Acctg Ed 18 – Strategic Cost Management
up of production with the expenses
Cost Management
- the process of identifying, collecting, measuring,
classifying, and reporting information that is useful to
managers and internal users to ascertain cost, plan,
control and make decisions
- the approaches and activities in short-run and long-
run planning and control decisions that increase the
value for the customers and lower the costs of
products and services
- includes all the activities and related infrastructures
that an entity employs to set and measure the
achievement of its goals and objectives
Cost management information
- developed for the Chief Financial Officer and other
managers to use to manage the firm and make it more
competitive and successful
- provided for each of the four major management
functions:
1) strategic management
- involves identifying and implementing goals and
action plans to achieve desired competitive advantage
and continued success
2) planning and decision-making
- involves budgeting and profit planning, cash flow
management and other decisions on operations e.g.,
capital budgeting
3) control
- involves assessment, monitoring, and evaluation of
activities
a) operational control
- monitoring activities of operating-level managers and
employees (e.g., production supervisors and different
department heads) by mid-level managers (e.g., plant
managers, product managers, and regional managers)
b) management control
- evaluation of mid-level managers by upper-level
managers (e.g, controller or CFO, CEO, etc.)
4) preparation of financial statements
- compliance by management with reportorial
requirements of various relevant entities (e.g., BIR,
Bangko Sentral ng Pilipinas, SEC, etc.)
Cost management nature and scope
Nature of Cost Management
- an interdisciplinary subject drawing its materials
from several other disciplines like costing, statistics,
mathematics, financial accounting, etc.
Scope of Cost Management
1) Cost Ascertainment:
- deals with the collection and analysis of expenses, the
measurement of production of the different products
at the different stages of manufacture and the linking
2) Cost Accounting
- the process of accounting for cost which begins with
recording of expenditure and ends with the
preparation of statistical data.
- A formal mechanism by means of which costs of
products or services are ascertained and controlled.
3) Cost Control
- the guidance and regulation by executive action of
the costs of operating an undertaking
- aims at guiding the actual performance towards the
line of targets; regulates the actual if they deviate or
vary from the targets
4) Budgetary Control:
- the establishment of budgets relating to the
responsibilities of executives to the requirements of a
policy and the continuous comparison of actual with
budgeted results
5) Cost Audit:
- the verification of the correctness of cost accounts
and a check on the adherence to the cost accounting
plan
Objectives of Cost Management
1) reduce costs expended by an organization while
strengthening the strategic position of the firm
2) enhance profit consciousness
3) more focus on more efficient operations
Types of cost management
1) those that strengthen the organization’s competitive
position
2) those that have no impact on the organization’s
position
3) those that weaken the organization’s position
Costs involved with cost management
 direct costs
- costs that are physically related to a project
- subject to the influence of the manager
 service costs
- costs that cannot be specifically related, but can be
linked, to a project
- assigned based on usage or consumption
 general and administrative costs
- cannot be specifically related to a project but benefit
all activities
Resource planning for cost management
- determining what physical resources (i.e., people,
equipment and materials) are needed to complete a
project
- resources are evaluated to assess the value the
organization will get from taking the project or
changing its methods to make it a more efficient
organization
Elements for cost management assessment:
 work breakdown structure (WBS)
- identifies the elements that will need resources in the
project in order for the project to be successfully
completed
- the primary input to resource planning
 historical information
- provides information regarding what types of
resources were required for similar work on similar
projects
 scope statement
- contains the project justification and objectives
 resource pool description
- knowledge of the physical resources
available/necessary for project completion
 organizational policies
- policies of the organization regarding staffing and the
rental/purchase of supplies/equipment
Techniques for cost estimating:
 analogous estimating (top-down estimating)
- using the cost of a previous similar project as a
reference for predicting the cost of the current project
- a form of expert judgment and used when there is a
limited amount of information about the project
 parametric modelling
- using mathematical parameters to predict project
costs
- models can be simple or complex
- most reliable when –
a) the historical information is correct
b) the parameters are quantifiable
c) the model can be applied to both large and small-
scale projects
 bottom-up estimating
- estimating the cost of work items and then summing
the estimates to get a project total
 computerized tools
- project management software and spreadsheets that
aid in project estimation
Benefits of effective cost management
1) improve pricing decisions
2) identify the source of costs
3) link corporate strategies
4) evaluate the effectiveness of activities for investment
Cost avoidance, reduction and control
Cost avoidance
- any actions that avoid having to incur costs in the
future
- preemptive actions that avert potential increases in
costs
- will never be reflected in the budget or the financial
statements
- examples:
a) reduction of a proposed price increase from a
vendor
b) elimination of the need for additional personnel
through process improvements, or
c) a change in maintenance schedules for critical
equipment to avoid work stoppages.
Cost-saving
- any actions that lower current spending, investment,
or debt levels
- results in a tangible financial benefit for the
organization
- amount of money saved should always be reflected in
the financial statements and next year’s budget
**actual should be visible in the financial
statements compared to prior periods
**planned cost savings should be reflected in
the budget.
- examples:
a) reduction of overtime hours
b) elimination of temporary labor employees
c) negotiation of price decreases for products and
services, or
d) the negotiation of a lower rental fees for facilities
and equipment.
Cost reduction
- a planned, positive approach to bring costs down of
goods manufactured or services rendered without
impairing their quality or suitability for their intended
use, or without reducing their value in terms of
customer satisfaction
- Goals:
1) reduce cost per unit
2) increasing productivity
- Steps:
1) elimination of wastes
2) improving operations
3) increasing productivity
4) search for cheaper materials
5) improved standards of quality
6) finding other means to reduce unit costs
- Difficulties generally found in cost reduction
programs:
1) workers and employees may resist the
implementation of the programs
2) they are usually carried out on an ad hoc basis
3) the schemes may be covered in some areas but it
should cover all activities
4) they may be implemented hurriedly
Cost control
- the comparative analysis of actual costs with
appropriate standards or budgets to facilitate
performance evaluation and formulation of corrective
measures
- management actions to keep costs within standards
and/or budget
- aims at accomplishing conformity between actual
results and standards or budgets, keeping
expenditures within prescribed limits
- techniques:
 performance measurement
- helps assess the magnitude of any variations that
occur within performance when compared with
similar projects/services
- determining the cause of variance and decide if
corrective action is to be made
 additional planning
- usually done when projects do not go as planned
- revisions may be made and alternative approaches
adopted
 computerized tools
- used to track planned costs versus actual costs, and to
predict cost changes