“HOW TO DRIVE STRATEGIC COST MANAGEMENT

TO WINNING COMPETITION”
By Daniel Godwin Sihotang CA,CMA, CIBA, CBV
President of ICMA INDONESIA
FOUNDER LEAN ACCOUNTING INDONESIA
Finance Business Partner in Euro MNC
@Daniel Godwin Sihotang @Daniel Godwin Sihotang
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 WELCOME NEW WORLD OF WORK

THE WORLD OF VUCA

Volatility, Uncertainty, Complexity, Ambiguity

I Challenge you to Become Change Agent
Nokia out from Competition

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Lazy Company
Lazy Company
Lazy Company
Lazy Company
Lazy Company
 This will become Zombie Company if still making loss…
Need Accounting Strategy to make Turn Around for make Profit…
Customers don’t
care about our
processes or the
way we organize
ourselves.

They care about

the value they
receive.
Disruption or To Be Disrupted?
Price

Incumbent
High End
Middle-Up
Segment

Low-End
Segment
New Comer Competitor
Attack Quantity
Order
0

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Why do we need to reduce costs?

Companies need to make a proper profit for future prosperity.

Ways of increasing profit
1. Increase selling price ------- We may lose the market because of a more expensive product.
2. Reduce the cost ------ It is possible with cooperative efforts and waste elimination.
3. Reduce both cost and selling price, and sell a lot of products ------ It is possible by
cooperative efforts and waste elimination.

Selling Price
It’s possible by
implementation Lean
Selling Price Selling Price Six Sigma. So plus both
manufactures and
Selling Price customers have
Profit advantages.
Profit Profit
Profit
Profit

Cost
Cost Cost Cost
Cost

Now 1 2 3
Increase profit Cost Reduction is necessary LEAN SIX SIGMA
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 Global Minded

Group Technology Centre

11 Manufacturing Locations
18 Sales and Distribution Hubs
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Current Finance Transformation in World Class Company
The New Finance Organization is built 5 Pilar
Role of Finance Business Partner
 Strategy

Financial Busines Partned is key player to set up Company Strategy

By become CMA
Member, Will help You
to fast track in
Management
Accounting Career to
the Top Level
Management
 Planning & Control – Organizational design

• A responsibility center is an organization unit for which a

manager is made responsible
• A ‘financial’ responsibility center defines the individual’s
responsibilities and accountability in financial terms
• Types:
– Cost centers (Eg Group services: HRM, F&A,...)
– Profit Centers (Eg Lamp, Heathcare,...)
 Planning & Control – Budgeting process
Strategy Review

Programming

Evaluation &
Rewarding
Managers Budget
Preparation &
approval
Reporting

Follow-up

(c) Prof. Dr. Werner Bruggeman

 Planning & Control

• 3 levels of planning
– Strategic review
High level Strategic positioning by product – market – segment
– X+3 planning process
• To obtain a consolidated picture of the Group over the next 3 years
• To review and update the mid-long term priorities of the activity platforms,
which will help to define the priorities and KPI’s of the next X+1
– X+1 planning process
The operational plan for next year

• Dual approach of the X+1 planning

– X+1 Goal planning (KPI,...)
– X+1 Financial Budget
 Cost price calculation – Standard Costing
A standard manufacturing cost
• Is based on yearly predetermined standards for all
materials, conversion and manufacturing overhead costs.
• Assumes ‘normal’ manufacturing conditions for the
output, activity level and manufacturing process.
Lay-outs of income statement and Variable cost
definition
• For internal purposes, Income Statement can be presented
in various lay-outs. In Some Company using Contribution
Report and Cash Cost Reports.
• Classification of items in Contribution reports and also
Cash Cost Reports is based on instructions of regional/ BP
controllers.
• Important feature of contribution report is split of costs to
fixed and variable cost.
• Variable costs is an expense that varies with production
output. Variable costs are those costs that vary depending
on a company's production volume; they rise as
production increases and fall as production decreases.
 Fixed costs definition
- Fixed costs are costs that do not change with an increase or
decrease in the amount of goods or services produced.
Fixed costs are expenses that are incurred by a company,
independent of any business activity.

Examples are fixed salaries of employees or fixed costs for lease of

building or warehouse.

- If the output is changing dramatically (jumping to different

level) in the course of time, some of fixed costs could change
as well.

For example, with increased volume of dispatched goods (let´s say it is

doubled), company needs to employ additional person in dispatching
department in order to deal with all orders.
 Standard Cost price calculation – Cost Centers
Cost Centers:

– Purpose: split the organisation in cost centers, being those responsibility centers
which accumulate and report costs for an organizational unit with budget
responsibility.

– Cost centers follow the organizational structure. For each (cluster of similar)
activity/activities planned, you need a cost center.

– Direct cost centers = production cost centers: used for the registration of the costs
of those departments which physically change the products: rod yard, wire
drawing, galv,…, i.e. Immediately linked to the production.

– Indirect cost centers = production support cost centers: used for the registration of
the costs of the other manufacturing departments: purchasing, maintenance,
production mgmt, quality ass,…, i.e. Not immediately linked to the production.

– Overhead cost centers: used for registration of cost of administrative departments:

General mgmt, Sales dptm,… Plant ≠ cost centers
 Cost price calculation – Tariff for each direct
Tariffs:
cost center
– The basis for making tariffs is the split-up of the factory in physical places where a
number of similar machines or lines have been installed, i.e. Cost Centers

– Determine cost driver for each activity (judgement – most appropriate cost driver):
ton, machine-hour, loading, man-hour,…

– Examples of direct cost natures and appropriate cost driver:

Overhead packing material – cost driver TON

Electricity consumed for drawing process – cost driver MACHINE HOUR

Same cost nature could be allocated to different cost drivers based on different
cost center character. For example, we could have situation that direct labour in
drawing dpt. is allocated per MACHINE HOUR, direct labour in make-up dpt. is
allocated per TON.
– Tariff for particular cost driver =

total direct costs + allocated indirect costs

representative capacity of cost driver

– Raw Material is not included in this tariff

– Special consumptions (coatings, scrap, dies) are not included in this tariff,
since not possible to allocate via general tariff.

– Decision whether to include item in special consumption or in tariff is

derived from significance of particular cost nature. For example, some
packing material is used for certain finished goods packing types but not
for the others. However, as amount of costs per ton for these packing
material is not significant, it is included in tariff and thus included in costs
price of each finished goods unit.
 Standard Costing VS Cash Cost
Where is difference??

Component of Standard Costing Component of Cash Cost

Wire rod Wire rod
TOTAL MATERIAL CASH COST TOTAL MATERIAL CASH COST
Labor Labor
Utilities Utilities
Packing Packing
Other Consumable Other Consumable
Maintenance Maintenance
Other Other
TOTAL CONVERSION CASH COST TOTAL CONVERSION CASH COST
Depreciation & amortization Commercial

Total Standard Costing TOTAL CASH COST OWN PRODUCTION

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 Break even point
• Breakeven point is defined as level of sales volume for which
the company´s result is equal to 0. When the company is
operating below this sales volume, sales revenue is not
covering company´s costs.
• It is expressed by following equation: Q = FC/ p – VC
- Example: the company´s total fixed costs (FC) are amounting to
1000 EUR, selling price per unit (p) is 20 and variable costs per
unit are amounting to 10 per unit of production
- Q = 1000/ (20-10) = 100
- In our case, the company needs to sell 100 units so as to be
able to achieve break - even point. Each single additional unit
sold means that company´s is increasing profit.
P&L Standard Reporting based on PSAK/IFRS VS Finance For Industrial Organization (SAP)

SAK/IFRS Finance Industrial (SAP)

P&L
Total Sales
COGS (QxAFSP sold)
Freight Costs
SGE

Production Value (QxAFSP prod)

Raw Material
Scrap
TOTAL MATERIAL CASH COST
Labor
Utilities
Packing
Other Consumable
Maintenance
Other
TOTAL CONVERSION CASH COST
Gross increase/decrease WIP and FG + Other
Inventory corrections
FIFO
Capitalized variances
Write off inventories
Depreciation & amortization
Manufacturing variance
GROSS PROFIT
Overheads
Other operating ongoing

REBIT

OTH.OP. NON-ONGOING
EBIT
NON-OPERATING
NET INCOME
 Financials for Industrial organization:
how does it work? (Value Stream P&L)

Our Financial stakeholders needs: The way we measure: Total Sales

COGS (QxAFSP sold)
SGE + Freight Costs
Profit
Manufacturing Var + SGE

Tax authority
Production Value (QxAFSP prod)
Wire rod
- Low cost Halfproduct
- Good Quality Manufacturing Var + TOTAL MATERIAL CASH COST
- On time delivery
Labor
Customers Utilities
Packing
- Salary Other Consumable
- Safety Maintenance
- etc. Other
SGE + TOTAL CONVERSION CASH COST

Employees Manufacturing Var + Gross increase/decrease WIP and FG + Other

Inventory corrections
FIFO
Capitalized variances
On time payment Write off inventories
Depreciation & amortization
Suppliers Manufacturing variance
Affected by Sales GROSS PROFIT
Overheads
Affected by PTBI factory Other operating ongoing

REBIT 6
 Financials for Industrial organization:
How did we do on the things we can affect?

Raw Material WE ACCOMPLISHED: Utilitiy

- To become a leaner
organization

-To reduce our structural cost!

We are ready to accelerate!!!!

Labor Maintenance
BUT STILL LARGE
OPPORTUNITIES to BECOME
ONE OF THE BEST:

- Waste level!!!!!!!
- Flexibility !!!!!!!!!!
- Cost leadership!!!!!!

Packing Consumable Other Cost

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Financials for Industrial organization:
What is the impact of volumes?

Can we affect Sales volumes?

YESS!!!!!

Should we react quickly on

volume change?

YES!!!!

Different volumes, different Cash

Cost

Different volumes, different targets!

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Simple Bridge Analysis – To Explain the Business
+14%
2,125
36
-70 3 76
253
1,864
-451 414

2020 Budget Volume Sales/Price CCC Impact FIFO & Depreciation SG&A Others 2020 Actual
Mix Inv
Adju

Comments
 Volume: higher 20 MT vs Budget 15 MT, more export
 Price mix: Impact on mix product (sales more low margin product)
 CCC : CCC improvement in reduction labor, consumable, maintenance , other cash cost and
transport cost
 FIFO: impact on reduce price Raw Material SLOB Provision.
 SG&A : lower in T&E cost
 Others : Tax refund
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 MAPPING THE COST

Use Pareto  Focus in Big Fish

RESULT COST REDUCTION AFTER IMPLEMENTATION
LEAN SIX SIGMA
 EVOLUTION PROFIT

IMPLEMENTATION SIX SIGMA TO MAXIMIZE PROFIT

 Du Pont Analysis

Benefit by implementation Lean Accounting is ROI is Positive.

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