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Cost Management
A Strategic Emphasis
2nd edition by Edward J. Blocher Kung H. Chen Thomas W. Lin

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Cost Management
An Overview

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The Uses of Cost Management Information

Information managers need to effectively manage an organization.

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Financial information about costs and revenues.

Nonfinancial information about productivity and quality.

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A Typical Organization Chart

Chief Executive Officer
Chief Financial Officer Vice President for Marketing Vice President for Operations

Controller

Treasurer

Chief Information Officer

Cost Management Financial Systems Financial Reporting Other Reporting Obligations

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Four Functions of Management

Strategic management

Planning and decision making

STRATEGIC MANAGEMENT IS THE MOST IMPORTANT. Management and Preparation of operational control financial statements

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Four Functions of Management

Strategic management

Planning and decision making

Identification and implementation Management and Preparation of of specific goals and objectives that operational control financial statements provide a competitive advantage.

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Four Functions of Management

Strategic management

Planning and decision making

Budgeting and profit planning, cash flow management, lease or buy Management and Preparation of decisions, repair or replace decisions, operational control financial statements product development decisions, and marketing decisions
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Four Functions of Management

Monitoring the activities Strategic Planning and at all levels to insure that management decision making goals and objectives are achieved.

Management and operational control

Preparation of financial statements

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Four Functions of Management

Compliance with Strategicreporting requirements Planning and of groups such as the management decision making FASB, IRS, SEC.

Management and operational control

Preparation of financial statements

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Strategic Management and Strategic Cost Management

Strategic management requires: Anticipating changes. Understanding the business and competitive environment. Ability to make changes quickly. Ability to identify and solve problems from a cross-functional view.
Strategic cost management is the development of cost management information to facilitate strategic management.

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Types of Organizations

Manufacturers

Merchandisers

Service firms

Government and Not-for-profit

Wholesalers

Retailers

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Contemporary Business Environment

Increased global competition

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Advances in manufacturing technologies

Advances in information technologies

Social, political, and cultural changes

New forms of management organization

Focus on the customer

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Contemporary Business Environment

Increased global competition

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Advances in manufacturing Better cost management Advances in technologies information is needed information to remain competitive. technologies

Social, political, and cultural changes

New forms of management organization

Focus on the customer

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Contemporary Business Environment

Advances in manufacturing technologies
Advances in information technologies

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Increased Just-in-time inventory global improvements competition Flexible manufacturing Increased facilities costs relative to costs of labor and material Social, political, and cultural changes
Quality

New forms of management organization

Focus on the customer

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Contemporary Business Environment

in Specialized software manufacturing Increased Internet technologies global E-commerce competition Telecommunications
Computerization Advances

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Advances in information technologies

Social, political, and cultural changes

New forms of management organization

Focus on the customer

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Contemporary Business Environment

Increased global competition

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Advances in manufacturing technologies

Advances in information technologies

Changing emphasis from low-cost production of large quantities Social, to quality, service, timely delivery, political, andto customer response New forms of cultural changes requests for specific features. management organization
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Focus on the customer

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Contemporary Business Environment

Increased global competition

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Advances in manufacturing technologies

Social, political, and cultural changes

New forms of management organization

Change from Advances in command-and-control information organization to a technologies flexible form that encourages teamwork and coordination across functions. Focus on the customer

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Contemporary Business Environment

Increased global competition

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Advances in manufacturing technologies

Social, political, and cultural changes

Advances in information technologies Ethnically and racially diverse workforce Renewed sense of ethical responsibility Focus on the Government deregulation New forms of customer of business management organization
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Business Environment Comparison

Manufacturing

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Business Environment Comparison

Prior Business Environment Contemporary Business Environment
Quality, functionality, customer satisfaction Low volume, short production run, focus on reducing inventory levels and other nonvalue added activities and costs
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Basis of Competition

Economies of scale, standardization

Manufacturing Process

High value, long production runs, significant levels of in-process and finished inventory

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Business Environment Comparison

Prior Business Environment Contemporary Business Environment
Robotics, flexible manufacturing systems, integrated technology applications connected by network

Manufacturing Technology

Assembly-line automation, isolated technology applications

Required Labor Skills

Machine paced, low-level skills

Individual and team paced, high-level skills

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Business Environment Comparison

Prior Business Environment Contemporary Business Environment
Strive for zero defects

Emphasis on Quality

Acceptance of a normal or usual amount of waste

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Business Environment Comparison

Marketing

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Business Environment Comparison

Prior Business Environment Contemporary Business Environment
Large number of variations, short product life cycles

Products

Relatively few variations, long product life cycles

Markets

Largely domestic

Global

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Business Environment Comparison

Management Organization

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Business Environment Comparison

Prior Business Environment Contemporary Business Environment
Financial and operating data, the firms strategic success factors
Network-based organization, teamwork focus employee has more responsibility and control, coaching rather than command and control
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Type of Information Recorded and Reported

Management Organizational Structure

Almost exclusively financial data

Hierarchical, command and control

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Business Environment Comparison

Prior Business Environment Contemporary Business Environment
Emphasis on the long term, focus on critical success factors, commitment to the long-term success of the firm, including adding shareholder value

Management Focus

Emphasis on the short term, shortterm performance measures and compensation, concern for sustaining the current stock price, short tenure and high mobility of top managers

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Four Stages in the Development of Cost Management Systems

Basic transaction recording systems.

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Focus on external reporting.

Track key operating data and develop

more accurate and relevant cost information for decision making.

Strategically relevant cost management

information is an integral part of the system.

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Benchmarking

Identify an activity that needs to be improved. Find an organization that is the most efficient at this activity.

Study its process, and utilize that process.

Benchm

rking

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Total Quality Management

Where are we? Benchmarking
Where do we want to go? Plan Do we need to change the plan?

Act

is

Do

How do we start?

Check

Continuous Improvement
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How are we doing?

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Activity-Based Costing and Management

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A product costing method that is useful in industries where overhead is high relative to other costs. Activity-based costing assigns costs to products based on several different activities whereas traditional costing methods only assign costs to products on one or two different departments ABC or allocation bases.
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Activity-Based Costing and Management

A product costing method that is useful in industries where overhead is high relative to other costs.

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ABC
Allocation Bases cost drivers
Products
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Traditional method

Products
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Reengineering
A business process
is diagrammed in detail.

Every step in
the business process must be justified.
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The process is
redesigned to include only those steps that make our product more valuable.
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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.

Every step in
the business process must be justified.
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The process is
redesigned to include only those steps that make our product more valuable.
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Theory of Constraints
A sequential process of identifying and removing constraints in a system.
Restrictions or barriers that impede progress toward an objective

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Mass Customization

Marketing and production processes are designed to meet each customers specific needs.

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Target Costing
Identify product opportunity.

Determine price that would make product competitive.

Determine if product can be made at cost sufficiently low to provide a desired profit.
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Life-Cycle Costing
Identify and monitor costs throughout a products life cycle
Research Product

and Development costs

design and testing costs

Manufacturing,

inspecting, packaging and warehousing

costs
Marketing, Sales

promotion, and distribution costs

and service costs

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The Balanced Scorecard

Management translates its strategy into performance measures that employees understand and accept.
Customer satisfaction

Financial

Performance measures
Internal business processes
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Innovation and learning

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The Balanced Scorecard

How do we look to the owners?

In which internal business processes must we excel?

How can we continually innovate and learn?

How do we look to customers?

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The Balanced Scorecard

Learning improves business processes.

Improved business processes improve customer satisfaction.

Improving customer satisfaction improves financial results.

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IMA Code of Ethics for Management Accountants

Competence
Confidentiality Integrity Objectivity

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IMA Code of Ethics for Management Accountants

Follow applicable laws, regulations and standards.

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Maintain professional competence.

Competence
Prepare complete and clear reports after appropriate analysis.

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IMA Code of Ethics for Management Accountants

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

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Confidentiality
Ensure that subordinates do not disclose confidential information.

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IMA Code of Ethics for Management Accountants

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

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Integrity
Recognize and communicate personal and professional limitations.

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IMA Code of Ethics for Management Accountants

Avoid activities that could affect your ability to perform duties.

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Refrain from activities that could discredit the profession.

Integrity
Communicate unfavorable as well as favorable information.

Refuse gifts or favors that might influence behavior.

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IMA Code of Ethics for Management Accountants

Communicate information fairly and objectively.

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Objectivity
Disclose all information that might be useful to management.
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End of Chapter 1

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