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Cost Management and Strategic Decision Making

Evaluating Opportunities and Leading Change

There will be one or two mid-term exams (for 30 percent

of your grade) and a comprehensive final exam (40 percent of your grade). Questions in exams are a combination of essays, multiplechoice and problems. These questions require specific understanding of the materials discussed in the textbook, class lectures and handout materials. Note: Student must use their own calculators for all quizzes and exams.

There will be MANY unannounced quizzes during the semester. Each quiz contains one or more problem(s) from the most

recently lectured materials. These quizzes are very similar to the problems at the end of each chapter of your textbook with minor changes. These quizzes and projects count for 20 percent of your grade.

Every student is required to participate in the class discussions. Students are encouraged to bring in to the class articles from business journals. During the first 15 minutes of every class meeting students are allowed to discuss those article(s) in the class. Other students may comment or question the


Attendance is as per Institute policy Do not enter after the class has started Once Seated cannot leave the class, however, may leave the class immediately after attendance Your attendance is required for all announced exams and unannounced quizzes, however

The accounting process

Economic activities

Accounting links decision makers with economic activities and with the results of their decisions.



Actions (decisions)

Decision makers

Types of Accounting Information Financial Tax


Information System
Cost & Revenue Determination Job costing Process costing ABC Sales Assets & Liabilities Plant and equipment Loans & equity Receivables, payables & cash Cash Flows From operations From financing From investing

Information Users Investors Creditors Managers Owners Customers Employees Regulatory agencies -SEC -IRS -EPA

Decision Support CVP analysis Performance evaluation Incremental analysis Budgeting Capital allocation Earnings per share Ratio analysis

Distinctions Between Management Accounting and Financial Accounting

Management Accounting Primary Users Choices Organization managers Costs versus benefits Financial Accounting External parties G.A.A.P.

Behavioural Implications
Time Focus Time Span Reports Activities

Influence on managerial behaviour

Future orientation Flexible Detailed Less sharply defined

Measurement of economic activity

Past orientation Less flexible Summary reports More sharply defined

The Past
Cost Accounting

Focused On
Recording Data

Measured And Reported Costs

Information about decision-making authority, for decision-making support, and for evaluating and rewarding decision-making performance.

Information useful in assessing both the past performance and future directions of the enterprise and information from external and internal sources.

Objectives of Managerial Reporting

Information useful to help the enterprise achieve its goal, objectives and mission.

Characteristics of Management Accounting Information

Timeliness A Means to an End Identify DecisionMaking Authority

Measures Efficiency and Effectiveness

Oriented Toward Future

Management Accounting for Managers

Management accounting exists because managers

require information to make decisions Primary focus of management accounting is towards users within an organization Management accounting does not exist to generate data, but it exists because managers require information for decisions Framework for Management Accounting
Strategic Planning Management Control Operational Control

Focus on organizations objectives

Effectiveness and efficiency of resource use Effectiveness and efficiency of tasks

Frameworks for Management Accounting

Accounts receivable Order entry

Budget analysis Short-term forecasting Engineered costs Variance analysis Overall budget Budget preparation

Tanker fleet mix Warehouse and factory location

Structured SemiStructured

Inventory reordering Inventory control Production scheduling Bond trading Cash management

Mergers and acquisitions Capital acquisition analysis New product planning

Unstructured PERT COST systems

Sales and production

R and D planning

Management Decision Process

1. Identify the problem. 2. Perform the necessary quantitative and qualitative analyses. 3. Identify alternative solutions to the problem. 4. Evaluate the alternative solutions. 5. Recommend one of the alternative solutions. 6. Implement the recommendation.

Major Means: Accounting Information 1. Problem-solving information Major Ends: Helping Decisions 1. Managers for long-range planning and special decisions

2. Attention-directing information

2. Managers for planning and controlling routine operations

3. Scorekeeping information

3. Outsiders for investors, tax collectors, regulators & others

Planning and Controlling

Evaluation Action

Planning involves setting objectives and the means to their attainment

What is desired? When and how is it to be accomplished? How is success to be evaluated?

Controlling involves the implementation of plans and the use of feedback to monitor


Product Life Cycle

The various stages through which a product passes, from conception and development through introduction into the market through maturation and, finally, withdrawal from the market
Sales over Typical Product Life Cycle

Product Development

Introduction to Market

Mature Market

Phase-Out of Product

The Value Chain

Value chain is the set of business functions that add value to the

products or services of an organization

Research and Development Customer Service Product & Service Process Design

Distribution Production


What is now the primary objective of cost management?

Characteristics of Cost Management

What is Cost Management?

Characteristics of Cost Management

What is Cost Management? In addition to measuring and reporting costs, it is a philosophy, an attitude, and a set of techniques to create more customer value at a lower cost.

The Future
Cost Management

Will Provide Information for Decisions Related To:

The Future
Cost Management

Will Provide Information for Decisions Related To:

Improving Products, Services, and Use of Resources

The Future
Cost Management

Will Provide Information for Decisions Related To:

Improving Products, Services, and Use of Resources

Supporting Strategies

The Future
Cost Management

Will Provide Information for Decisions Related To:

Improving Products, Services, and Use of Resources

Supporting Strategies

Systematically Reducing Costs

Define Managerial Accounting

Managerial accounting is the process of Identifying Measuring Analyzing Interpreting Communicating Information in pursuit an organizations goals

Managerial versus Financial Accounting

Accounting System (accumulates financial and managerial accounting data) Managerial Accounting Information for decision making, planning, and controlling an organizations operations. Internal Users Financial Accounting Published financial statements and other financial reports.

External Users

How Managerial Accounting Adds Value to the Organization

Providing information for decision making and

planning. Assisting managers in directing and controlling activities. Motivating managers and other employees towards organizations goals. Measuring performance of activities, managers, and other employees. Assessing the organizations competitive position.

Managing Resources, Activities, and People

An organization . . .

Acquires Resources

Organized set of activities

Decision Making



Hires People

Work of Management

Directing and Motivating




Select alternative that does

the best job of furthering organizations objectives.

Develop budgets to guide

progress toward the selected alternative.

Directing and Motivating

Directing and motivating involves managing day-today activities to keep the organization running smoothly.
Employee work assignments.

Routine problem solving.

Conflict resolution. Effective communications.

The control function ensures that plans are being followed. Feedback in the form of performance reports that compare actual results with the budget are an essential part of the control function.

Exh. 1-1

Planning and Control Cycle

Formulating long-and short-term plans (Planning) Comparing actual to planned performance (Controlling)


Decision Making

Implementing plans (Directing and Motivating)

Measuring performance (Controlling)

Organizational Structure
Decentralization is the delegation of decision-making authority throughout an organization.

Corporate Organization Chart

Board of Directors President Purchasing Personnel Vice President Operations Chief Financial Officer Controller


The Chief Financial Officer (CFO)

A member of the top management team responsible for:
Providing timely and relevant data to support

planning and control activities. Preparing financial statements for external users.

The chief managerial and financial accountant responsibility for:
Supervising accounting personnel
Preparation of information and reports, managerial

and financial Analysis of accounting information Planning and decision making

Responsible for raising capital and safeguarding the organizations assets. Supervises relationships with financial institutions. Work with investors and potential

investors. Manages investments. Establishes credit policies. Manages insurance coverage

Internal Auditor
Responsible for reviewing accounting procedures, records, and reports in both the controllers and the treasurers area of responsibility. Expresses an opinion to top management regarding the effectiveness of the organizations accounting system.

Who Are Cost Managers?

They serve as communicators of company

values to employees. They have diverse educational backgrounds. They need broad knowledge of the organization. Competence is a given!

Who Are Cost Managers?


Characteristics of Cost-Management Analysts

Cost analysts use cost accounting and other data to?

Characteristics of Cost-Management Analysts

Cost analysts use cost accounting and other data to:

Improve products

Improve resource use

Improve services

Support strategies

Reduce costs

What are the Characteristics of Cost-Management Analysts?

Characteristics of Cost-Management Analysts


Broad knowledge of the business

Ability to work in cross-functional teams

Ethical Standards for CostManagement Analysts

Cost-management analysts must maintain high standards of ethical behavior because they can control the information used for important strategic management decisions.

Professional Ethics


Ethical Behavior
Follow applicable laws, regulations and standards.

Maintain professional competence.

Prepare complete and clear reports after appropriate analysis.

Ethical Behavior
Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage.


Ensure that subordinates do not disclose confidential information.

Ethical Behavior
Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organizations legitimate objectives.

Recognize and communicate personal and professional limitations.

Ethical Behavior
Avoid activities that could affect your ability to perform duties.

Refrain from activities that could discredit the profession.

Communicate unfavorable as well as favorable information.

Refuse gifts or favors that might influence behavior.

Ethical Behavior
Communicate information fairly and objectively.

Disclose all information that might be useful to management.

Team Focus
Earlier Management responsibilities were defined by their FUNCTIONAL ROLES FUNCTIONAL ROLES - Narrowly Defined - Jobs That Focus On Specific Activities

Team Focus

Involves bringing together individuals from diverse functions and backgrounds to generate innovative solutions to problems.

Team Focus
Focuses On Finding New Opportunities;

Informed of, But Not Restricted By The Past

What is Strategic Decision Making?

Strategic Decision Making


An organizations overall plan or policy to achieve its goals.

Key questions?

Strategic Decision Making

Strategy An organizations overall plan or policy to achieve its goals.
Key questions

Where do we want to go?

How do we want to get there?

Where do We Want to Go? Strategic Missions

New market potential Be early entrant Achieve growth Capture market share

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





Continuing market Maintain cash flow Maintain volume Cut costs



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




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 exist in a value chain that enables an organization to provide more value at a lower cost than its competitors.

Choosing A Long Term Strategy

Identify The Organizations Source Of Competitive Advantage.
A competitive advantage is anything the

organization can do better than its competitors to provide valued products and services for which customers will pay higher prices.

Cost Management Systems



efficiency and effectiveness of major activities. Identify and evaluate new activities that can improve performance.

Cost Management System

Example: Should We Outsource Accounts Receivable?

QUALITATIVE 1. Loss of direct contact with customers 2. Adverse effects of personnel reduction

QUALITATIVE 1. Quality of service

Example: Should We Outsource Accounts Receivable?

QUANTITATIVE 1. Contracted service 2. Contracted Administration 3. Total quantifiable costs

QUANTITATIVE 1. Personnel cost savings 2. Facilities cost savings 3. Support cost savings

What is the Value Chain?

Scale and Scope Of Operations

A set of linked operations or processes that are

involved in providing goods & services to customers.

Begin by obtaining resources.

End by providing goods & services that the customers want.

Scale and Scope Of Operations

A set of linked operations or processes that are

involved in providing goods & services to customers.

Everything in between is the Value Chain

Begin by obtaining resources.

End by providing goods & services that the customers want.

Value Chain

The value chain describes the activities that increase the value of an organizations products or services.

Production Marketing R& Customer Distributio Design D Service n

What is a Process?
A related set of tasks that transforms inputs into

identifiable outputs Research and development Design Supply Production Marketing Distribution Customer service Support services

Strategic Cost Management and the Value Chain

Product Design Production Research and Development Securing raw materials and other resources


Distribution Customer Service


What is the Value Chain?

Where do we want to go? How do we want to get there? Physical resources
Support services Accounting Human resources Legal services Information systems Telecommunications

Human resources

R& D

Desig n


Production Marketing


Customer service

Value of products and services

Primary processes

Production Marketing R& Customer Distributio Design D service n
Non ValueValue Added Activity: Added Activity: Does this Hmmmm? Customers add value? perceive no as adding value. value. Evaluate each activity

Does this add value?

Value Added Activity: Customers perceive as adding value.
Can we improve the activity?

Non ValueAdded Activity: Customers perceive no value.

Can we eliminate the activity?

Value Chain
R&D Research and Development

Creating a new product.


Non Value-Added

Value Chain

Developing and engineering the new product.


Non Value-Added

Value Chain

Producing the product.


Non Value-Added

Value Chain

Informing potential customers about the product.


Non Value-Added

Value Chain

Delivering the product to customers.


Non Value-Added

Value Chain
Customer Service CS

Supporting customers who use the product.


Non Value-Added

Outsourcing and the Value Chain

Focus resources on parts of the value chain that are most important to company goals.
What is most likely to be outsourced? Outsource those value chain processes that can be done more efficiently by others.

Potential problem?

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.

Alternative Value Chain Configurations

This is a technique for identifying opportunities for

improvement and measuring the effects of proposed improvement by comparing both the cost and benefits of a proposal. Cost benefit analysis

Managerial Decisions

What adds value to the firm?

Carmens Cookies
Are costs greater than benefits? What are Carmens cost drivers? What are Carmens differential revenues? What are Carmens differential costs?

Cost Benefit Analysis

Consider both the costs and benefits of a proposal.
Is the cost greater than the benefit?

Dont Expand


Cost Driver
What are Carmens cost drivers?

Cost Drivers Factors that cause or drive cost

What drives my cost?

These are estimates and require assumptions.

Some may be realized

Some may not be realized

Cost Driver


Number of storefronts


Labor Ingredients

Number of cookies

Differential Costs
Costs that change in response to a particular course of action.

Differential costs

differ between actions.

Differential Revenues
Revenues that change in response to a particular course of action.

Differential revenues

differ between actions.

Differential Costs, Revenues & Profits

Projected Income Statement For One Week
(1) Status Quo Original Shop Sales Only (2) Alternative Wholesale & Retail Distribution Difference (3)

Sales revenue ...

Costs Food Labor .. Utilities . Rent . Other .. Total costs . Operating profits .




1,800 1,000 400 1,250 1,000 $5,450 $850

2,700b 1,500b 600b 1,250 1,200c $7,250 $1,255

900 500 200 ----200 $1,800 $405

35 percent higher than status quo

50 percent higher than status quo 20 percent higher than status quo

A financial plan for the revenues and resources needed to meet financial goals.

Budgeted Costs For the Month Ending April 30
Number of cookies Food Flour Eggs Chocolate Nuts Other Total Food $2,200 4,700 1,900 1,900 2,200 12,900 Labor Manager Other Total Labor Utilities Rent Total cookie costs 3,000 1,500 4,500 1,800 5,000 $24,200 32,000

Actual to Budget Comparison

Actual vs Budgeted Costs For the Month Ending April 30
Difference Actual Number of cookies sold Costs Food Flour $2,100 $2,200 $(100) 32,000 Budget 32,000 (Variance) 0

Chocolate Nuts Other Total Food

2,000 2,000 2,200 $13,500 2,200

1,900 1,900 0 $12,900

100 100 $600

Actual to Budget Continued

Difference Actual Labor Manager Other Total Labor Utilities Rent Total cookie costs 3,000 1,500 4,500 1,800 5,000 $24,800 5,000 $24,200 1,500 4,500 1,800 0 $600 3,000 0 0 0 0 Budget (Variance)

Quantitative Information
Quantitative Information can be measured relatively easily and is usually expressed in Rupees or other quantities relating to size,

frequency, etc.

Qualitative Information
Qualitative Information is descriptive and is based on characteristics or perceptions, such as relative desirability, rather than quantities.

Competitive Advantages, Sources and Threats

Product Strategy Low Cost Production Source of Capability Create New Knowledge Product Differentiation Imitate Others Market Focus

Business Unit Strategy Build

Harvest Divest

Formulation of Strategic Action Plans

An 8-step process
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.

Evaluating Plans and Outcomes

Operational performance analysis Strategic performance analysis

Has short-run performance met expectations?

Has long-run performance met expectations?

Evaluating Plans and Outcomes

Variance Analysis

Cost Benefit Analysis

Variances are the differences between a plans actual and expected quantities.

The Changing Business Environment

Just-in-time production
Total quality management Process reengineering

Theory of constraints
International competition E-commerce

Business environment changes in the past twenty years

Evolution and Adaptation in Managerial Accounting

E-Business Service vs. Manufacturing Firms Emergence of New Industries Global Competition Focus on the Customer Cross-Functional Teams Computer-Integrated Manufacturing Product Life Cycles Time-Based Competition


Information and Communication Technology

Just-in-Time Inventory Total Quality Management Continuous Improvement

The Balanced Scorecard

How do we look to owners?

Financial Perspective Goals Measures

In which activities must we excel?

Customer Perspective Goals Measures

How do customers see us?

Operations Perspective Goals Measures

Innovation Perspective Goals Measures

How can we continue to improve?

Just-in-Time (JIT) Systems

Receive customer orders.

Complete products just in time to ship customers.

Schedule production.

Receive materials just in time for production.

Complete parts just in time for assembly into products.

JIT Consequences
Improved plant layout Zero production defects

Reduced setup time

Flexible workforce

JIT purchasing Fewer, but more ultrareliable suppliers. Frequent JIT deliveries in small lots. Defect-free supplier deliveries.

Benefits of a JIT System

Reduced inventory costs Freed-up funds

Higher quality products

Greater customer satisfaction

Increased throughput

More rapid response to customer orders

Total Quality Management (TQM)

TQM improves productivity by encouraging the use of fact and analysis for decision making and if properly implemented, avoids counter-productive organizational infighting.

Continuous Improvement Systematic problem solving using tools such as benchmarking


Choosing A Long Term Strategy


Competitive Advantage


How do companies use benchmarking to make important decisions?

Process Reengineering
A business process is diagrammed in detail.

Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced.
The process is redesigned to eliminate all non-value-added activities

Every step in the business process must be justified.

Process Reengineering versus TQM

Process Reengineering
Radically overhauls

Total Quality Management

Tweaks existing

existing processes.
Likely to be imposed

processes to realize gradual improvements.

Uses a team approach

from above and to use outside consultants.

involving people who work directly in the process.

Theory of Constraints
A sequential process of identifying and removing constraints in a system.
Restrictions or barriers that impede progress toward an objective

Theory of Constraints
A constraint (also called a bottleneck) is anything that prevents you from getting more of what you want.

The constraint in a system is determined by the step that has the smallest capacity.

Theory of Constraints
Only actions that strengthen the weakest link in the chain improve the process.
1. Identify the weakest link. 2. Allow the weakest link to set the tempo.

3. Focus on improving the weakest link.

4. Recognize that the weakest link is no longer so.

International Competition
Increasing sophistication in international markets.

Fewer tariffs, quotas, and other barriers to free trade.

Competition has become worldwide in most industries.

Improvements in global transportation systems.

An excellent management accounting system is needed to succeed in todays competitive global marketplace.

Stallion Gears is considering cessation of its consumer division due to rising litigation cost, but this will put 400 people out of work.

Stallions President is concerned about the morale of the other workers. Is this decision quantitative or qualitative in nature?

What is the style of management that puts several people from different areas together to generate innovative problem solutions?

A. Functional Role Management B. Cross-Functional Team Decision Making C. Entrepreneurial Decision Making

What is the set of linked operations that are involved in providing goods & services to customers?

A. Production Chain B. Value-Added Process C. Value Chain


CMC helps companies adapt organizational structures to current industry trends. Recently, the CEO approached Aplab Ltd., a hi-tech research company that offered a contract to CMC to assist in reorganizing the company. CMC reported the following costs and revenues during the past year. CMCs Annual Statement Sales Costs Labour Equipment Lease Rent Salaries Other Costs Total Costs Operating Profit Rs. 1.20 crores Rs. 57.00 lacs Rs. 8.40 lacs Rs. 5.40 lacs Rs 35.00 lacs Rs. 3.80 lacs Rs. 1.17 crores Rs. 3.20 lacs

If CMC decides to take the contract to help the company reorganize, it will hire a full-time consultant at Rs.13.40 lacs. Equipment Lease will increase by 5%, it must buy certain computer Equipment. Supplies will increase by an estimated 10% and other costs by 15%. Existing building has space for new consultant and no new person would be required. What costs would be incurred as a result of taking the contract? If the contract will pay Rs. 15 lacs in the 1st year, should CMC accept it? What considerations other than costs are necessary for making a decision?

How does outsourcing affect an organization's value chain?

Suppose you are the VP of the largest department store in the region. The President calls you and says though we are the largest

store, only 30% of the sales are from locals. Find out why the balance are not? Why could this be a critical question and how would you organize the team to find the answers?

If every manager minimizes the cost of process he or she supervises, overall cost of the company will decrease. Do you think this is a

wise strategy? Why or why not?

What is a virtual organisation?

Group Assignment
Identify 2 companies from any

industry, find their most recent annual reports on the net. From the Directors reports identify and list the similarities and differences in these 2 competitors declared strategies.

End of Lecture