STRACO – STRATEGIC COST MANAGEMENT

Second Semester, AY 2022-2023

Bachelor of Science in Management Accounting III

CHAPTER 1

OVERVIEW OF COST MANAGEMENT AND STRATEGY

EXPECTED LEARNING OUTCOMES

After studying the chapter, you should be able to:

1. Explain what strategy is
2. Relate strategic cost management to strategic management
3. Describe the nature of cost management information and how they are developed
4. Explain the objective, scope and benefits derived from proper cost management
5. Enumerate and describe the various users of cost management information
6. Explain how cost management information is used for the following management
functions:
• Strategic Management
• Planning and Decision-Making
• Management and Operational Control
• Reportorial and compliance to legal and various regulatory requirements
7. Understand the cost management accountant’s role in strategic cost management
8. Describe the role of the cost management accountant in the development and
implementation of strategic decision for the business firm
9. Enumerate and explain the basic cost management perspective

• Business managers must think and act competitively and doing so requires a strategy.
• Strategy is a set of policies, procedures and approaches to business that produce long-term
success. It is a set of goals and specific action plans that if achieved, provide the desired
competitive advantage.
• Strategic management involves the development of a sustainable competitive position.
• Strategic cost management involves the development of cost management information to
facilitate the principal management function which is strategic management.
• Cost management information is the information that manager needs to effectively
management the firm, profit-oriented as well as not-for-profit organization. This includes
both financial information about cost and revenues as well as relevant nonfinancial
information about productivity, quality and other key success factor for the firm.
• Cost management is the practice of accounting in which the accountant develops and uses
cost management information.
• For competitive success, it is not enough to emphasize only on financial information. This
could lead manager to stress cost reduction (a financial measure) while ignoring or even
lowering quality standards (a nonfinancial measure).

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 1
 • If a firm is to compete successfully, importance should be given to nonfinancial and long-
term measures of operating performances such as product and manufacturing advances,
product quality and customer loyalty.
• Cost management information, is thus a value-added concept – adds value by helping a
firm to be more competitive.
• Strategic thinking involves anticipating changes. Products and production process are
designed to accommodate expected changes in customer demands.

USERS OF COST MANAGEMENT INFORMATION

• Cost management information is useful in all organizations: business firms, government

units, and not-for-profit organizations.

USES OF COST MANAGEMENT INFORMATION

• Cost management information is needed for each of the following management functions,
namely:

1. Strategic Management
• It involves the development of a sustainable competitive position in which the
firm’s competitive advantage spells continued success.
• It involves identifying and implementing the goals and action plans.
• Management must make sound strategic decisions regarding the choice of
products, manufacturing methods, marketing techniques and channels and other
long-term issues.

2. 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 production, pricing and managing distribution
of products to customers, and so forth.

3. Management and Operation 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
managers.
• Operation Control takes place when mid-level manager monitors the activities
of operating-level managers and employees.
• Management Control is the evaluation of mid-level manager by upper-level
manager.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 2
 4. Reportorial and Compliance to Legal Requirements
• Reportorial and compliance responsibilities require management to comply
with the financial reporting requirements to regulatory agencies such as the
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 interest as accounting scandals have shown how crucial and important
accurate financial information is for investors.

MANAGEMENT ACCOUNTANT’S ROLE IN STRATEGIC COST MANAGEMENT

• Cost Management is an area of accountancy practice as performed by management

accountants.
• Management accountants are the accounting professionals who develop and analyze cost
management information and other accounting information. They are concerned with
providing information to managers, that is, people inside an organization who direct and
control the operations.
• Management Accounting involves the application of appropriate techniques and concepts
to economic data so as to assist management in establishing plans for reasonable economic
objectives and in the making of rational decision with a view toward achieving these
objectives. It also comprises the preparation of financial reports for non-management
groups such as shareholders, creditors, regulatory agencies and tax authorities. It is
concerned primarily with providing information to internal managers who are charged with
planning and controlling the operations of the firm and making a variety of management
decisions.
• Generally, management accountants do the following tasks:
(a) Scorekeeping or data accumulation which enables both internal and external
parties to evaluate organizational performance and position.
(b) Interpreting and reporting of information that helps manager to focus on
operating problems, opportunities as well as inefficiencies.
(c) Problem-solving or quantification of the relative merits of possible courses of
action as well as recommendations as to the best procedure. This is commonly
associated with non-recurring decisions.
• Specifically, the management accountant provides a system which allows management to
receive the necessary information used in performing its administrative functions of:
(a) Planning
(b) Controlling
(c) Decision making

Planning
• It involves identifying alternatives and selecting a course of action and specifying how the
action will be implemented to further the organization’s objectives.
• The plan communicates a company’s goals to employees and specifies the resources
needed to achieve them.
• The plans of management are often expressed formally in budgets.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 3
Control
• Control of organizations is achieved by evaluating the performance of managers and the
operations for which they are responsible.
• Managers are evaluated to determine how their performance should be rewarded or
punished, which in turn motivates them to perform at a high level.
• The reports used to evaluate the performance of managers and the operations they control
are referred to as performance reports.
• Performance reports can be used by managers to “flag” areas that need closer attention and
to avoid areas that are under control.
• Typically, managers follow the principle of management by exception when using
performance reports. This means that managers investigate departures from the plan that
appear to be exceptional; they do not investigate minor departures from the plan.
• Operations are evaluated to provide information as to whether or not they should be
changed (i.e., expanded, contracted, or modified in some way).
• Managers can compare actual results with planned results and decide if corrective action
is necessary. If actual results differ from the plan, the plan may not have been followed
properly, the plan may have not been well thought out, or changing circumstances may
have made the plan out of date.

Fig~re 1-1: Planning and Control Process

Plan

Decisions to change
l
Action taken to
operations or revise implement plan

·Results

Decisions to reward or Comparison of planned

· · punish managers and actual results

Decision Making
• Decisions are made to reward or punish managers, and decisions are made to change
operations or revise plans.
• How well the managers make decisions will determine future profitability and, possibly,
the survival of the company.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 4
 RELATIONSHIP BETWEEN COST ACCOUNTING AND COST MANAGEMENT

• Cost accounting is a systematic set of procedures for recording and reporting

measurements of the cost of manufacturing goods and performing services in the aggregate
and in detail.
• Cost management needs the output of cost accounting. Its purpose is to provide managers
with information which aids decision.
• There is no generally accepted principles which specify how management accounting
information is to be reported. The most effective systems result when the manager-decision
maker and the accountant work together until the accountant understands the decision to
be made and the manager understands the source of information that accountant will report.
• Managers use cost management information to choose strategy, to communicate it and to
determine how best to implement it. They use this information to coordinate their decisions
about designing, producing and marketing a product or service.

STRATEGIC DECISION MAKING AND THE COST MANAGEMENT ACCOUNTANT

Basic Cost Management Perspectives

• For cost management process to succeed, it is necessary that managers must complement
their measurement skills with basic management perspectives that “go beyond numbers.”
This will enable them to make intelligent planning, control, and decision making for the
enterprise. These are:
a. A Strategic Management Perspective
b. An Enterprise Risk Management Perspective
c. A Corporate Social Responsibility Perspective
d. A Process Management Perspective
e. A Leadership Perspective
f. An Ethical Perspective

A. A Strategic Management Perspective

• The key to a company’s success is creating value for customers while differentiating
itself from its competitors. Identifying how a company will do this is what strategy
is all about. However, a chosen strategy is only as good as how effectively it is
implemented.
• The management accountant provides input that aids in developing strategy, building
resources and capabilities, and implementing strategy.
• The focal point of a company’s strategy should be its target customers. A company
can only succeed if it creates a reason (formally called customer value propositions)
for its target customers to choose it over a competitor.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 5
 • Customer value premises tend to fall into three broad categories, namely:
(a) Customer Intimacy Strategy
“You should choose us because we can customize our products and
services to meet your individual needs better than our competitors.”
(b) Operational Excellence
“You should choose us because we deliver products and services faster,
more conveniently, and at a lower price than our competitors.”
(c) Product Leadership
“You should choose us because we offer higher quality products than
our competitors.”

B. An Enterprise Risk Management Perspective

• Every business manager should recognize the fact that every strategy, plan and
decision involve risks.
• Enterprise risk management is a process by an entity to identify those risks and
develop responses to them that enable it to be assured of meeting its goals.
Examples of Controls to Reduce
Examples of Business Risks Business Ris~s
1. Losing market share due to the Develop an approach for legally gathering
unforeseen actions of competitors informa_ tion abou~ competitors' plans and
practices
2. Products harming ·customers Develop a formal and rigorous new
product testing program
3. Intellectual assets being stolen from Create firewalls that prohibit computer
computer files hackers from corrupting or stealing
, intellectual property
4. A website malfunctioning Thoroughly test the website before going
' "live" on the .Internet
5. A supplier ·strike halting the flow of Establish · a relationship· ·with two
• raw materials companies capable of providing needed
raw materials
6. Poor -weather conditions shutting Develop coqtingency
' . . plans for. overcoming
.

down operations . .
•, weatherirelated disruptions
7. A poorly designed ·i incentive .· Create a balanced set of performance
compensation ·system · causing measures that motivates the desired I

employees to make bad decisions behaviour ..

8. Inaccurate budget estimates causing Implement . a rigorous budget review
-. excessive or insufficient production . process .
9, Roor _environmenta1 . . ste'f'ardship Create a reporting sy~tem that tracks key
causing reputation al ·and fin·ancial environment~! performance indicators
damage
10. Failing to comply With . equal Create a report th~t tracks key metrics
employment opportunity laws. related to compliance with the laws

C. A Corporate Social Responsibility Perspective

• Corporate social responsibility (CSR) is a concept where business organizations

consider the needs of all stakeholders (customers, suppliers, communities and
environmental and human rights advocate) when making decisions.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 6
D. A Process Management Perspective

• Effective managers understand that business processes, more so than functional

departments (Marketing Department, the Research and Development Department, and
the Accounting Department), serve the needs of company’s most important
stakeholders – its customers.
• A business process is a series of steps that are followed in order to carry out some
tasks in a business. These steps often span departmental boundaries, thereby requiring
managers to cooperate across functional departments. The term value chain is often
used to describe how an organization’s functional departments interact with one
another to form business processes.
• A value chain consists of the major business functions (Research and Development,
Product Design, Manufacturing, Distribution, and Customer Service) that add value to
a company’s products and services.
• Managers need to understand the value chain to be effective in terms of planning,
control, and decision making. For example, if a company’s engineers plan to design a
new product, they must communicate with the Manufacturing Department to ensure
that the product can actually be produced, the Marketing Department to ensure that
customers will buy the product, the Distribution Department to ensure that large
volumes of the product can be cost-effectively transported to customers, and the
Accounting Department to ensure that the product will increase profits.

E. A Leadership Perspective

• To achieve success, organizational leaders must be able to unite the behaviors of the
fellow employee who have diverse needs, beliefs and goals to the workplace.
• Leaders need to understand how (a) internal motivation, (b) external incentives, and
(c) cognitive bias influence human behavior.
(a) Internal motivation refers to motivation that comes from within one’s
self. A leader who is perceived by employees as credible and respectful
of their value to the company can increase the extent to which those
employees are intrinsically motivated to pursue strategic goals.
(b) External incentives such as bonus compensation, are given by many
organizations to highlight important goals and to motivate employees to
achieve them.
(c) Cognitive bias. Leaders should be aware that are all people (including
themselves) should possess cognitive biases or distorted thought
processes such as promoting false assertion that can adversely affect
planning, controlling and decision making. To reduce, if not totally
eliminate cognitive biases, a leader may routinely appoint independent
team of employees to assess the credibility of recommendations set forth
by other individuals and groups.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 7
F. An Ethics Perspective

• Without fundamental trust in the integrity of the business, the economy would
operate much less effectively.
• Therefore, for the benefit of everyone, it is vitally important that businesses be
conducted within an ethical framework that builds and sustains trust.

End

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 8