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1 Cost Management

A Strategic Emphasis2nd edition

by

Edward J. BlocherKung H. ChenThomas W. Lin

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1 Cost ManagementAn Overview

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1 The Uses of CostManagement Information

Information managers need toeffectively manage an organization.

Information managers need toeffectively manage an organization.

Financialinformationabout costs

and revenues.

Nonfinancialinformation

about productivityand quality.

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A Typical Organization Chart

Chief FinancialChief Financial OfficerOfficer

Chief Executive OfficerChief Executive Officer

Vice PresidentVice Presidentfor Marketingfor Marketing

Vice PresidentVice Presidentfor Operationsfor Operations

ControllerController TreasurerTreasurer Chief InformationChief InformationOfficerOfficer

Cost ManagementCost Management

Financial SystemsFinancial ReportingOther Reporting Obligations

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1 Four Functions of Management

Strategicmanagement

Strategicmanagement

Planning anddecision making

Planning anddecision making

Management and operational controlManagement and

operational controlPreparation of

financial statementsPreparation of

financial statements

STRATEGIC STRATEGIC MANAGEMENTMANAGEMENT

IS THE MOSTIS THE MOSTIMPORTANT.IMPORTANT.

STRATEGIC STRATEGIC MANAGEMENTMANAGEMENT

IS THE MOSTIS THE MOSTIMPORTANT.IMPORTANT.

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1 Four Functions of Management

Strategicmanagement

Strategicmanagement

Planning anddecision making

Planning anddecision making

Management and operational controlManagement and

operational controlPreparation of

financial statementsPreparation of

financial statements

Identification and implementationof specific goals and objectives thatprovide a competitive advantage.

Identification and implementationof specific goals and objectives thatprovide a competitive advantage.

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1 Four Functions of Management

Strategicmanagement

Strategicmanagement

Planning anddecision making

Planning anddecision making

Management and operational controlManagement and

operational controlPreparation of

financial statementsPreparation of

financial statements

Budgeting and profit planning, cashflow management, lease or buy

decisions, repair or replace decisions,product development decisions,

and marketing decisions

Budgeting and profit planning, cashflow management, lease or buy

decisions, repair or replace decisions,product development decisions,

and marketing decisions

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1 Four Functions of Management

Strategicmanagement

Strategicmanagement

Planning anddecision making

Planning anddecision making

Management and operational controlManagement and

operational controlPreparation of

financial statementsPreparation of

financial statements

Monitoring the activitiesat all levels to insure that

goals and objectives are achieved.

Monitoring the activitiesat all levels to insure that

goals and objectives are achieved.

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1 Four Functions of Management

Strategicmanagement

Strategicmanagement

Planning anddecision making

Planning anddecision making

Management and operational controlManagement and

operational controlPreparation of

financial statementsPreparation of

financial statements

Compliance with reporting requirements

of groups such as theFASB, IRS, SEC.

Compliance with reporting requirements

of groups such as theFASB, IRS, SEC.

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1 Strategic Management and Strategic Cost Management

Strategic managementStrategic management requires:Anticipating changes.Understanding the business and competitive environment.Ability to make changes quickly.Ability to identify and solve problems from a cross-functional view.

Strategic managementStrategic management requires:Anticipating changes.Understanding the business and competitive environment.Ability to make changes quickly.Ability to identify and solve problems from a cross-functional view.

Strategic cost managementStrategic cost management is the development of costmanagement information to facilitate strategic management.

Strategic cost managementStrategic cost management is the development of costmanagement information to facilitate strategic management.

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1 Types of Organizations

MerchandisersMerchandisersManufacturersManufacturers Servicefirms

Servicefirms

Government and Not-for-profit

Government and Not-for-profit

WholesalersWholesalers RetailersRetailers

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Increasedglobal

competition

Advances inmanufacturingtechnologies

New forms ofmanagementorganization

Social,political, and

cultural changes

Focuson the

customer

Advances ininformationtechnologies

Contemporary Business Environment

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Increasedglobal

competition

Advances inmanufacturingtechnologies

New forms ofmanagementorganization

Social,political, and

cultural changes

Focuson the

customer

Advances ininformationtechnologies

Contemporary Business Environment

Better cost managementinformation is neededto remain competitive.

Better cost managementinformation is neededto remain competitive.

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Increasedglobal

competition

Advances inmanufacturingtechnologies

New forms ofmanagementorganization

Social,political, and

cultural changes

Focuson the

customer

Advances ininformationtechnologies

Contemporary Business Environment

Just-in-time inventoryQuality improvementsFlexible manufacturingIncreased facilities costs relative to costs of labor and material

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Increasedglobal

competition

Advances inmanufacturingtechnologies

New forms ofmanagementorganization

Social,political, and

cultural changes

Focuson the

customer

Advances ininformationtechnologies

Contemporary Business Environment

ComputerizationSpecialized softwareInternetE-commerceTelecommunications

ComputerizationSpecialized softwareInternetE-commerceTelecommunications

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Increasedglobal

competition

Advances inmanufacturingtechnologies

New forms ofmanagementorganization

Social,political, and

cultural changes

Focuson the

customer

Advances ininformationtechnologies

Contemporary Business Environment

Changing emphasis from low-costproduction of large quantities

to quality, service, timely delivery, response to customer

requests for specific features.

Changing emphasis from low-costproduction of large quantities

to quality, service, timely delivery, response to customer

requests for specific features.

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Increasedglobal

competition

Advances inmanufacturingtechnologies

New forms ofmanagementorganization

Social,political, and

cultural changes

Focuson the

customer

Advances ininformationtechnologies

Contemporary Business Environment

Change fromcommand-and-control

organization to aflexible form that

encourages teamworkand coordinationacross functions.

Change fromcommand-and-control

organization to aflexible form that

encourages teamworkand coordinationacross functions.

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Increasedglobal

competition

Advances inmanufacturingtechnologies

New forms ofmanagementorganization

Social,political, and

cultural changes

Focuson the

customer

Advances ininformationtechnologies

Contemporary Business Environment

Ethnically and racially diverse workforceRenewed sense of ethical responsibilityGovernment deregulation of business

Ethnically and racially diverse workforceRenewed sense of ethical responsibilityGovernment deregulation of business

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Manufacturing

Business Environment Comparison

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Basis of Economies of scale, Quality,Competition standardization functionality,

customer satisfaction

Manufacturing High value, long Low volume, shortProcess production runs, production run, focus

significant levels of on reducing inventory in-process and levels and other non- finished inventory value added activities

and costs

Prior Business Contemporary Environment Business Environment

Business Environment Comparison

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Manufacturing Assembly-line Robotics, flexibleTechnology automation, isolated manufacturing

technology systems, integrated applications technology applications

connected by network

Required Machine paced, Individual and teamLabor Skills low-level skills paced, high-level

skills

Prior Business Contemporary Environment Business Environment

Business Environment Comparison

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Emphasis on Acceptance of a Strive for zero Quality normal or usual defects

amount of waste

Prior Business Contemporary Environment Business Environment

Business Environment Comparison

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Marketing

Business Environment Comparison

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Products Relatively few Large number of variations, long variations, short product life cycles product life cycles

Markets Largely domestic Global

Prior Business Contemporary Environment Business Environment

Business Environment Comparison

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Management Organization

Business Environment Comparison

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Type of Almost exclusively Financial andInformation financial data operating data, theRecorded and firm’s strategicReported success factors

Management Hierarchical, Network-based Organizational command and organization, teamworkStructure control focus – employee has more

responsibility and control, coaching rather than command and control

Prior Business Contemporary Environment Business Environment

Business Environment Comparison

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Management Emphasis on the Emphasis on the long Focus short term, short- term, focus on critical

term performance success factors, measures and commitment compensation, to the long-term concern for success of the sustaining the firm, including adding current stock price, shareholder value short tenure and high mobility of top managers

Business Environment Comparison

Prior Business Contemporary Environment Business Environment

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1 Four Stages in the Developmentof Cost Management Systems

Basic transaction recording systems.Basic transaction recording systems.

Focus on external reporting. Focus on external reporting.

Track key operating data and develop Track key operating data and develop more accurate and relevant cost more accurate and relevant cost information for decision making.information for decision making.

Strategically relevant cost management Strategically relevant cost management information is an integral part of the information is an integral part of the system.system.

Basic transaction recording systems.Basic transaction recording systems.

Focus on external reporting. Focus on external reporting.

Track key operating data and develop Track key operating data and develop more accurate and relevant cost more accurate and relevant cost information for decision making.information for decision making.

Strategically relevant cost management Strategically relevant cost management information is an integral part of the information is an integral part of the system.system.

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1 Benchmarking

Identify an activity that needs to be improved.

Find an organization that is the most efficient at this activity.

Study its process, and utilize that process.

Identify an activity that needs to be improved.

Find an organization that is the most efficient at this activity.

Study its process, and utilize that process.

aaBenchm rking

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Do we need to change the plan?

Where are we?

Where do we want to go?

How do we start?

How are we doing?

Do

Check

Plan

Act is

Total Quality Management

Benchmarking

ContinuousImprovement

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1 Activity-Based Costingand Management

A product costing method that is useful in industries where overhead is high overhead is high relative

to other costs.

Activity-based costing assigns costs to products based on several different several different activities activities whereas traditional costing

methods only assign costs to products on one one or twotwo different departments

or allocation bases. ABC

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1 Activity-Based Costingand Management

A product costing method that is useful in industries where overhead is high overhead is high relative

to other costs.

ABC Traditionalmethod

Products Products

Allocation BasesAllocation Bases““cost drivers”cost drivers”

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1 Reengineering

The process isredesigned to include

only those steps that makeour product more valuable.

Every step inthe businessprocess mustbe justified.

A business processis diagrammed

in detail.

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Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced.

The process isredesigned to include

only those steps that makeour product more valuable.

Every step inthe businessprocess mustbe justified.

A business processis diagrammed

in detail.

Reengineering

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1 Theory of Constraints

A sequential process of identifying and removing constraints in a system.

Restrictions or barriers that impedeprogress toward an objective

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1 Mass Customization

Marketing and production processes are

designed to meet each customer’s specific needs.

Marketing and production processes are

designed to meet each customer’s specific needs.

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1Target Costing

Identify product opportunity.

Determine price that wouldmake product competitive.

Determine if product can be made at cost sufficiently low to provide a

desired profit.

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1 Life-Cycle Costing

Identify and monitor costs throughout a product’s life cycle

Research and Development costs

Product design and testing costs

Manufacturing, inspecting, packaging and warehousing costs

Marketing, promotion, and distribution costs

Sales and service costs

Identify and monitor costs throughout a product’s life cycle

Research and Development costs

Product design and testing costs

Manufacturing, inspecting, packaging and warehousing costs

Marketing, promotion, and distribution costs

Sales and service costs

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1 The Balanced Scorecard

Management translates its strategy into performance measures that employees

understand and accept.

Management translates its strategy into performance measures that employees

understand and accept.

Performancemeasures

FinancialCustomer

satisfaction

Innovationand learning

Internalbusiness

processes

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1 The Balanced Scorecard

How do we lookto the owners?

How can wecontinually innovate

and learn?

In which internalbusiness processes

must we excel?

How do we lookto customers?

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1 The Balanced Scorecard

Learning improvesbusiness processes.

Improved businessprocesses improve

customer satisfaction.

Improving customersatisfaction improves

financial results.

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1 IMA Code of Ethics for Management Accountants

Competence

Confidentiality

Integrity

Objectivity

Competence

Confidentiality

Integrity

Objectivity

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1 IMA Code of Ethics for Management Accountants

Follow applicable laws, regulations and

standards.

Prepare complete and clear reports after appropriate

analysis.

Maintain professional competence.

Competence

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1 IMA Code of Ethics for Management Accountants

Do not disclose confidential information unless legally

obligated to do so.

Ensure that subordinates do not disclose confidential

information.

Do not use confidential

information for personal

advantage.

Confidentiality

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1 IMA Code of Ethics for Management Accountants

Avoid conflicts of interest and advise others of potential conflicts.

Recognize and communicate personal and

professional limitations.

Do not subvert organization’s

legitimate objectives.

Integrity

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1 IMA Code of Ethics for Management Accountants

Integrity

Avoid activities that could affect your ability to

perform duties.

Communicate unfavorable as well as favorable information.

Refrain from activities that could

discredit the profession.

Refuse gifts or favors

that might influence behavior.

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1 IMA Code of Ethics for Management Accountants

Objectivity

Communicate information fairly and objectively.

Disclose all information that might be useful to

management.

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1 End of Chapter 1