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How should we Cost is primarily a function Cost is a function of strategic choice about
try to understand of output volume: variable the structure of how to compete and
cost behavior? cost, fixed cost, step cost, managerial skill in executing the strategic
mixed cost choices: in terms of structural cost drivers
and executional cost drivers
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EXHIBIT 2
Contrasting Cost Management Paradigms:
Conventional Cost Management vs Strategic Cost Management
Conventional Cost Management Strategic Cost Management
Standard cost system with normal allowance No allowance for scrap, waste, rework; zero
for scrap, waste, rework; zero defect standard defect is the concept
is not practical.
Overhead variance analysis; maximize Overhead absorption is not the key; standard
production volume (not quality) to absorb costs and variance analysis are
overhead. deemphasized, in general
Variance analysis on raw material price; No control on raw material price; certify
procedure from multiple suppliers to avoid vendors who can deliver right quantity, right
unfavorable price variance; low price/low- quality, and on time
quality raw materials
3
EXHIBIT 2 (Continued)
Contrasting Cost Management Paradigms:
Traditional Cost Management vs Strategic Cost Management
Conventional Cost Management Strategic Cost Management
No tracking of customer acceptance Systematic tracking of customer acceptance
(customer complaints, order lead time, on-time
delivery, incidence of failures in customers’
locations)
No cost of quality analysis Quality costing as a diagnostic and management
control tool
CONTROL PHILOSOPHY
The goal is to be in the top tier of the The goal is kaizen
reference group
The annual target is to meet the Industry norms set the floor
standards The annual target is to beat last year’s performance
Standards are to be met, not exceeded Each achievement level sets a new floor for future
A regularly exceeded standard is not achievement
tough enough
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SCM’s Three Underlying
Themes
◆ Value Chain Analysis
◆ Cost Driver Analysis
◆ Strategic Positioning Analysis
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Value Chain Analysis
(concerned with the focus of Cost Management efforts)
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EXHIBIT 3
Value Chain in the Paper Products Industry
Pulp Manufacturing
Competitor D
Paper Manufacturing
Competitor G
Competitor A
Converting Operations
Competitor E
Competitor F
Distribution
End-Use Customer 7
EXHIBIT 4
A Summary of Value Chain Versus Conventional
Management Accounting
Conventional Value Chain Analysis
Management Accounting in the SCM Framework
Focus Internal Value added External
Perspective Entire set of linked activities from raw material
suppliers to ultimate end-used customers
Cost Cost reduction approached Cost containment is a function of the cost driver(s)
containment via responsibility centers regulating each value activity
philosophy or product cost issues Exploit linkages with suppliers
Exploit linkages with customers
Exploit linkages within the firm
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EXHIBIT 4 (Continued)
A Summary of Value Chain Versus Conventional
Management Accounting
Conventional Management Value Chain Analysis
Accounting in the SCM Framework
Insights for None are readily apparent. Identify cost drivers at the individual activity
strategic This is a major reason level; develop cost/differentiation advantage
decisions why strategy consulting either by controlling those drivers better than
firms typically throw away competitors or by reconfiguring the value chain
conventional reports as they
begin their cost analysis For each value activity, ask strategic questions
pertaining to make versus buy and forward
versus backward integration
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Strategic Positioning Analysis
(concerned with role of Cost Management in the firm)
10
Exhibit 5
Differences in Cost Management Caused by Differences in
Strategy
Primary Strategic Emphasis
Product Differentiation Cost Leadership
Role of engineered product costs in Not very important Very important
assessing performance
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Conventional Approach to
Cost Driver Analysis
Level and Behavior of Costs
Total Cost
Output Volume
13
Cost Driver Categories
◆ Structural -- related to strategic choices
that drive costs
◆ Executional – related to an organization’s
ability to execute successfully
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Structural Cost Drivers
(Related to organizational choices)
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Executional Cost Drivers
(Related to organizational skills)
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Cost Driver Analysis – Some Key
Ideas
◆ Volume is usually not the best way to explain cost
behavior
◆ More useful to explain cost position in terms of
structural choices and executional skills
◆ Not all strategic cost drivers operable or equally
important all the time but some are probably
very important in every instance
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Linkages Among Value Chain Analysis,
Strategic Positioning Analysis and Cost
Driver Analysis
◆ Understanding the value chain helps define the
optimal positioning strategy
◆ Understanding the value chain and positioning
strategy helps identify the relevant cost drivers
18