with no scenario link. Fix: For each point, name the scenario's market, competitor or product and say what the information would show.
• Listing PESTEL factors without applying them to the scenario. Fix: Use a fact from the scenario, say what it does to this business, and say how performance would change.
• Confusing Five Forces with SWOT, or using Five Forces on a single firm. Fix: Remember that Five Forces looks at industry attractiveness. SWOT is a summary of internal and external findings. Use each for its own purpose.
• Treating accounting profit as value created. Fix: Always compare return with the cost of capital. Use EVA or a similar measure to show that profit must cover the capital charge.
• Listing value drivers without linking them to the scenario. Fix: Pick only the drivers that fit the strategy and quote scenario facts to support each one.
• Treating target costing as a cost-plus method. Fix: Start from the market price, subtract the required profit, and treat the result as a ceiling that costs must meet.
• Listing technique definitions without applying them to the scenario. Fix: Use scenario facts in every paragraph. Say what the technique shows for this company and what it should do next.
• Treating MIS and DSS as the same thing. Fix: Say an MIS gives routine, structured reports for control, while a DSS supports unstructured decisions through modelling and what-if analysis.
• Listing the 4 Vs with no link to the scenario. Fix: Give each V a scenario example, for instance velocity as real-time sensor data from the client's machines.

Exam tips

• Always tie SMA points to the scenario. Generic textbook answers score poorly on application and professional skills.
• Use the strategy stages (formulation, implementation, control) as a ready-made answer structure.
• When asked to 'discuss', include both benefits and limitations, then conclude.
• Expect this topic to be combined with others such as the balanced scorecard, value chain or big data. Show the link rather than treating it in isolation.
• Keep answers concise on a phone-sized planning page: three headings, one scenario example each, then write.
• Always name the tool in your answer headings, then apply it. Markers look for the framework and for scenario facts.
• Use professional skills: prioritise the most important points, challenge the data where it is thin, and give a clear recommendation.
• Do not spend time defining models. The exam assumes you know them, so go straight to application.