Accounting 102

Strategic Cost Analysis

Professor:
Christopher Ittner

Email: ittner@wharton.upenn.edu

Online Office Hours: Mondays and Wednesdays 2:30 to 3:30 or by

appointment

Other Resources:
TA Office Hours: To be announced

Piazza for content-related questions

Course Requirements
(See the Syllabus)
OPTIONAL MATERIAL:
Recommended: Shim, J.K., Seigel, J.G., Shaum’s Outlines,
Managerial Accounting (2nd Edition), McGraw Hill Companies, Inc.,
2012

Text With Applications: Davila, A., Oyon, D., Malea Fashion District,
How Successful Managers use Financial Information to Grow
Organizations (Any Cost or Managerial Accounting textbook can be
used as an alternative)

Simple introduction to the topics we discuss:

Alshar, Kalpesh, Cost Accounting & Management Essentials You
Always Wanted To Know, Vibrant Publishers
(e-book available for approximately $10)
or
Holtzman, Mark P., Managerial Accounting For Dummies,
(e-book available for approximately $15)
 GRADING: BEST 2 OF first 3 EXAMS (33.33% of final score each) +
REQUIRED COMPREHENSIVE FINAL EXAM (33.33%)
PROFESSOR’S DISCRETION TO ADJUST TOTAL SCORES UP OR
DOWN BY 5% FOR CLASS PARTICIPATION AND ATTENDANCE

Date Time

7:00 TO 8:30 PM
Exam 1 February 7 (Monday)

Exam 2 March 16 (Wednesday) 7:00 TO 8:30 PM

Exam 3 April 4 (Monday) 7:00 TO 8:30 PM

Exam 4 TBD

RAW SCORES WILL BE USED TO DETERMINE GRADES.

EXAM SCORES WILL NOT BE STANDARDIZED.
 COURSE RULES
• Students should sit in the same seat each class session and display their name
tent (provided).
• Class starts and ends on time. If a unique situation arises such that you must
come in late or leave early, please inform your professor ahead of time.
• Students should remain in attendance for the duration of class (unless there is a
valid reason to leave).
• I expect that you will treat this course as a professional engagement. Please do
not carry on private conversations, messaging, etc. during class.
• Follow the Code of Academic Integrity. On behalf of the majority of the students
who make an honest effort in this class, I will take action against anyone
suspected of breaching this Code. Students caught cheating will receive a grade
of “F” for the course and will be remanded to the appropriate school disciplinary
board(s).

Electronics policy: In the interests of maximizing learning outcomes for all students,
I ask that phones be turned off for the duration of the class. Laptops and tablets are
allowed for note-taking only.
Exam Accommodations
• If you need additional time for an exam because of a university-recognized disability,
please notify your instructor by e-mail, as soon as possible.
• In addition, you must notify SDS, so that the appropriate arrangements can be made.

Exam Conflicts
• If you cannot take an exam during the assigned time due to a course conflict, please notify
me as soon as possible for permission to take the exam at a different time.
• If some emergency arises which prevents you from taking an exam at the scheduled time,
please notify me as soon as possible.
• If you miss an exam with your instructor’s permission, you will be required to take
a make-up exam at the beginning of classes for the Fall Semester.
• IF YOU MISS AN EXAM WITHOUT YOUR INSTRUCTOR’S PERMISSION, YOU WILL
BE ASSIGNED A GRADE OF 0 FOR THAT EXAM.
Overview of the Course
 What is Strategic Cost Analysis?

● Strategic Cost Analysis is the process of analyzing and managing costs in

order to improve the strategic position of the business.

● Accomplished by having a thorough understanding of which activities and

costs support an organization’s strategic position and which activities
and costs either weaken it or have no impact.

● Cost management efforts can then focus on reducing or limiting

expenditures on activities that add little or no strategic value, while
increasing expenditures on activities that support the strategic position
of the organization.

● Performance can then be evaluated to ensure that the chosen actions are
taken, and that these actions are yielding improved strategic performance.

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 Course Objectives
● Understand the key issues in analyzing and managing
the relevant costs for a given decision (“Different costs
for different purposes”)

● Present methods available to strategically assess and

manage relevant costs (“Strategic Cost Analysis” and
“Strategic Cost Management” )

● Evaluate the methods, assumptions, and limitations in

the cost accounting data found in most firms (Beware:
Cost accounting will haunt you for your entire career,
so you better understand how it works)

● Examine the methods and potential consequences of

different cost- and profit-based performance evaluation
methods 10
 Course Outline
● 1. The Strategic Cost Analysis and Management Process
(Today)

● 2. Identifying Relevant Decision-Making Information

● 3. Conducting Cost Estimation and Planning; Developing

Cost-Based Financial Models

● 4. Collecting Relevant Cost Data Using Cost Accounting

and More Sophisticated Costing Methods

● 5. Implementing Strategic Cost Analysis and Cost

Management Techniques

● 6. Evaluating Performance and Providing Incentives

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 Strategic Cost Analysis ≠ Cost Accounting

Cost Accounting Strategic Cost Measurement,

Financial Reporting
regulatory compliance
Analysis, and Management

•[e.g., GAAP, IFRS]

Cost Reporting &
•Costs of goods sold
•Inventory valuation
Analysis
(feedback on performance)
• Spending vs. budget variance
analysis
• Profitability reporting
• Process analysis (e.g., lean,
benchmarking, COQ)
• Performance measures
• Learning; corrective actions
Decision Support/
Cost Planning
• Fully absorbed & incremental pricing
• Driver-based budgeting & financial
forecasts
• What-if analysis
• Product, channel & customer
rationalization
• Outsourcing & make vs. buy analysis

History
Source: “A L2010Low value-add Modest value-add High value-add
 Strategic Cost Management and
Cost Optimization

● Strategic Cost Management:

● A process for applying cost management techniques

so that they simultaneously improve the company’s
strategic position and improve profitability

● Cost Optimization:

● Identifying alternatives that offer the best tradeoffs

between cost, risk, and strategic value

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 The Strategic Cost Analysis and Cost Management
Decision-Making Process

First: Determine the

Strategic Issues Third: Relevant Cost Analysis
and Strategic Cost Management
Second: Specify the Criteria
Identify and Collect
and Identify the
Relevant Information
Alternative Actions

Predict Future Values of

Relevant Costs & Revenues

Fourth: Select and

Implement a Consider Strategic Issues
Course of Action

Fifth: Evaluate
Performance

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 Strategic Situation Analysis
In the Cost Analysis and Management
Process: The Key Questions
1. How well is firm’s present strategy working?

● Determine current strategy of company

● Examine key indicators of strategic and financial performance

2. What are the firm’s resource strengths and weaknesses and its external
opportunities and threats?
3. Are firm’s prices and costs competitive?
4. How strong is the firm’s competitive position relative to rivals?
5. What strategic issues does the firm face?
6. Given this strategic analysis, what actions should be taken to
simultaneously improve the organization’s cost position and
improve strategic performance?
The Emphasis Placed on Different Cost Management
Will Vary With the Strategic Environment

Source: Deloitte,April 2016

 Activity Analysis and Strategic Cost Management

● Activity Analysis is the foundation for Strategic Cost

Management and Cost Optimization

● Activities create resource demands

● What activities do we perform and why?
● How do they contribute to achieving strategic
objectives?
● Do they create value for the internal or external
customer?
● How can we adjust activities or reallocate resources to
optimize costs given our strategic objectives?

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Strategic Cost Management Focuses on Both
“What” and “How” Activities Are Performed

● Reduce or refocus what ● Adjust how activities are

activities are performed: performed:

● Eliminate unnecessary or ● Lean-out processes or

nice-to-have services or standardize activities
activities
● Automate
● Rationalize service levels
● Rationalize the value
● Rationalize the frequency chain
or number of deliverables
● Modify organizational
● Increase activities that add structures
greater value
● Outsource activities 17
Effective Strategic Cost Analysis and Management
Methods Cut Across Functions

Types of Strategies

Financial and
Relationship-Driven Market-Driven
Management-Driven
Cost Management Cost Management
Cost Management
Techniques Techniques
Techniques

• Managing Vendor and • Cash flow • Competitive bidding

Customer Relationships management • Grassroots and
• Outsourcing IT • Managing employee guerilla sales and
applications, benefits, retention and turnover marketing techniques
sales financial
management, etc.
costs • Public Relations vs.
• Cooperatives for • Budgeting, planning, Advertising Costs
purchasing, advertising, forecasting • Customer referral,
etc. (including trade • Estimates and price retention and loyalty
associations) quotes systems
• Joint Ventures and • Corporate • Barter networks
strategic alliances
• Employee incentives and
restructuring,
rewards for cost-cutting recapitalization and
and profit improvement reorganization
initiatives
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 Assessing Strategic Cost Management
Alternatives
Example: Managing Human Capital Costs

● Employees vs. Independent Contractors

● Hiring the right person the first time and rewarding loyalty
(significantly reduces turnover/replacement costs)

● Outsourcing payroll processing, benefits, taxes, etc.

● Part-time/special project/temporary workers

● Telecommuting and virtual offices

● Outsourcing most or all of the Human Resource function

● Professional Employer Organizations (PEOs) can handle everything from

payrolls to 401(K) account administration to hiring and firing functions
(PEOs now oversee over 2.5 million workers in the U.S.)

What factors should be considered when choosing

among these alternatives? 20
 Considering Risks

● To what extent do the alternatives fit within the

unit’s:
● Risk appetite?
● Risk tolerances?
● Risk capabilities?

● Have a broad set of risks been considered (not just

financial risks)?

● Have risk interdependencies been taken into account?

● What risk management tactics can be employed?

(accept, mitigate, avoid, share) 19
McKinsey’s Five Ways to Make Cost Cuts Stick
● Only 10% of cost reduction programs show sustained results
three years later. The consulting firm recommends the
following:

● Assign accountability at the right level

● Focus on how to cut, not just how much

● Don’t let financial accounting data get in the way of cost

management

● Clearly articulate the link between cost management and

strategy

● Treat cost management as an ongoing activity

WE WILL FOCUS ON THESE ISSUES THROUGHOUT THE COURSE

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