cost management and strategic decision making understand how cost management supports strategic...

McGraw-Hill/Irwin

1 Cost Management

and Strategic

Decision Making Evaluating

Opportunities and

Leading Change

Learning Objectives

1. Understand how cost management supports

strategic planning and decision making

2. Understand the importance of ethical behavior in

decision making

3. Describe and understand the steps in strategic

decision making

4. Apply benefit-cost and variance analysis to help

evaluate an organization’s strategic plans

Learning Objective 1 1-3

?

What is Cost Management?

•It goes beyond historical

measurement and reporting.

•It assesses the impacts of

current or proposed decisions.

•It is a philosophy, an attitude,

and a set of techniques to

create more customer

value and achieve lower cost.

Characteristics of Cost Management 1-4

Learning Objective 2 1-5

Characteristics of Cost-Management Analysts

Cost analysts use cost

accounting and other data to:

Support

strategies

Improve

products

Improve

services

Reduce

costs

Improve

resource use

1-6

Characteristics of Cost-Management Analysts

Integrity

Ability to work

in cross-functional

teams

Broad knowledge

of the business

1-7

Ethical Standards for Cost-Management Analysts

Cost-management analysts must maintain high

standards of ethical behavior because they can

control the information used for important

strategic management decisions.

The IMA (Institute of Management Accountants) Statement of

Ethical Professional Practice, published for its management

accountant membership, offers guidance for ethical

behavior applicable to cost-management analysts.

1-8

Professional Ethics

The four standards of ethical conduct for

management accountants as advanced

by the Institute of Management

Accountants are:

Competence

Confidentiality

Integrity

Objectivity

Competence

Follow applicable laws,

regulations and

standards.

Maintain

professional

expertise, and

communicate any

limitations or

constraints. Provide decision support

information and

recommendations that are

accurate and timely.

IMA Standards for Ethical Behavior

1-10

Confidentiality

Do not disclose confidential

information unless legally

obligated to do so.

Inform relevant parties

about the proper use of

confidential information.

Do not use

confidential

information for

personal

advantage.

IMA Standards for Ethical Behavior

1-11

Avoid conflicts of interest

and advise others of

potential conflicts.

Abstain from activities that

might discredit the

profession.

Refrain from

conduct that could

compromise ethical

performance. Integrity

IMA Standards for Ethical Behavior

1-12

Communicate information

fairly and objectively.

Disclose all information

that should influence an

intended user’s

understanding of reports

and analyses.

Objectivity

IMA Standards for Ethical Behavior

Disclose delays or

deficiencies in

information and

its processing.

1-13

Sarbanes-Oxley Act (SOX) (Section 404)

The CEO and CFO

are now personally

responsible for their

company’s financial

statements.

They must sign the

statements and take

responsibility for

their accuracy.

The CEO and CFO

are responsible for

their company’s

system of internal

controls over its

financial reporting.

Accurate cost

measurement has

gained in

importance.

1-14

Internal Control System (to assure that a company achieves…)

Effectiveness and

efficiency in its

operations

Reliability in its

financial reporting

Compliance with

laws and

regulations

1-15

Learning Objective 3 1-16

Strategic Decision Making

An organization’s overall plan

or policy to achieve its goals.

Strategy

Key

questions

How do we want

to get there?

Where do we

want to go?

1-17

Where do We Want to Go? – Strategic Missions

Low

Low

Medium

Medium

High

High

RISK

RE

WA

RD

S

Divest

Harvest

Hold

Build

• Declining market • Exit at lowest cost • Minimize losses • Find a buyer quickly

• Continuing market • Maintain cash flow • Maintain volume • Cut costs

• Continuing market • Maintain growth • Be a major player • Protect market share

• New market potential • Be early entrant • Achieve growth • Capture market share

Exh. 1.1

1-18

How Do We Want to Get There?

Managers are more successful

in attaining objectives if they:

Understand sources

and threats to

competitive advantages.

Use effective

decision making

techniques.

Competitive advantages result from achieving a value chain

that enables an organization to provide more value

(perhaps at a lower cost) than its competitors.

1-19

The Value Chain Where do we want to go?

How do we want to get there?

Physical

resources

Human

resources

Support services

•Accounting

•Human resources

•Legal services

•Information systems

•Telecommunications

R &

D

Design

Supply Production Marketing Distri-

bution

Customer

service

Value of

products

and

services

Primary processes

Exh. 1.2

1-20

Value Creation

Creating value is an important part of planning

and implementing strategy.

Value is the usefulness a customer gains from a

company’s product or service. The entire

customer experience determines the value a

customer derives from a product.

Copyright © 2015 Pearson Education

Management Accounting and Value, concluded

The Value chain is the sequence of business functions in which a product is made progressively more useful to customers.

The Value chain consists of:

1. Research & development

2. Design of Products and Processes

3. Supply

4. Production

5. Marketing

6. Distribution

7. Customer service

1. R & D : Generating and experimenting with ideas

related to new products, services and processes.

2. Design : Detailed planning and engineering of

products, services and processes.

3. Supply: relations with external suppliers to control the

quality and timing of supply shipments.

4. Production : Acquiring, coordinating and assembling

resources to produce a product or provide a service.

5. Ma r k e t i n g : Promoting and selling products or

services to customers or prospective customers.

6. Di s t r i b u t i o n : Delivering products or services to

customers.

7. Customer Service : Providing after- sale support to

customers.

Outsourcing and the Value Chain

Focus resources on

parts of the value chain

that are most important

to company goals.

Outsource those value

chain processes that

can be done more

efficiently by others.

What is most likely

to be outsourced?

Information services,

legal, logistics, human

resources, payroll,

accounting, tax.

Potential problem

Loss of control

and

internal expertise.

1-24

Exercise

Burger King, hamburger fast food restaurant, incurs the following costs:

A. Cost of oil for the deep fryer.

B. Wages of the counter help who give customers the food they order.

C. Cost of the costume for the king on the Burger King television commercials.

D. Cost of children's toys given away free with kids’ meals.

E. Cost of posters indicating the special “two cheeseburgers for $2”

F. Cost of frozen onion rings and French fries.

G. Salaries of food specialists who create new sandwiches for the restaurant chain.

H. Cost of “to-go” bags requested by customers who could not finish their meals in the restaurant .

Required:

Classify each of the cost items (A-H) as one of the business functions of the value chain .

Classificati

on

Cost Item

Production Cost of oil for the deep fryer. A

Distribution Wages of the counter help who give customers the food. B

Marketing Cost of the costume for the king on the Burger King Television commercials. C

Marketing Cost of children's toys given away free with kids’ meals. D

Marketing Cost of posters indicating the special “two cheeseburgers for $2”. E

Production Cost of frozen onion rings and French fries. F

Design Salaries of food specialists who create new sandwiches for the restaurant chain. G

Customer

Service

Cost of “to-go” bags requested by customers who could not finish their meals. H

Outsourcing and the Value Chain

Focus resources on

parts of the value chain

that are most important

to company goals.

Outsource those value

chain processes that

can be done more

efficiently by others.

What is most likely

to be outsourced?

Information services,

legal, logistics, human

resources, payroll,

accounting, tax.

Potential problem

Loss of control

and

internal expertise.

1-27

Competitive Advantages, Sources and Threats

Exh. 1.3

Product Strategy

Business Unit Strategy

Low Cost Production

Product Differentiation

Market Focus

Build

Hold

Harvest

Divest

Source of Capability

Create New Knowledge

Imitate Others

Supplie

rs

1-28

Formulation of Strategic Action Plans

1. Identify need for change.

2. Create team to lead and manage change.

3. Create vision of the change and strategy for achieving vision.

4. Communicate vision and strategy for change and have change team

act as a role model.

5. Encourage innovation and remove obstacles to change.

6. Ensure that short-term achievements are frequent and obvious.

7. Use successes to create opportunities for improving entire

organization.

8. Reinforce culture of more improvement, better leadership, more

effective management.

An 8-step process at Pursuit Data

1-29

Learning Objective 4 1-30

Evaluating Plans and Outcomes

Operational performance

analysis

Strategic performance

analysis

Has short-run

performance met

expectations?

Has long-run

performance met

expectations?

1-31

Evaluating Plans and Outcomes

Cost Benefit

Analysis

Variance Analysis

Differences between

the expected and

actual costs of

business operations

Quantitative information

and qualitative information

about a proposed plan

1-32

End of Chapter 1 1-33