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Strategic Cost
Management
Professor William F. OBrien, MBA, CPA
Fall 2004
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STRATEGIC COST MANAGEMENT-FALL 2004 1-2
Session 1A--Introduction
& Cost Accounting Review Cost Management
Financial
Non-Financial
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STRATEGIC COST MANAGEMENT-FALL 2004 1-3
Financial Management
EvolutionDATA
INFORMATION
ANALYSIS
IMPLEMENTATION
TodaysCorporateFocus is on
Results!
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STRATEGIC COST MANAGEMENT-FALL 2004 1-4
CompanyF/S
Users
EconomicDecisions
FinancialImpact
(useful &
relevant)
Financial Accounting Model
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STRATEGIC COST MANAGEMENT-FALL 2004 1-5
Managerial Accounting Model
Plan
Implement
Monitor
Adjust AccountingInformation
Communication Environment
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STRATEGIC COST MANAGEMENT-FALL 2004 1-6
Four ManagementFunctions
another Perspective Strategic Management
Planning and Decision Making
Management and Operational Control F/S Preparation
How is Cost Management Info Used?
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STRATEGIC COST MANAGEMENT-FALL 2004 1-7
Factors InfluencingTodays Business
Environment Global competition
Manufacturing and IT advances
Customer focus Revised organizational structures
Social, political and cultural changes
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STRATEGIC COST MANAGEMENT-FALL 2004 1-8
Contemporary Mgt.Techniques
Benchmarking
Total Quality Management (TQM)
Continuous Improvement
Activity-Based Costing (ABC) and Mgt. (ABM)
Reengineering Theory of Constraints (TOC)
Mass Customization
Target Costing
Life-cycle Costing
The Balanced Scorecard
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STRATEGIC COST MANAGEMENT-FALL 2004 1-9
Ethics
Lack of ethics--everyone loses
Recent examples
Enron WorldCom
Adelphia
Arthur Andersen
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STRATEGIC COST MANAGEMENT-FALL 2004 1-10
Ethics and You
You will face an ethical challenge
It could impact
Your job Your family
Your relationships
Your financial stability Your physical well-being
You have only ONE reputation...
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STRATEGIC COST MANAGEMENT-FALL 2004 1-11
Cost Actg. Review
Costan economic sacrifice
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STRATEGIC COST MANAGEMENT-FALL 2004 1-12
Critical Cost Terms Fixed vs. Variable
Product vs. Period Manufacturing vs. Non-manufacturing
Direct vs. Indirect
Controllable vs. Uncontrollable Opportunity and Sunk Costs
Differential Cost and Revenue
Cost Drivers
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STRATEGIC COST MANAGEMENT-FALL 2004 1-13
Cost Drivers and
Final Cost Objectives Cost Drivers
Anything that causes a cost to occur
Final Cost Objective (FCO) Generally used in conjunction with Activity
Based Costing
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STRATEGIC COST MANAGEMENT-FALL 2004 1-14
Manufacturing Cost Flows
BOH
I
O
EOH
RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS
B O/H R/M B O/H WIP B O/H F/G
R/M PURCHASES
TRANSFERS TOWIP
E O/H R/M
R/M TRANSFERSDIR. LABORMFG OVERHEADMANUFACTURINGCOSTS
COST OF GOODSMANUFACTURED
(COGM)
E O/H WIP
COGM
COST OF GOODSSOLD
(COGS)
E O/H F/GP&L
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STRATEGIC COST MANAGEMENT-FALL 2004 1-15
Direct Costing
Also known as Contribution Margin Format Direct costing direct costs
P&L format:
Sales xxx
Variable costs -xxx
Contribution margin xxx
Fixed costs -xxx
Net income xxx
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STRATEGIC COST MANAGEMENT-FALL 2004 1-16
CVP Analysis
Uses
Revenue planning
Cost classification Commission analysis
Volume and mix determination
ABC modifications
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STRATEGIC COST MANAGEMENT-FALL 2004 1-17
Break-even Analysis
Sales - variable costs = fixed costs
Contribution Margin Approach
FC/contribution margin ratio ($) FC/unit contribution margin (units)
Equation Approach
(Unit SP)x - (unit VC)x = FC (units) X - (VC%)x = FC ($)
CM approach is the easier to apply
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STRATEGIC COST MANAGEMENT-FALL 2004 1-18
Margin of Safety
Actual sales - B/E sales
Margin of safety percentage
Margin of safety/actual sales
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STRATEGIC COST MANAGEMENT-FALL 2004 1-19
Operating Leverage
CM/NI
Reflects the percentage increase in sales
compared to the percentage increase in netincome
High OL reflects high opportunity and high risk
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STRATEGIC COST MANAGEMENT-FALL 2004 1-20
Multiple Product Line
FormatMultiple Product Line ExampleProduct Line A Pruduct Line B Pruduct Line C Total Company
$ % $ % $ % $ %
Sales
Var. Costs
Contr. Mar.Fixed Costs
Net Income
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STRATEGIC COST MANAGEMENT-FALL 2004 1-21
Behavioral Issues
Risk aversion bias
Uncertainty
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STRATEGIC COST MANAGEMENT-FALL 2004 1-22
CVP Limitations
Relevant range assumption
Difficulty in cost determination
Allocations The Scarlet Letter of accounting
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STRATEGIC COST MANAGEMENT-FALL 2004 1-23
Scarlet Letter ofAccounting
Lacks Cost Mgt. Error Prone
Distraction
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STRATEGIC COST MANAGEMENT-FALL 2004 1-24
Session 1B--StrategicCost Management & theOrganizational Role of
Management Accountants
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STRATEGIC COST MANAGEMENT-FALL 2004 1-25
Strategic CostManagement
Strategic cost management is the developmentof cost management information to facilitate
the principal management function--strategicmanagement.
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STRATEGIC COST MANAGEMENT-FALL 2004 1-26
Ansari: SMA
Strategic Triangle (QCT)
Competition based on quality, cost & Time
Mgt. Acctg. Triangle (TBC) Impacts technical, behavioral & cultural aspects
Mgt. Acctg. Links Strategy with Action
It is not an end unto itself
It is an integrating tool
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STRATEGIC COST MANAGEMENT-FALL 2004 1-27
SMA, cont.
The two triangles are dependent upon eachother
This process is a framework to ensure that ourmanagement accounting tools possess theattributes necessary to achieve our strategicgoals
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STRATEGIC COST MANAGEMENT-FALL 2004 1-28
SMA, cont.
QCT Triangle
Self evident
TBC Triangle Provides Technical insight
Encourages Behavioral changes
Supports Cultural beliefs
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STRATEGIC COST MANAGEMENT-FALL 2004 1-29
Accounting Business SkillsThe What
Business Perspective
Organizational Focus
Bias for Action Communication Excellence
People Proficiency
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STRATEGIC COST MANAGEMENT-FALL 2004 1-30
Financial ManagementGuidelines
The How Cc: communication versus control
KTT: know the territory
MBWA: manage by wandering around R R3: respect is a function of...
responsiveness
reliability relevance