STRATEGIC COST MANAGEMENT
PRELIMS REVIEWER
Lesson #1 Strategic Cost Management and
Strategy
A. Nature of Strategic Cost Management
 Strategic cost management (scm)
deals with measuring and managing
costs and aligning them to the
business strategy. The cost and
management accounting information
thus developed would help managers
to understand and implement the
strategy, diagnosis the performance
and influence behavior and
decisions.
 It is the analysis of cost in a broader
context, where the strategic elements
become more conscious, explicit,
and formal. Cost data is used to
develop superior strategies in route
to gaining sustainable competitive
advantage. SCM gives a clear
understanding of the firm's cost
structure in search for sustainable
competitive advantage through cost
reduction.
 The main objective of this standard
is to provide a basic guideline to
those companies who plan to
undergo cost analysis as a part of
strategic analysis. It tries to facilitate
the practitioners to apply SCM as a
driver to ensure sustainable
competitive advantage. The standard
presents relevant analysis covering
three core components of SCM
which are
a) Strategic positioning
b) Cost driver analysis
c) Value chain analysis.
DEFINITIONS
 Strategic Cost Management: SCM
is the process of identifying,
accumulating, measuring, analyzing,
interpreting, and reporting cost
information useful to both internal
and external groups concerned with
the way in which an organization
uses its resources to meet its
objectives
.
 Value Chain Analysis: Value chain
analysis relies on the basic economic
principle of advantage - companies
are best served by operating in
sectors where they have a relative
productive advantage compared to
their competitors. Simultaneously,
companies should ask themselves
where they can deliver the best value
to their customers.
 Strategic Positioning: A company's
relative position within its industry
matters for performance. Strategic
positioning reflects choices a
company makes about the kind of
value it will create and how that
value will be created differently than
rivals.
 Differentiation: Driving up prices is
one way to increase profitability. To
command a premium price, a
company must deliver distinctive
value to customers. This is
differentiation.
 Cost Leadership: Driving down costs
is another way to increase
profitability. To compete on cost,
companies must balance price with
acceptable quality. This is cost
leadership.
  Cost Driver Analysis: Examination,
quantification, and explanation of the
monetary effects of cost drivers
associated with an activity.
 Executional Cost Drivers:
Executional cost drivers are factors
that a firm can manage in short-term
as a part of operational decision
making to reduce costs. They are
derived from the execution of the
business activities such as capacity
utilization, plant layout, work-force
involvement, design of the
production process, and supplier
relationships.
 Structural Cost Drivers: Structural
cost drivers are strategic in nature
because they involve decisions that
have long-term effects on the firm's
total costs. They are derived from the
business strategic choices about its
underlying economic structure such
as scale and scope of operations,
complexity of products, use of
technology, and complexity.
 Value: Value is referred to as the
price that the customer is willing to
pay for a certain offering.
Benefits of SCM in creating a competitive
advantage for the firm
 When developed would help
managers to understand and
implement the strategy, diagnosis the
performance and influence behavior
and decisions.
 the application of cost management
techniques so that they
simultaneously improve the strategic
position of a firm and reduce costs
(Cooper, Slagmulder)
 Lead to an increase in profit and use
those funds to improve all aspects of
its operations such as investing in
better capital equipment and
increased productivity from
employees.
Needs for SCM
 It is an updated form of cost
analysis, in which the strategic
elements are more clear and formal
and improves the overall position of
the company.
 It is used to analyse cost
information, and use it to develop
various measures to achieve a
sustainable competitive advantage.
 It provides a better
understanding of the overall
cost structure in the quest of
gaining a sustainable
competitive advantage.
 It uses cost information
specifically to govern the
strategic management process
– formulation,
communication,
implementation and control.
 It helps in identifying the cost
relationship between value
chain activities and its
process of management to
gain competitive advantage.
MANAGEMENT ACCOUNTING AND
THE ROLE OF COST ACCOUNTING
 COST MANAGEMENT
ACCOUNTING- is developed and
used to implement the
organization’s strategy. It consists
of financial information about costs
and revenues, and non-financial
information about customer
 retention, productivity, quality, and
other key success factors for the
organization.
 COST MANAGEMENT is the
development and use of cost
management information.
- We use cost management to
describe the approaches and
activities of managers to use
resources to increase value to
customers and to achieve
organizational goals.
MANAGEMENT ACCOUNTING
- A profession that involves
partnering in management
decision making, devising, planning
and performance management
systems, and providing expertise in
financial reporting and control to
assist management in the formulation
and implementation of an
organization’s strategy.
MANAGEMENT ACCOUNTING
 It measures, analyzes, and reports
financial and nonfinancial
information that helps managers
make decisions to fulfill the goals of
an organization.
 Managers use management
accounting information to develop,
communicate, implement strategy,
coordinate product design,
production, and marketing decisions
and to evaluate performance.
 Management accounting information
and reports do not have to follow
set principles or rules.
KEY QUESTIONS IN M.A
 How will this information help
managers do their job better?
 Do the benefits of producing this
information exceed the costs?
FUNCTIONS OF STRATEGIC COST
MANAGEMENT
1. Strategic Management
- is the development and
implementation of a sustainable
competitive position.
 A strategy is a set of goals and
specific action plans that, if
achieved, provide the desired
competitive advantage. Strategic
management involves identifying
and
implementing these goals
2. Planning and Decision Making-
 Involve budgeting and profit
planning, cash flow management,
and other decisions related to
operations 3.
MANAGEMENT AND
OPERATIONAL CONTROL
 Operational control takes place
when mid-level managers monitor
the activities of operating-level
managers and employee. (e.g.,
production supervisors and various
department heads)
 Management control is the
evaluation of mid-level managers by
upper-level managers. (the controller
or the CFO)
4. Preparation of Financial Statementsa
 Preparation of financial
statements requires management
to comply with the financial
reporting requirements of
regulatory agencies.
 Cost management information is
needed to provide accurate
accounting for inventory and
other assets, in compliance with
reporting requirements, for the
 preparation of financial reports 4. Changes in management
and for use in the three other organizations, new reporting
management functions. practices to recognize the new focus
on cross-functional teams in which
1.0 The factors in the contemporary employees from all areas of the firm
business environment that affect
work together to make the firm
business firms and cost management
are: successful;
5. Changes in the social, political,
1. Increased global competition, and cultural environment of
which means an increasingly business, which requires an
competitive environment for all expansion of cost management
firms and thus the need for cost reporting to include critical success
management information to become factors related to the expectations of
more competitive; the need for those beyond the ownership of the
competitive non-financial firm including employees, local
information in addition to financial government officials, and
information in cost management community leaders.
reports;
2. Changes in manufacturing and
information technologies, and thus
the need for cost management
information to facilitate the
introduction of new manufacturing
and product technologies (e.g.,
determining which technologies will
most contribute to profitability), and
to incorporate in cost management
reports the information needed to
manage the new technologies
effectively; the importance of life
cycle costing -- considering the total
costs of the product or service over
its entire cost life cycle, from raw
materials to sales and service;
3. A focus on the customer, which
requires cost management reports to
include critical information about
customer satisfaction, changing
customer preferences, etc.;