Strategic Management Accounting Functions

by Osmond Vitez

Many businesses use some form of management accounting, whose functions include budgets, cost allocation methods and cost-volume-profit or break-even analysis. Strategic management accounting goes beyond these functions, focusing on how external factors (such as a competitor analysis or political/monetary policy review) and non-financial information can improve a company’s operations.

Relative Cost Position

A relative cost position is a detailed analysis that includes the production capacity and cost positions of all competing companies in the economic marketplace. Business owners use this information to create a chart indicating which companies have the lowest and highest relative cost position in the market. This also outlines the entire industry’s supply of specific consumer goods or services. Business owners can use strategic management accounting to determine their economies of scale, reducing individual unit costs by increasing the amount of production output. However, most companies usually have a point where an economy of scale does not provide any more advantages. A company’s economy of scale is usually the best relative cost position for its goods or services in the economic marketplace.

Sustainable Cost Advantage

Strategic management accounting creates a sustainable cost advantage. Companies often use sustainable cost advantages to ensure their products are the most competitively priced in the economic marketplace. Business owners also create a sustainable cost advantage to avoid losing sales to substitute or inferior goods. Substitute or inferior goods are products that provide similar benefits to a company’s products at cheaper consumer prices or a lower quality. Businesses control costs by contracting directly with suppliers to purchase a certain amount of goods at a fixed price for a specific length of time. These contracts also take away a supplier’s bargaining power. Supplier bargaining power allows supply companies to dictate the price a business will pay for economic resources. This can increase a business' direct materials expense and decrease their sustainable cost advantage.


Differentiation is a way business owners differentiate their companies from other businesses in the economic marketplace. Strategic management accounting works in tandem with other organizational departments to create value for consumer goods and services. Differentiation is often achieved through customer service, supply chain, image and product placement. Business owners use strategic management accounting to review the costs associated with these activities to ensure the company does not lose its relative cost position. Maintaining a sustainable cost advantage is a must when companies differentiate their products from other businesses in the marketplace.

References (1)

  • "Managerial Accounting"; Ronald W. Hilton; 2008

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