Acctg Ed 18 – Strategic Cost Management
expenses, the measurement of production of the
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
different products at the different stages of
manufacture and the linking up of production
with the expenses
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