Acctg.

Ed 6 Strategic Cost Management

UNIT I – INTRODUCTION TO STRATEGIC COST MANAGEMENT

This unit introduces what Strategic Cost Management is. It will touch on overview of Cost
Management and Strategy, the Professional Environment of Cost Management, Contemporary
Business Environment and Strategic Focus of Cost Management and Developing a Competitive
Strategy and Contemporary Cost Management Techniques.

MODULE NO. 3 OVERVIEW OF COST MANAGEMENT AND STRATEGY

This module will cover topics: Contemporary business environment, strategic focus of
cost management, relationship between cost management and accounting systems. And
concept of integrative framework on how the accounting system is used in the firms’
organization architecture.

Learning Objectives:

At the end of this module, the learners should be able to:

1. Describe the more recent changes in contemporary business

environment such as
• The global business environment
• Advances in Manufacturing Technique
• Advances in information
• A greater focus on customers
• New forms of organization
• Changes in the Social, Political & Cultural Environment
2. Explain the strategic focus of cost management
3. Describe the relationship between cost management and the
accounting systems
4. Explain the concept of integrative framework on how the
accounting system is used in the firm’s organizational architecture.

Contemporary Business Environment

The business environment in recent years has been characterized by increasing competition
and relentless drive for continuous improvement. These changes include (1) an increase in
global competition; (2) advances in manufacturing technologies; (3) advance in information
technologies, the Internet, and e-commerce; (4) a greater focus on the customer; (5) new forms
of management organization; and (6) changes in the social, political, and cultural environment
of business.

Corporate executives are now using cost data to chart successful futures for their companies.
Adapting management accounting system to better meet management’s needs for information
is crucial to an organization’s survival when competing in global markets.
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The global business environment

Globe business environment is very competitive and firms need cost management information
to sustain competitiveness. The also need financial and nonfinancial information about doing
business and competing effectively.

Advances in Manufacturing Technologies

Firms around the world adopt new manufacturing technologies to remain competitive in the face
o the increased global competition. Some firms include just-in-time inventory method in order
to reduce the cost and waste of maintaining large level of raw materials and unfinished product.
A key competitive edge that forms have is the ability to deliver the product or service faster than
the competition.

Advances in Information Technologies, The Internet and E-Commerce

The increasing use of information technology, the internet and e-commerce is perhaps the most
fundamental of all business changes in recent years. These technologies have resulted in the
growing focus in cost management by reducing the time required to process transactions,
thereby expanding the individual’s access to information within the firm, the industry and the
business environment around the world.

A greater focus on Customers

To succeed in this era, customer value is the key focus that businesses of all types must be
concerned with. Producing value for the customer has changed the orientation managers from
low-cost production of large quantities to quality, service, faster delivery and ability to respond
to the customer’s desire for specific feature.

Generally, firms chose a strategic position corresponding to one of the two general strategies:
(a) Cost leadership, and
(b) Superior product through differentiation

Successful pursuit of cost leadership and/or differentiation strategies requires an understanding

of a firm’s value chain (internal) and supply chain (external).

New Forms of Management Organization

Management of organization has changed in response to changes in marketing and
manufacturing. Because of the focus on customer satisfaction and value, the emphasis has
shifted from financial and profit-based measures of performance to customer-related,
nonfinancial performance measures such as quality, time to delivery and service.

Figure 3-1: Comparison of Prior and Contemporary Business Environments

Management Organization
Prior Business Environment
Contemporary Business
Environment
Type of information recorded Almost exclusively financial Financial and operating data,
and reported data the firm’s strategic success
factors
Management organizational Hierarchical, command and Network-based organization
structure control forms, teamwork focus –
Acctg. Ed 6 Strategic Cost Management

employee has more

Management focus Emphasis on the short term,
short-term performance
measures and
compensation, concern for
sustaining the current stock
price, short tenure and high
mobility of top managers
responsibility and control,
coaching rather than
command and control
Emphasis on the long term,
focus on critical success
factors, commitment to the
long-term success of the firm,
including adding shareholder
value

Manufacturing
Prior Business Environment Contemporary Business
Environment
Basis of compensation Standardization, economies Quality, functionality,
of scale customer satisfaction
Manufacturing process High volume, long production Low volume, short production
runs, significant levels of in- runs, focus on reducing
process and finished inventory levels and other
inventory non-value-added activities
and costs
Manufacturing technology Assembly-line automation, Robotics, flexible
isolated technology manufacturing systems,
applications integrated technology
applications connected by
networks.
Required labor skills Machine-paced, low-level Individually and team-paced,
skills high-level skills

Marketing
Prior Business Environment Contemporary Business
Environment
Products Relatively few variations, Large number o variations,
long product life cycles short product life cycles
Markets Largely domestic Global

Changes in the Social, Political, and Cultural Environment of Business

The new business environment requires firms to be flexible and adaptable and to place greater
responsibility in the hand of a more highly skilled workforce.

Strategic Focus of Cost Management

A competitive firm incorporates the emerging and expected change in the contemporary
environment of business into its business planning and practices.
Acctg. Ed 6 Strategic Cost Management

Guided by strategic or long-term thinking, the management accountant focuses that make the
company successful rather than just focusing on cost control and other financial measure.

Phases of the development of cost management systems should consider the following:
Stage 1: Cost management systems are basic transaction reporting systems.
Stage 2: As they develop into the second stage, cost management systems focus on external
financial reporting. The objective is reliable financial reports; accordingly, the
usefulness for cost management is limited.
Stage 3: Cost management systems track key operating data and develop more accurate and
relevant cost information for decision making; cost management information is
developed.
Stage 4: Strategically relevant cost management information s an integral part of the system.

Cost Management and Accounting Systems

We use cost management to describe the approaches and activities of managers in short-run
and long-run planning and control decisions that increase value for customers and lower costs
of products and services. Information from accounting systems helps managers make such
decisions, but the information and the accounting systems themselves are not cost
management.

When Should The Internal Accounting Be Changed?

There is no such thing as the ideal management accounting system. Each organization has
different circumstances that lead to different management accounting decisions. Also,
accounting must continually deal with trade-offs among external users wanting information
describing firm performance and internal users wanting information for decision making and
control.

Integrative Framework
This is the framework for understanding how the accounting system is used in the firm’s
organizational architecture. Starting at the top, two external factors (technological innovation
and market conditions) affect the firm’s business strategy. The business strategy then interacts
with the firm’s organization architecture to provide incentives for managers and employees.
These incentives affect the actions taken, which in turn affect the value of the firm.