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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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Financial Management

EvolutionDATA

INFORMATION

ANALYSIS

IMPLEMENTATION

TodaysCorporateFocus is on

Results!

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CompanyF/S

Users

EconomicDecisions

FinancialImpact

(useful &

relevant)

Financial Accounting Model

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Managerial Accounting Model

Plan

Implement

Monitor

Adjust AccountingInformation

Communication Environment

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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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Factors InfluencingTodays Business

Environment Global competition

Manufacturing and IT advances

Customer focus Revised organizational structures

Social, political and cultural changes

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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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Ethics

Lack of ethics--everyone loses

Recent examples

Enron WorldCom

Adelphia

Arthur Andersen

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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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Cost Actg. Review

Costan economic sacrifice

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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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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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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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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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CVP Analysis

Uses

Revenue planning

Cost classification Commission analysis

Volume and mix determination

ABC modifications

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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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Margin of Safety

Actual sales - B/E sales

Margin of safety percentage

Margin of safety/actual sales

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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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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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Behavioral Issues

Risk aversion bias

Uncertainty

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CVP Limitations

Relevant range assumption

Difficulty in cost determination

Allocations The Scarlet Letter of accounting

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Scarlet Letter ofAccounting

Lacks Cost Mgt. Error Prone

Distraction

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Session 1B--StrategicCost Management & theOrganizational Role of

Management Accountants

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Strategic CostManagement

Strategic cost management is the developmentof cost management information to facilitate

the principal management function--strategicmanagement.

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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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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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SMA, cont.

QCT Triangle

Self evident

TBC Triangle Provides Technical insight

Encourages Behavioral changes

Supports Cultural beliefs

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Accounting Business SkillsThe What

Business Perspective

Organizational Focus

Bias for Action Communication Excellence

People Proficiency

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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

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