cost management and strategic decision making understand how cost management supports strategic...
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McGraw-Hill/Irwin
1 Cost Management
and Strategic
Decision Making Evaluating
Opportunities and
Leading Change
Learning Objectives
1. Understand how cost management supports
strategic planning and decision making
2. Understand the importance of ethical behavior in
decision making
3. Describe and understand the steps in strategic
decision making
4. Apply benefit-cost and variance analysis to help
evaluate an organization’s strategic plans
Learning Objective 1 1-3
?
What is Cost Management?
•It goes beyond historical
measurement and reporting.
•It assesses the impacts of
current or proposed decisions.
•It is a philosophy, an attitude,
and a set of techniques to
create more customer
value and achieve lower cost.
Characteristics of Cost Management 1-4
Learning Objective 2 1-5
Characteristics of Cost-Management Analysts
Cost analysts use cost
accounting and other data to:
Support
strategies
Improve
products
Improve
services
Reduce
costs
Improve
resource use
1-6
Characteristics of Cost-Management Analysts
Integrity
Ability to work
in cross-functional
teams
Broad knowledge
of the business
1-7
Ethical Standards for Cost-Management Analysts
Cost-management analysts must maintain high
standards of ethical behavior because they can
control the information used for important
strategic management decisions.
The IMA (Institute of Management Accountants) Statement of
Ethical Professional Practice, published for its management
accountant membership, offers guidance for ethical
behavior applicable to cost-management analysts.
1-8
Professional Ethics
The four standards of ethical conduct for
management accountants as advanced
by the Institute of Management
Accountants are:
Competence
Confidentiality
Integrity
Objectivity
Competence
Follow applicable laws,
regulations and
standards.
Maintain
professional
expertise, and
communicate any
limitations or
constraints. Provide decision support
information and
recommendations that are
accurate and timely.
IMA Standards for Ethical Behavior
1-10
Confidentiality
Do not disclose confidential
information unless legally
obligated to do so.
Inform relevant parties
about the proper use of
confidential information.
Do not use
confidential
information for
personal
advantage.
IMA Standards for Ethical Behavior
1-11
Avoid conflicts of interest
and advise others of
potential conflicts.
Abstain from activities that
might discredit the
profession.
Refrain from
conduct that could
compromise ethical
performance. Integrity
IMA Standards for Ethical Behavior
1-12
Communicate information
fairly and objectively.
Disclose all information
that should influence an
intended user’s
understanding of reports
and analyses.
Objectivity
IMA Standards for Ethical Behavior
Disclose delays or
deficiencies in
information and
its processing.
1-13
Sarbanes-Oxley Act (SOX) (Section 404)
The CEO and CFO
are now personally
responsible for their
company’s financial
statements.
They must sign the
statements and take
responsibility for
their accuracy.
The CEO and CFO
are responsible for
their company’s
system of internal
controls over its
financial reporting.
Accurate cost
measurement has
gained in
importance.
1-14
Internal Control System (to assure that a company achieves…)
Effectiveness and
efficiency in its
operations
Reliability in its
financial reporting
Compliance with
laws and
regulations
1-15
Learning Objective 3 1-16
Strategic Decision Making
An organization’s overall plan
or policy to achieve its goals.
Strategy
Key
questions
How do we want
to get there?
Where do we
want to go?
1-17
Where do We Want to Go? – Strategic Missions
Low
Low
Medium
Medium
High
High
RISK
RE
WA
RD
S
Divest
Harvest
Hold
Build
• Declining market • Exit at lowest cost • Minimize losses • Find a buyer quickly
• Continuing market • Maintain cash flow • Maintain volume • Cut costs
• Continuing market • Maintain growth • Be a major player • Protect market share
• New market potential • Be early entrant • Achieve growth • Capture market share
Exh. 1.1
1-18
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 result from achieving a value chain
that enables an organization to provide more value
(perhaps at a lower cost) than its competitors.
1-19
The Value Chain Where do we want to go?
How do we want to get there?
Physical
resources
Human
resources
Support services
•Accounting
•Human resources
•Legal services
•Information systems
•Telecommunications
R &
D
Design
Supply Production Marketing Distri-
bution
Customer
service
Value of
products
and
services
Primary processes
Exh. 1.2
1-20
Value Creation
Creating value is an important part of planning
and implementing strategy.
Value is the usefulness a customer gains from a
company’s product or service. The entire
customer experience determines the value a
customer derives from a product.
Copyright © 2015 Pearson Education
Management Accounting and Value, concluded
The Value chain is the sequence of business functions in which a product is made progressively more useful to customers.
The Value chain consists of:
1. Research & development
2. Design of Products and Processes
3. Supply
4. Production
5. Marketing
6. Distribution
7. Customer service
1. R & D : Generating and experimenting with ideas
related to new products, services and processes.
2. Design : Detailed planning and engineering of
products, services and processes.
3. Supply: relations with external suppliers to control the
quality and timing of supply shipments.
4. Production : Acquiring, coordinating and assembling
resources to produce a product or provide a service.
5. Ma r k e t i n g : Promoting and selling products or
services to customers or prospective customers.
6. Di s t r i b u t i o n : Delivering products or services to
customers.
7. Customer Service : Providing after- sale support to
customers.
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.
1-24
Exercise
Burger King, hamburger fast food restaurant, incurs the following costs:
A. Cost of oil for the deep fryer.
B. Wages of the counter help who give customers the food they order.
C. Cost of the costume for the king on the Burger King television commercials.
D. Cost of children's toys given away free with kids’ meals.
E. Cost of posters indicating the special “two cheeseburgers for $2”
F. Cost of frozen onion rings and French fries.
G. Salaries of food specialists who create new sandwiches for the restaurant chain.
H. Cost of “to-go” bags requested by customers who could not finish their meals in the restaurant .
Required:
Classify each of the cost items (A-H) as one of the business functions of the value chain .
Classificati
on
Cost Item
Production Cost of oil for the deep fryer. A
Distribution Wages of the counter help who give customers the food. B
Marketing Cost of the costume for the king on the Burger King Television commercials. C
Marketing Cost of children's toys given away free with kids’ meals. D
Marketing Cost of posters indicating the special “two cheeseburgers for $2”. E
Production Cost of frozen onion rings and French fries. F
Design Salaries of food specialists who create new sandwiches for the restaurant chain. G
Customer
Service
Cost of “to-go” bags requested by customers who could not finish their meals. H
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.
1-27
Competitive Advantages, Sources and Threats
Exh. 1.3
Product Strategy
Business Unit Strategy
Low Cost Production
Product Differentiation
Market Focus
Build
Hold
Harvest
Divest
Source of Capability
Create New Knowledge
Imitate Others
Supplie
rs
1-28
Formulation of Strategic Action Plans
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.
An 8-step process at Pursuit Data
1-29
Learning Objective 4 1-30
Evaluating Plans and Outcomes
Operational performance
analysis
Strategic performance
analysis
Has short-run
performance met
expectations?
Has long-run
performance met
expectations?
1-31
Evaluating Plans and Outcomes
Cost Benefit
Analysis
Variance Analysis
Differences between
the expected and
actual costs of
business operations
Quantitative information
and qualitative information
about a proposed plan
1-32
End of Chapter 1 1-33