LEARNING MODULE

JIFFAMAE C. GELACIO

COURSE LEARNING OUTCOMES:

 Describe various techniques and process
which are available to assist managers in
planning and controlling organizational ac-
tivities
 Analyze the processes involved in identify-
ing, measuring, analyzing, interpreting and
communicating information to managers in
pursuit of the organization's goals
 Explain the role of cost information in or-
ganizations

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 Topics

I. Overview of Cost Management and Strategy

II. The professional Environment of Cost
Management
III. Contemporary Business Environment and
Strategic Focus of Cost Management
IV. Developing a Competitive Strategy and
Contemporary Cost Management
Techniques

Topic Outline I

Overview of Cost Management and Strategy

Topic Learning Outcomes:

Describe the nature of cost management information and how

they are developed

Explain the objective, scope and benefits derived from proper

cost management

Explain how cost management information is used for the fol-

lowing management functions:
A. Strategic Management
B. Planning and Decision-making
C. Management and Operational Control
D. Reportorial and compliance to Legal and Various Regula-
tory Requirements

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Self Assessment on Prior Knowledge
I. Have you encountered the term Strategy? If yes,
how and when is it used?
_________________________________________________
_________________________________________________
_________________________________________________
_________________________________________________

Have you applied it? Think and cite instances

where you used strategy.
________________________________________________
________________________________________________
________________________________________________
________________________________________________
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II. Are you familiar with the term Cost? If yes, write
down items you have had with cost.

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Discussion:
: set of policies, procedures and ap-
proaches to business that produce long-term suc-
cess.
: involves the de-
velopment of a sustainable competitive position.
involves
the development of cost management information
to facilitate the principal management function
which is strategic management .

Discussion:
: the information that
the manager needs to effectively manage the firm, profit-oriented
as well as not-for-profit organization. This includes both financial
information about costs and revenues as well as relevant nonfi-
nancial information about productivity, quality, and other key
success factors for the firm.
the practice of accounting in which
the accountant develops and uses cost management infor-
mation for the company’s competitive success.

Business Firms Governmental Units

Non-profit Organizations

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 Search and site examples of in-
ACTIVITY formation generated by cost
management.

1) _______________________________________________________
2) _______________________________________________________
3) _______________________________________________________
4) _______________________________________________________
5) _______________________________________________________
6) _______________________________________________________
7) _______________________________________________________
8) _______________________________________________________
9) _______________________________________________________
10) _______________________________________________________

USES OF COST MANAGEMENT INFORMATION

I. Strategic Management
Since it involves development of a sustainable competitive competition, cost management in-
formation provides sound basis for strategic decisions.

II. Planning and Decision Making

Cost management information is needed to support recurring decision such as replacing and
maintaining equipment, managing cash flows, budgeting raw materials purchases, scheduling pro-
duction, pricing and man aging distribution of products to customers.

III. Management and Operational Control

Cost management information is needed to provide a fair and effective basis for identifying
inefficient operations and to reward and motivate the most effective manages.

IV. Reportorial and Compliance to Legal Requirements

Reportorial and compliance responsibilities require management to comply with the financial
reporting requirements to regulatory agencies such as Securities and Exchange Commission (SEC),
Bureau of Internal Revenue (BIR), and other relevant government authorities and agencies.
The Financial Statement Preparation role has recently received a renewed new focus and in-
terest as ac counting scandals have shown how crucial and important accurate financial information
is for investors.
The financial statement information also serves the other three management functions as
this infor mation is often an important part of planning and decision making, control, and strategic
management.
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 ENABLING TASK

Do-It-Yourself. Answer the following questions:

1. Name a firm or organization you know of that you are reasonably sure uses strategic
cost management and explain why it does so.

2. Give three examples of firms you think would not be significant users of cost
management information and explain why.
a. __________________________________________________________________________________________
__________________________________________________________________________________________

b. __________________________________________________________________________________________
__________________________________________________________________________________________

c. __________________________________________________________________________________________
__________________________________________________________________________________________

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Topic Outline II

The Professional Environment of Cost Management

Topic Learning Outcomes:

Describe the role and the relationship between the

Chief Financial Officer and the Controller

Describe the functions and responsibilities of the con-

troller as the top management accountant

Describe the role and the relationship between the

Chief Financial Officer and the Treasurer

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Discussion:
This is an example of
an organizational struc-
ture.
The Chief Financial Of-
ficer is the executive
responsible for oversee-
ing the financial opera-
tions of the firm. The
CFO is responsible for
the following:
 Controllership
 Treasury
 Risk Management
 Taxation
 Internal Audit

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What does a Controller do? :

 As the chief accounting officer he is the financial executive primarily
responsible for management accounting and financial accounting.
 He reports and interprets relevant data (problem solving and atten-
tion-directing roles).
 He also influence management in making better-informed decisions.
 He provides reports for planning and evaluating company activities
such as budgets and performance reports.
 Provides information needed to make management decisions. Exam-
ple: decisions related to construction of a new factory or decisions
related to adding or dropping a product.
 Responsible for all financial accounting reports and tax filings with
the Bureau of Internal Revenue and other taxing agencies.
 Coordinating the activities of the firm’s external auditors.

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Functions of Treasurer:
 Has custody of cash and funds invested in various mar-
ketable securities.
 Generally responsible for maintaining relationships with
investors, banks, and other creditors.
 Prepares cash forecasts.
 Obtains financing from banks and other lenders.
 Responsible for the firm’s operation relating to credit and
collection, inventory management, corporate pension and
retirement fund, investor relations, insurance, and com-
pliance with legal and regulatory provisions, and lastly co-
ordination of the finance function with accounting func-
tion.

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ENABLING TASK

Multiple Choice. Encircle the letter of your best choice.

1. Management Accounting is considered successful when it
a) helps creditors evaluate the company’s performance
b) helps managers improve their decisions
c) is accurate
d) is relevant and reported annually
2. Responsibility of a CFO includes all except
a) Providing financial reports to shareholders
b) Managing short-term and long-term financing
c) Investing in new equipment
d) Preparing tax returns.
3. _______________ produces information that helps workers, managers, and executives in organizations make better
decisions.
a) Governmental Accounting
b) Management Accounting
c) Auditing
d) Financial Accounting
4. _______________ includes strategic, tactical, and operating aspects
a) Controlling
b) Communication
c) Planning
d) Evaluating

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5. ______________ judges implications of historical and expected events and helps to choose the optimum
course of action
a) Controlling
b) Communication
c) Planning
d) Evaluating
6. Which of the following functions provides information on the performance of managers and operating
units.
a) Operating control
b) Product and customer costing
c) Management control
d) Financial Accounting
7. Which of the following is not a role of management accounting information in operating control?
a) To provide feedback information about quality
b) To provide feedback information about timeliness
c) To provide feedback information about the efficiency of tasks performed
d) To provide performance measures for decentralized organizational units.
8. Accounting and other reports that help managers monitor performance and focus on problems and/or
opportunities that might otherwise go unnoticed
a) Feedback
b) Performance report
c) Financial Accounting
d) Managerial Accounting
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Topic Outline III

Contemporary Business Environment and Strategic Focus of

Cost Management

Topic Learning Outcomes:

Recognize the more recent changes in contemporary

business environment such as:
 The Global Business Environment

 Advances in Manufacturing Techniques

 Advances in Information Technology

 Greater focus on Customers

 New forms of organization

 Changes in the Social, Political and Cultural Envi-

ronment

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Contemporary Business Environment
The business environment in recent years has been characterized by increasing competition and relentless drive for con-
tinuous improvement. The changes include:

1. Increase in global competition

Global business environment is very competitive and firms need cost management information to sustain competitive-
ness. They also need financial and non-financial information about doing business and competing effectively.

2. Advances in manufacturing technologies

Firms around the world adopt new manufacturing technologies to remain competitive in the face of the increased global
competition.

3. Advances in information technologies

The increasing use of information technology, the internet and e-commerce is perhaps the most fundamental of all busi-
ness changes in recent years. This new economy is manifested in the rapid growth of Internet-based firms and the increased
use of the internet for business data processing, communication, and sales.

4. Greater focus on the customer

To succeed in this era, customer value is the key focus that businesses of all types must be concerned with. The new
business process focuses on customer satisfaction. Cost leadership and superior product through differentiation are the strat-
egies firms generally choose. Successful pursuit of the two strategies requires an understanding of a firm’s value chain and
supply chain.

5. New forms of management organization

Management organization has changed in response to the changes in marketing and manufacturing . Because of the fo-
cus on customer satisfaction and value, the emphasis has shifted from financial and profit-based measures of performance to
customer-related, non-financial performance measures such as quality, time to delivery and service.
6. Changes in the social, political, and cultural environment of the business
Although the nature and extent of the changes vary from country to country, they include a more ethically and racially
diverse workforce, a renewed sense of ethical responsibility among managers and employees , and an increased deregulation
of business by the national government.

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ENABLING TASK

Instruction: think of a company you knew and assess the changes in their business operation.
Example: Changes in the social, political, and cultural environment of the business:
Jollibee Foods Corporation used to use plastic boxes and cellophanes for their take
out orders, but today they use biodegradable boxes.

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 Topic Outline IV
Developing A Competitive Strategy And Contemporary Cost
Management Techniques

Topic Learning Outcomes:

Differentiate the two basic competitive strategies

Describe the various contemporary cost management

techniques

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 The two Competitive Strategies

Cost Leadership: a competitive strategy in which a firm succeeds in producing products or services at the lowest
cost in the industry. A firm that is a cost leader makes sustainable profits at lower prices, thereby limiting the growth
of competitions in the industry through its success in price wars and undermining the profitability of competitors
which must meet the firm’s low price.
 Product Differentiation: it is implemented by creating a perception among consumers that the product or service
is unique in some important way, usually by being of higher quality, features or innovation. This perception allows
the firm to charge higher prices and outperform the competition in profits without reducing cost significantly.

 Distinctive Aspects of the Two Competitive Strategies

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 Contemporary Cost Management Techniques
 Total Quality Management: a technique in which management develops policies and practices to ensure that the firm’s products
and services exceed customers’ expectations. This technique aims to ensure that products are of the highest quality and production
process are efficient.

 Just-In-Time: it is a system in which each component on a production line is produced immediately as needed by the next step in the
production line. In a JIT production line, manufacturing activity at any particular workstation is prompted by the need for that
station’s output at the following station.

 Process Reengineering: is an approach where a business process is diagrammed in detail, questioned and then completely rede
signed in order to eliminate unnecessary steps, to reduce opportunities for errors and to reduce costs. a business process is any
series of steps that are followed in order to carry out some task in a business. The main objective of this approach is the simplifica
tion and elimination of wasted effort and the central idea is that all activities that do not add value to product or service should be
eliminated. This process can yield the following anticipated results: process is simplified, process is completed in less time, costs are
reduced, and opportunities for errors are reduced.
 Benchmarking: is a process by which a firm determines its critical success factors, studies the best practices of other firms for achiev
ing these critical success factors, and then implements improvements in the firm’s processes to match or beat the performance of
those competitors.

 Mass Customization: a management technique in which marketing and production processes are designed to handle the increased
variety that results from delivering customized products and services to customers.

 Balanced Scorecard: it is an accounting report that includes the firm’s critical success factors in four areas:
- Financial Performance
- Customer satisfaction

- Internal Business Process

- Innovation and Learning

 Activity-based Costing and Management

- Activity analysis: used to develop a detailed description of the specific activities performed in the operation of the firm. It provides
the basis for activity-based costing and activity-based management
- Activity-based Costing (ABC) is used to improve the accuracy of cost analysis by improving the tracing of costs to products or to

individual customers.

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 Contemporary Cost Management Techniques (Continuation)

 Theory of Constraints (TOC): it emphasizes the importance of managing the organization’s constraints
or barriers that hinder or impede progress toward an objective. Since the constraint is whatever is
holding back the organization, improvement efforts usually must be focused on the constraint to be
really effective.
 Life Cycle Costing: a management technique to identify and monitor the costs of a product throughout
its lifecycle. It consists of all steps from product design and purchase of raw materials to delivery of and
service of the finished product.
 Target Costing: involves the determination of the desired cost for a product or the basis of a given
competitive price so that the product will earn a desired profit. The basic relationship that is observed in
this approach is

Target Cost Market determined Price Desired Profit

The entity using target costing must often adopt strict cost—reduction measures to meet the market
price and remain profitable. This is a common strategic approach used by intensely competitive
industries where even small price differences attract consumers to the lower-priced product.

 Computer-Aided Design and Manufacturing: more companies are using computer-aided design (CAD)
and computer-aided manufacturing (CAM) to respond to changing consumer tastes more quickly.
Computer-Aided Design (CAD) is the use of computers in product development, analysis, and design
modification to improve the quality and performance of the product.
Computer-Aided Design (CAM) is the use of computers to plan, implement, and control production.

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 Contemporary Cost Management Techniques (Continuation)
 Automation : involves and requires a relatively large investment in computers,
computer programming, machines, and equipment. Many firms add automation
gradually, one process at a time. To improve efficiency and effectiveness continuously,
firms must integrate people and equipment into the smoothly operating teams that have
become a vital part of manufacturing strategy.
 E-Commerce: a number of internet-based companies have emerged and been proven
successful in last decade. This E-commerce business model adopted by Amazon.com and
eBay has also attracted many investors to pursue the use of Internet in conducting busi-
ness. Established companies will undoubtedly continue to expand into cyberspace– both
for business-to-business transactions and for retailing.
 The Value Chain: refers to the sequence of business functions in which usefulness is
added to the products or services of a company. The term value refers to the increase in
the usefulness of the product or service and a result its value to the customer. The value
chain is an analysis tool that firms use to identify the specific steps required to provide a
product or service to the customer. The key idea of this concept is that the firm studies
each step in its operation to determine how each activity contributes to the firm’s compe-
titiveness and profits.
Internal Value Chain is the set of activities required to design, develop, produce, market
and deliver products or services to customers. If customer values are emphasized, mana-
gers are forced to determine which activities in the value chain are important to custo-
mers. A management accounting system should track information about a wide variety of
activities than span the internal value chain.

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Illustrative Case: Value Chain Analysis

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Required: Develop an analysis of the value chain to help Jack better understand the nature of the com-
petition between the Archers and the Lions, and to identify opportunities for adding value and/or cost
reduction at each step.

Analysis

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ENABLING TASK

Instruction: Read every item comprehensively and choose the letter of your best
answer.

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 MAIN TASKS

Select two companies in the same industry

and identify their competitive strategies

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MAIN TASKS

Using the same companies on your prior

main task, what are the benefits of having
cost information system in their operations?

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 MAIN TASKS

Ram Radio manufactures yacht radios, navigational equipment and depth sounding
and related equipment form a small plant near MNR-North, Tuguegarao City. One of
Ram’s most popular products, making up 40 percent of its revenues and 35 percent of
its profits, is a marine radio, model VF4500, which is installed on many of the large
boats produced in the Northern Luzon. Average production and sales are 500 units per month.
Ram has achieved its success in the market through excellent customer service and product
reliability. The manufacturing process consists primarily of assembly of components purchased
from various electronic firms, plus a small amount of metalworking and finishing. The manu-
facturing operations cost P110 per unit. The purchased parts cost Ram P250, of which P130 is
for parts that Ram could manufacture in its existing facility for P80 in materials for each unit,
plus an investment in labor and equipment that would cost P35,000 per month.
Ram is considering outsourcing to another MNR firm, Basher Enterprises, the market-
ing, distribution and servicing for its units. This would save Ram P125,000 in monthly materi-
als and labor costs. The cost of the contract would be P105 per radio.

Required:
1. Prepare a value chain analysis for Ram to assist in the decision whether to purchase or
manufacture the parts, and whether to contract out the marketing, distribution, and ser-
vicing of the units.
2. Should Ram (a) continue to purchase the parts or manufacture them and (b) continue to
provide marketing, distribution and service or outsource this activity to Basher? Explain
your answer.

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