Strategic Cost Management

1. Strategic Cost Management Professor William F. O’Brien, MBA, CPA Fall 2004

2. Session 1A--Introduction & Cost Accounting Review • Cost Management • Financial • Non-Financial STRATEGIC COST MANAGEMENT-FALL 2004

3. Financial Management Evolution DATA Today’s Corporate Focus is on Results! INFORMATION ANALYSIS IMPLEMENTATION STRATEGIC COST MANAGEMENT-FALL 2004

4. Financial Accounting Model (useful & relevant) Company Users F/S Financial Impact Economic Decisions STRATEGIC COST MANAGEMENT-FALL 2004

5. Managerial Accounting Model Communication Environment Plan Adjust Accounting Information Implement Monitor STRATEGIC COST MANAGEMENT-FALL 2004

6. Four Management Functions…another Perspective • Strategic Management • Planning and Decision Making • Management and Operational Control • F/S Preparation • How is Cost Management Info Used? STRATEGIC COST MANAGEMENT-FALL 2004

7. Factors Influencing Today’s Business Environment • Global competition • Manufacturing and IT advances • Customer focus • Revised organizational structures • Social, political and cultural changes STRATEGIC COST MANAGEMENT-FALL 2004

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 STRATEGIC COST MANAGEMENT-FALL 2004

9. Ethics • Lack of ethics--everyone loses • Recent examples • Enron • WorldCom • Adelphia • Arthur Andersen STRATEGIC COST MANAGEMENT-FALL 2004

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... STRATEGIC COST MANAGEMENT-FALL 2004

11. Cost Actg. Review • Cost…an economic sacrifice STRATEGIC COST MANAGEMENT-FALL 2004

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 STRATEGIC COST MANAGEMENT-FALL 2004

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 STRATEGIC COST MANAGEMENT-FALL 2004

14. RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS BOH I O EOH B O/H R/M B O/H WIP B O/H F/G R/M TRANSFERS DIR. LABOR MFG OVERHEAD MANUFACTURING COSTS COST OF GOODS MANUFACTURED (COGM) E O/H WIP COGM COST OF GOODS SOLD (COGS) E O/H F/G R/M PURCHASES TRANSFERS TO WIP E O/H R/M P&L Manufacturing Cost Flows STRATEGIC COST MANAGEMENT-FALL 2004

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 STRATEGIC COST MANAGEMENT-FALL 2004

16. CVP Analysis • Uses • Revenue planning • Cost classification • Commission analysis • Volume and mix determination • ABC modifications STRATEGIC COST MANAGEMENT-FALL 2004

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 STRATEGIC COST MANAGEMENT-FALL 2004

18. Margin of Safety • Actual sales - B/E sales • Margin of safety percentage • Margin of safety/actual sales STRATEGIC COST MANAGEMENT-FALL 2004

19. Operating Leverage • CM/NI • Reflects the percentage increase in sales compared to the percentage increase in net income • High OL reflects high opportunity and high risk STRATEGIC COST MANAGEMENT-FALL 2004

20. Multiple Product Line Format STRATEGIC COST MANAGEMENT-FALL 2004

21. Behavioral Issues • Risk aversion bias • Uncertainty STRATEGIC COST MANAGEMENT-FALL 2004

22. CVP Limitations • Relevant range assumption • Difficulty in cost determination • Allocations • The “Scarlet Letter” of accounting STRATEGIC COST MANAGEMENT-FALL 2004

23. Scarlet Letter of Accounting • Lacks Cost Mgt. • Error Prone • Distraction STRATEGIC COST MANAGEMENT-FALL 2004

24. Session 1B--Strategic Cost Management & theOrganizational Role of Management Accountants STRATEGIC COST MANAGEMENT-FALL 2004

25. Strategic Cost Management • Strategic cost management is the development of cost management information to facilitate the principal management function--strategic management. STRATEGIC COST MANAGEMENT-FALL 2004

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 STRATEGIC COST MANAGEMENT-FALL 2004

27. SMA, cont. • The two triangles are dependent upon each other • This process is a framework to ensure that our management accounting tools possess the attributes necessary to achieve our strategic goals STRATEGIC COST MANAGEMENT-FALL 2004

28. SMA, cont. • QCT Triangle • Self evident • TBC Triangle • Provides Technical insight • Encourages Behavioral changes • Supports Cultural beliefs STRATEGIC COST MANAGEMENT-FALL 2004

29. Accounting Business Skills“The What” • Business Perspective • Organizational Focus • Bias for Action • Communication Excellence • People Proficiency STRATEGIC COST MANAGEMENT-FALL 2004

30. Financial Management Guidelines“The How” • Cc: communication versus control • KTT: know the territory • MBWA: manage by wandering around • R ƒ R3: respect is a function of... • responsiveness • reliability • relevance STRATEGIC COST MANAGEMENT-FALL 2004