7AC002 Accounting and Finance: Evaluation of Air Canada

Task 1: 

The primary objective of the study is to present a financial performance evaluation of Air Canada (TSX: AC) and West Jet (TSX: WJA). In this study, key financial ratio are employed for assessment as well as comparison of financial health and condition of the corporation with respect to liquidity, profitability as well as solvency of each of the above mentioned corporations across financial years 2015 and 2016. Thereafter, this study also evaluates diverse sources of finances that are available to firms such as Air Canada and West Jet.  

Introduction of two publicly listed organizations

Main Organization and its Competitors

The main organization selected for the current study is the Air Canada. Air Canada is necessarily a flag carrier and is the largest airways of Canada. Air Canada founded in the year 1937 delivers scheduled as well as charter air transport services for different passengers along with cargo to approximately 182 destinations globally. In particular, this is the eight largest passenger airways in the entire world in terms of fleet size and is also a founding member of the Star Alliance. Essentially, the regional service of the airline is the Air Canada Service. The national airway of Canada necessarily originated from mainly the Canada’s federal government’s creation of primarily Trans-Canada Airlines that started running their transcontinental flight routes during the year 1938. During the year 1965, TCA was renamed as Air Canada after government authorization. However, after deregulation of mainly airline market of the Canada during the year 1980s, this airline was privatised during the year 1988.

The firm selected as competitor in this study is the West Jet. West Jet Airlines can be considered as a low cost airway in Canada that was founded during the year 1996. Essentially, it started its operation as a low cost alternative to nation’s major airlines. As such west Jet delivers scheduled as well as charter air services to around 100 destinations to different parts of Canada. Reports say that West Jet is at present the second largest air carrier in Canada that is only after Air Canada, running an average of approximately 425 flights as well as carrying more than 45000 passengers each day. Particularly, during the year 2013, the airline West Jet carried nearly 18.5 million passengers and thereby making it the 9^th largest airway in North America in terms of passengers that are carried by them. As such, West Jet is considered as a public corporation that is having more than 10000 members of the staff and is not considered to be a part of mainly airline alliance. This airline mainly runs three different variants of particularly Boeing 737 Next Generation along with Boeing 767 aircraft on diverse selected long haul routes.

Research Business Practices of the corporation

Air Canada is considered to be the largest domestic, U.S transborder as well as global airways and is also the largest provider of scheduled service to passengers in the Canadian airline market. As per annual report of the corporation pronounced during the year 2016, major business practices of Airline Canada include operation of a fleet of around 168 aircraft, consisting of approximately 75 narrow-body airbus, 68 Beoing as well as wide body airline. 25 Embraer regional jet, whilst Air Canada Rouge mainly operationalised a fleet of around 45 aircraft, comprising of 20 Airbus (A319), 5 Airbus (A321) as well as 20 Boeing (767 to 300) for a total fleet of roughly 213 aircraft.

According to the report of the corporation, it can be hereby mentioned that ongoing process of renewal as well as expansion of mainly Air Canada’s wide body fleet stays to be an important component of the business strategy in order to profitably formulate the global network and to become an international champion. During the year 2016, Air Canada necessarily made delivery of approximately 9 Boeing that is (787 aircraft). Fundamentally, all these aircraft having lower level of operating costs, medium-size capability along with longer range are necessarily driving novel opportunities for overall profitable growth as well as development of the firm (Williams 2014). This in turn permits this airline to operate more effectively and enhance profitability as well as competitiveness in diverse leisure markets, reflecting a coordinated stratagem that necessarily leverages overall strength.

Analysis of the annual report of the corporation Air Canada reveals the fact that the principle aim of the firm is to be one of the best global airlines, continually enhance experience of the customers along with engagement of the employees, and generate value for diverse shareholders. Again, management of Air Canada adopts four different strategies that involve identification as well as implementation of initiatives of cost reduction as well as revenue generation. In addition to this, strategies also include adoption of profitable worldwide opportunities of growth and leveraging competitive attributes for enhancement of margins, augmentation of existing and novel international gateways. Furthermore, the business strategy of the corporation also involves engagement of customers by persistent enhancement of travel experience and delivering superior customer service with main focus on premium and business passengers. Additionally, the strategy of the corporation also includes fostering positive culture alteration by means of employee engagement programs.

Analysis of the industry

As per reports presented by KPMG, for airlines as well as different airport operators, adaptation can be considered to be a very important aspect of survival. Essentially, the airlines Industry in Canada has underwent plenty of turmoil particularly over the past few years. Subsequent to essentially the period of economic crisis mainly in the USA and enhanced by the 9/11 terrorist attacks, outbreak of the SARS epidemic and warfare in Iraq, the airline segment also started to grow during the year 2004. In essence, there is tax load that is weighing down the entire airline segment and this can be regarded as a hindrance to growth in traffic in Canada. According to reports presented by the KPMG, in case if the passengers of the airline industry become less inclined to bear these specific costs, there might possibly be a migration to diverse less burdensome destinations or else airports. However, barring general taxes that are applicable to different businesses, the overall contribution of this sector to mainly the federal treasury essentially increased to 19.6%.

Understanding Macro Economic and Business Factors

Political factors:

Transnational firms-The airline industry in Canada can be considered to be mature industry that has several big players apart from the two major players namely the Air Canada as well as West Jet. As such, other players in the airline industry are essentially the corporations having head offices outside that of Canada and per se compete on several routes. In essence, the foreign-owned corporations are adequately large that can help in subsidizing diverse routes and at the same time recoup in diverse areas. Essentially, these players can also spread the overall overhead cost to several departments (Henderson et al.  2015).

Transfer Pricing- Majority of the foreign invested corporations utilize transfer pricing as a way of making certain that profits can be properly realized (Hoskin et al. 2014). However, regrettably the Canadian government necessarily takes concern with specific corporations that decide to mainly transfer the profits to another nation in case if profits can be realized in Canada. Particularly, the Canadian government also believed that these types of profits have the need to be taxed mainly in Canada and not essentially in host nation where there are tax advantages.

Taxes- Analysis of the political environment of the airline industry in Canada reflects the fact that the airline segment is heavily taxed (Van der Stede 2016). However, the taxation is for general customer taxes to environmental taxes for manly air pollution. Nevertheless, all these different taxes are mainly passed to different clients and replicated through high priced fare.

Economic Environment:

Cloud Services- Owing to technological alterations, majority of airlines have introduced transformations in the operations and essentially have moved from particularly physical system of physical booking as well as check in services to particularly online system of booking along with check ins. In particular, this has saved different operational costs. Additionally, electronic system of communication has also transformed operations that in turn are utilized to solve different customer issues (Dekker 2016).

Influence of prices of fuel- as rightly indicated by Hopper and Bui (2016), the economic downturn mainly during the year 2008 along with the fluctuating levels of prices of mainly fuel has generated a tightening mainly in the airline segment leaving several airline players thriving for capacity of seats and utilizing alliances as well as partnerships for ensuring capacity.

Social Environment:

Safety- safety can be considered to be highly regulated under aviation directives. Essentially, the Canadian Transport Agency can be referred to be a regulator that helps in monitoring diverse safety measures. Particularly, this can be regarded as a huge facet that in mainly transportation service and simultaneously in the airline segment. However, there are numerous strict regulations in safety in Canada starting from arrival to reaching destination (Weil et al.  2013).

Shift in demands of customers- The demands of customers has shifted towards fast service as well as quick response. Establishment of online platform for sales, third party involvement along with mobile sales have augmented the way clients interact with airways (Henderson et al.  2015).

Technological Environment:

The Airline industry operating in Canada has the need to maintain pace with the novel aerodynamic technology to acquire passengers to their own destinations in a timely way (Henderson et al.  2015). Essentially, this implies that airlines are significant investments and they compete for latest technologically advanced planes from airplane manufacturers.

Legal Environment:

Airline industry in Canada is mainly charged an environmental tax and need to adhere to diverse regulations. Several corporations essentially self-supervise and utilize governance as well as structure of corporate social responsibility in order to lessen the overall carbon footprint. Canadian aviation Act also governs diverse parts, activities related to aircraft service and licensing and training of members of airline staff.

Comparative analysis of Performance of Ratio Analysis and Interpretation

Table below showing the calculations of key financial ratio of the main company Air Canada and the competitor West Jet

Comparative analysis of performance:

The current ratio is essentially a liquidity ratio that helps in enumerating capability of the firm to repay different short term as well as long term obligations. The current ratio of Air Canada has declined during 2016 to 0.98 from 1.077 during 2015, indicating an unfavourable condition as it implies decline in ability of the firm to repay its obligations of mainly short term. On the other hand, the current ratio of West Jet has increased to 1.21 during 2016 as compared to 0.96 during 2015. Therefore, in terms of liquidity, the competitor firm West Jet is said to be in a better financial condition (Alin-Eliodor 2014).

The gearing ratio can be considered to be general categorization illustrating a key financial ratio that again can compare diverse forms of owner’s equity with that of the funds that are borrowed by the business concern (Bodie 2013). The gearing ratio of the Air Canada increased to 2.98 in 2016 as compared to the year ago figure of 93.05. This reflects a favourable financial condition as this replicates decline in debt and increase in equity. On the other hand, the gearing ratio of the corporation West Jet is registered to be 0.52 in 2015 and that increased to 0.92 in 2016. This replicates an unfavourable financial condition as this reflects increase in proportionate increase in debt and higher obligation of interest payment. Therefore, in terms of solvency, the main firm Air Canada is said to have a better financial condition.

 Gross Profit margin ratio that is enumerated by subtracting cost of goods sold from the total revenue and then dividing the same by the total revenue (Magalhães 2014). The gross profit margin ratio enumerated for the firm Air Canada is observed to increase from 37.68 during 2015 to 39.17 during 2016. This replicates a desirable financial condition as this indicates higher capability of the firm to generate gross profit from the new sales of the firm. On the other hand, the gross profit margin of the West Jet declined during 2016 as compared to the year ago period, reflecting an undesirable financial condition.

Operating profit margin ration refers to the profit that a business concern makes after making payments for different variable production costs namely wages as well as raw materials and many others (Jordan 2014). Essentially, this is also reflected as a specific percentage/proportion of sales and then replicates the overall efficiency of a business concern in controlling the overall costs as well as expenses related to the operations of the business concern (Lin et al.  2015). The operating profit margin ratio of Air Canada declined from 10.78 in 2015 to 9.16 in 2016, representing decline in decrease in capability of the corporation to generate earnings before interest and tax from the net sales. On the other hand, the operating profit margin ratio of West Jet also decreased sharply as compared to the year ago period, reflecting an undesirable financial condition (Edmonds et al.  2016).

Return on assets refers to a specific financial ratio that reflects the overall percentage or else proportion of profit that a business concern earns in association to the overall available resources of the firm (Edmonds et al.  2016). This is generally enumerated by dividing the net income by the total assets of a business concern. The return on assets enumerated for the firm Air Canada increased from 2.34 during 2015 to nearly 5.79 during 2016, indicating higher efficiency of the corporation in utilizing the firm’s assets for generation of greater earnings. On the other hand, the return on assets calculated for West Jet reflects a sharp decline, indicating an unfavourable financial condition of the competitor firm.

Return on capital employed refers to a specific financial ratio that enumerates overall firm’s profitability as well as efficiency of a business concern with which a capital is engaged (Edmonds et al.  2016). The return on capital employed enumerated for the main firm Air Canada can be witnessed to have declined from 11.39 in 2015 to 8.89 in 2016, reflecting decrease in relative profitability of the firm during the mentioned time period. However, on the other hand, the same has also declined for the competitor firm. Among the two, Air Canada is said to have higher return on capital employed during 2016.

Task 2

Interpretation of Annual Reports: Management and Accounting Decisions

As per the annual report of the main firm Air Canada, it can be hereby mentioned that the management has the objective of enhancing the worldwide international to international linking traffic by means of major Canadian hubs. Again, the overall growth in traffic during 2016 replicated an augmentation in linking traffic by means of Canada to transnational destinations. Again, the management of the corporation also has the objective of lessening the risk associated to cash flow associated to foreign dominated flow of cash (Dekker 2016). In addition to this, administration of the business concern also intends to minimize the overall potential of the firm to alter the rates of interest for causing adverse transformations in flows of cash of Air Canada. Additionally, the investment strategy of the firm is to invest suitably diverse plan assets particularly in a prudent as well as diversified manner in order to mitigate risk associated to fluctuations in price of diverse asset classes along with individual investments (Weil et al. 2013).

Furthermore, management decisions also include identification as well as implementation of specific strategies for reduction of cost and initiatives for generation for revenue. In addition to this, the management of the firm has also decided to assume profitable global growth opportunities and at the same time leveraging diverse competitive attributes (Weil et al. 2013). Additionally, the management of the firm intends to engage large number of customers by persistent enhancement of travel experience and delivering persistently higher level of customer service with additional stress on particularly premium, business passengers as well as products.  Moreover, the management decision is also to foster positive transformation in culture by means of diverse employee engagement programs (Van der Stede 2016).

Primarily, the management decisions are centred on the main objectives of the corporation. In relation to management of capital, there is requirement for maintenance of financial leverage at or below the level of 2.2 by the year 2018, formulating structure of mainly repayment obligations consistent with the anticipated life of firm’s principal. Again, management decision also needs to make certain that the corporation has proper access ro capital to finance diverse contractual obligations, maintain a suitable balance between debt and investor supplied capital and monitor the credit ratings (Dekker 2016).

Analysis of the financial reports of the firm reveals that the firm Air Canada prepares as well as presents financial assertions as per the generally accepted accounting principles particularly in Canada. These regulations are presented in the CPA Canada Handbook that again integrates International Financial Reporting Standards as is issued by mainly the International Accounting Standards Board. Essentially, the financial pronouncements were authorized by the Board of Directors of the corporation and are founded by the accounting policies. Financial assertions are prepared under mainly historical cost convention excluding process of cash revaluation, equivalents of cash as well as short term investment, limited cash along with derivative instruments that are enumerated at fair values. The financial assertions comprise of diverse accounts of particularly Air Canada as well as its subsidiaries. The financial instruments such as financial assets as well as liabilities counting derivatives are identified on the consolidated assertions of financial position at the time when the firm becomes a party of mainly the financial instrument or else derivative agreement. Additionally, the firm evaluates diverse available information counting forward looking basis the anticipated credit losses related to assets that are carried at amortised cost (Hopper and Bui 2016).

On the other hand, analysis of financial assertions of West Jet reflects the critical accounting judgements as well as estimates and various judgements. Essentially, the preparation of mainly consolidated financial declarations is in accordance with regulations of IFRS to arrive at judgements as well as estimates (Hopper and Bui 2016). This can materially affect the overall amounts that are acknowledged in financial pronouncements. In essence, the componentization of company’s assets such as aircrafts are founded on management’s judgements of diverse components makes up a considerable cost in association to the entire cost of a specific asset. Fundamentally, depreciation as well as amortization mechanisms for particularly aircraft as well as associated components along with other plant, property as well as equipment along with intangible assets are founded on judgement of the management (Hoskin et al. 2014). This can replicate the overall pattern of the future economic advantage from an asset that is anticipated to be consumed. Again, evaluation of impairment is mainly founded on judgement of the management. There are also adequate internal as well as external facets that would replicate that an asset or else cash generating unit is necessarily impaired. Evaluation of finance lease and operating lease is mainly founded on judgement of the criteria implemented in the IAS 17. The financial statements of West Jet audited by KPMG mentions that the consolidated financial assertions of the firm are prepared as well as presented as per the Canadian Generally Accepted Auditing Standard. Additionally, the consolidated financial declarations of the corporation are also prepared by the management of the business concern as per the directives of the International Financial Reporting Standards (Hoskin et al. 2014).

Need of financial statements for the chosen and the competitor organization

The financial pronouncements of the main corporation “Air Canada” and the competitor corporation “West Jet” can help in identification of trends as well as associations between different items of financial assertions. In essence, internal management as well as external users of different financial assertions have the need to assess profitability, liquidity as well as solvency of the firm.  As such, the financial declarations deliver various financial information that diverse financiers as well as creditors utilize for the purpose of analysis of financial performance of the corporation. Bodie (2013) asserts that financial pronouncements presented in the reports are also very significant for the mangers of a corporations as by publishing the financial assertions, administration of the corporation can communicate with diverse interested members regarding accomplishments of the business concerns.

Jordan (2014) asserts that the financial statements presented by the firm both main as well as competitor firm can assist in understanding the financial condition of the corporations. This is of main concern to different financiers as well as creditors. In addition to this, financial pronouncements also assist in reflecting operating results. This is because financial status reflected in the balance sheet provides snapshots of assets, liabilities as well as equity, subsequently reveal what happened during a specific period from diverse operations that might have created alterations to financial conditions. Again, the profit of the corporation reflected in the income statement are essentially accounting income and is supposed to include different non-cash components, delivering no direct information on cash exchange of the corporation during a specific period. In addition to this, assertions on shareholders’ equity can be considered to be important to diverse equity investors as it replicates the alterations in diverse equity elements, counting retained earnings, particularly during a specific time period.

Utilization of ratios as a Performance Measurement Tool

Ratio analysis can be considered as a veritable way of monitoring, enumerating and at the same time enhancing performance in a specific corporation. Essentially, financial ratio can be regarded as an effective instrument of management in the process of provision of information as well as data requirement in planning along with determination of efficacy of management for a specific period. As rightly indicated by Jordan (2014), ratio can be properly utilized for establishment of association as well as trends in financial pronouncements. As such, ratio can also be considered to be important and effective for diverse user groups that includes the following

-Ratio analysis helps users to carry out trend analysis that in turn can help in assessment of financial position of the corporation

-Ratio also helps diverse user groups to understand the capability of a corporation to satisfy short as well as long term obligations (Jordan 2014)

-Ratio also assists in determination of profitability of a corporation and meet the short as well as long term debts.

-Operational efficiency also reflects the way the management uses the assets and the way the assets are utilized in generation of sales as well as revenue.

Interpretation of financial evaluation

Financial analysis can be regarded as a procedure of selection, evaluation as well as interpretation of diverse financial data together with relevant information for the purpose of formulation of process of assessments of corporation’s (both main and competitor firn) present as well as future financial condition (Jordan 2014).

Task 3: Historical Evolution of Management Accounting

As rightly indicated by Fullerton et al. (2014), the International Federation of Accountants during 1998 illustrates management accounting before the period of 1950 essentially as a technical action that is required for attainment of the objectives of the corporation. Essentially, the emphasis of management accounting primarily shifted to essentially the stipulation of information for the purpose of planning as well as control purposes during the period of 1950s as well as 1960s. Developments in particularly management accounting since the period of 1950s includes introduction of both cost as well as management accounting that again can be recognized as discount cash flows, Cusum Charts, Optimum Transfer pricing as well as Total Quality Management. Again, during 1970s, cost and management accounting innovations include introduction of computer technology, critical path scheduling, opportunity cost budgeting, management by objectives and zero base budgeting. Thereafter, during the period 1970s, cost as well as management accounting innovations comprised of information economics as well as agency theory, experience curves, materials resource planning, matrix organization, processes of product repositioning, portfolio management as well as diversification. The augmented global competition during the period of early 1980s along with the global recession during the period of 1970s followed by the oil price shock lead to the introduction of novel management as well as production mechanisms, processes of controlling costs, and diminution of waste in reserves utilized in business procedures. During the period 1990s, global industry persistently faced significant uncertainty along with unparalleled advances in mainly manufacturing as well as technologies of information processing (Renz 2016). Particularly, the management accounting can be classified into four different phases as mentioned below:

Table: Stages- Evolution of Management Accounting

Diagram: Table: Features of Evolution of Management Accounting

Examination of the relevance and importance of management accounting

It can be hereby mentioned that in the present intricate industrial world, management accounting has essentially become an important part of overall management (Collier 2015). Particularly, professional management accountant properly guides and at the same time advises the entire management at each and every step. In essence, management accounting not only enhances efficiency of the entire management but also enhances the efficiency of the members of the staffs of corporations. The primary relevance as well as importance of management are hereby presented one by one below:

• Management accounting helps in the process of determination of goal and discovering ways of achieving the predetermined goals (DRURY 2013)
• Management accounting also assists in the process of preparation of plan
• The cost control tool in mainly management accounting also enables the overall decrease in the product prices and serve the customers better
• Management accounting also helps in formation of judgements as there are several plans as well as policies that is before administration of firms and can be adapted as per the requirements (DRURY 2013)
• There are several techniques of budgetary control under management accounting that can be used for enumeration of performance, measurement of efficiency of employees, enhance the overall efficiency of operations of business and deliver effective tools for management control (Hoyle et al. 2015). 
• Maximum amounts of profits can also be attained when possible in a bid to control unnecessary expends.
• Safety as well as security from specific trade cycle can be attained using management accounting (Hoyle et al. 2015). 

Modern Management Accounting Tools

The modern management accounting tools can be considered to be very useful for any corporation that in turn can help in surviving during the long run period. Majority of particularly large as well as small manufacturing corporations are very much concerned regarding decision making that was purely founded on the profit as well as cost that was incurred. Again, management accounting can be regarded as the backbone of businesses regardless of size as well as volume. Essentially, there are different methods as well as tools appropriate for management accounting (Brown 2014). Even though there are several mechanisms of cost accounting, activity based costing can be regarded to be one of the most prominent mechanisms of costing. Fundamentally, it can be utilized in majority of the international corporations such as Mc Donalds, IBM as well as Tesco. Again, some of the major techniques of costing comprise of standard costing, historical costing, absorption costing as well as marginal costing. Activity based costing is mainly founded on actions and is said to be better than mechanisms that are traditional. Thereafter, the total quality management (TQM) can be regarded as another important tool that can assist in strengthening the competitive position of the corporation by reduction of waste and enhancement of consistency of production. Again, target costing can also be used for designing different phases and reducing costs of products during life cycle (Gray et al.  2014).

Management Accounting Techniques

There are diverse tools as well as techniques that are utilized in management accounting that can be categorised into the following groups. The primary management accounting techniques include the following:

-Financial Planning-

-Evaluation of Financial Assertions-

-Historical Cost Accountings

-Standard Costing

-Budgetary Control

-Marginal Costing

-Funds Flow Declaration

-Cash Flow Declaration

-Decision Making

-Revaluation Mechanism

-Statistical as well as diagrammatical mechanisms

-Communications

Management Accounting Tree

The management accounting tree refers to decision trees reflecting numerous probable courses of activities and possible incidents along with the potential results of each course of actions. In this case, each substitute course of activities or else incidents is reflected by a specific branch that again leads to subsidiary branches for further courses of activities or else possible incidents. As correctly indicated by Hribar et al. (2014), management decision tree can be regarded as an outcome as well as probability map of the specific scenario. Majority of the business problems might potentially have over and above varying solutions and each alternative might lead to diverse results (Sun et al.  2014).

Emerging Scenario- Strategic Management Accounting

The major trends in essentially strategic management accounting are as follows:

-Extension from particularly product to particular channel as well as customer profitability evaluation

-Expanding role as well as responsibilities of management accounting that can be associated to enterprise performance management

-There is also shift to predictive accounting system (Edwards 2013)

-Business analytics also remain embedded in diverse enterprise performance management

-Co-existence as well as enhanced management accounting mechanisms (Demski 2013)

-Managing information technology as well as shared services as a specific business

-The requirement for superior competence and skills with mainly behavioural cost management (Bennett and James 2017)

Conceptual Viewpoint on Strategic Management Accounting

As rightly put forward by Weygandt et al. (2015), strategic management accounting (SMA) can be regarded as the merging of different strategic business goals with information on management accounting. This can help in the process of delivering forward looking model that can subsequently assist management in arriving at appropriate business decisions (Demski 2013). Unlike management accounting that necessarily concentrates on internal accounting dimensions, the SMA focuses on analysis of diverse external information on specific trends on costs, share of market, flow of cash and their influence on specific resources for determining suitable tactical responses. Simkin et al. (2014) asserts that strategic component of management accounting calls for the need of augmented intelligence regarding competitors, technologies as well as suppliers.

Strategic Management accounting from application perspective

As rightly put forward by Fullerton et al. (2014), from the perspective of application it can be said that strategic management accounting concentrates on environment of corporation. Awareness regarding competitive conditions can be considered as the primary variance between strategic management accounting as well as traditional systems of management accounting. Demski (2013) mentions that SME primarily concentrate on environment of the corporation. Again, environment of the firm within the purview of strategic management accounting concentrates and necessarily revolves around its association with diverse suppliers as well as customers. In essence, another environment mainly comprises of corporation’s current as well as potential customers (Renz 2016). Thus, intelligence of corporations might show a requirement towards reduction of prices for gaining competitive advantage. Additionally, SMA from the perspective of accounting can help in the process of evaluation of up-stream of the business concern and the cost structure (Fullerton et al. 2014).

Essential Techniques of Strategic Management Accounting

Collier (2015) asserts that there are several things that are within authority of strategic management accounting (SMA). In particular, strategic management accounting utilizes diverse approaches as well as techniques to attain strategy execution. This can help in development of assimilated approaches for enumeration of performance. However, some of the important strategic tools that can be used for measurement of performance include target costing, kaizen costing, life cycle costing, bench marking as well as theory of constraints (Sun et al. 2014).

Concepts of Strategic Management Accounting

As correctly put forward by Collier (2015), strategic management can be considered to be an important element of the entire base of skill of professional accountant. In essence, the concepts of strategic management accounting assists in illustrating the role of strategic management accounting that in turn can support the development of strategy along with daily operations of the corporations. In addition to this, notions of strategic management accounting also assists in illustrating and applying the procedures of strategic management as well as industry value analysis for comprehending diverse value drivers, drivers of cost and reconfiguration of value chains (Hoyle et al. 2015). Furthermore, this also helps in illustrating the overall role of selection of specific projects, planning of projects, supervising and completion of implementation strategy (Hoyle et al. 2015).

Techniques of Strategic Management Accounting

Different techniques of strategic management accounting (SMA) include the following:

-Target Costing- As correctly mentioned by Edwards (2013), target costing can be considered as a specific approach that can help in determination of life cycle cost of a product that need to be adequate for development of specified functionality as well as quality, whilst making certain preferred profit.

-Kaizen Costing- As rightly indicated by Bennett and James (2017), kaizen costing can be considered as a system cost reduction. Bennett and James (2017) mentions that kaizen costing can be regarded as the maintenance of mainly current levels of cost for specific products that is currently produced through systematic efforts to attain the desired level of cost.

-Life Cycle Costing- Gray et al. (2014) asserts that life cycle costing can be considered as a significant economic evaluation that can be utilized in the process of selection of diverse alternatives that can influence both pending as well as upcoming costs. Essentially, this can help in comparison of the particular initial investment alternative and recognizes the least cost substitutes (Hoyle et al. 2015).

-Theory of Constraints- As rightly put forward by Gray et al. (2014), the theory of constraints is essentially a management philosophy that concentrates on improvement of systems of performance. Essentially, this is a significant problem structuring as well as solving method that alters and the overall thinking pattern of managers.

-Bench Marking- Hribar et al. (2014) asserts that benchmarking is mainly developed by corporations functioning in an industrial business environment. The business environment of different corporations show that the benchmark value and application of the same for the enhancement of business functions, business procedures, systems as well as performances.

Practical Challenges of Strategic Management Accounting

The challenges encountered while implementation of the strategic management accounting exercises include the following:

• Management fails to understand the reason why it is necessary to execute different techniques of SMA (Edwards 2013)
• Essentially, swift alterations occurs in internal as well as external environment and there remains no time left as well as personnel reserves in order to make these alterations into the system of management accounting (Weygandt et al.2015)
• Management mainly perceives that implementation and using techniques of SMA is not part of their action plan
• Techniques of SMA can be considered to be very intricate and it necessarily calls for the need of special skills as well as competence for implementation or utilization (Fullerton et al.2014)
• Management of corporations also does not become aware of different techniques of SMA.
• Again, there are also no knowledgeable individuals that can execute different techniques of SMA (Fullerton et al.2014)

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