Professional Documents
Culture Documents
Chap 1,2,4
Chap 1,2,4
INTRODUCTION
The growing pressures of global competition, trade wars among countries, technological innovation and
changes in business processes have made cost management much more important, critical and dynamic
than ever before. 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 while
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.
In today's business environment, the development and use of information, especially cost management
information, is a critical factor in the effective management of a firm or organization.
Cost management information is the information that the manager needs to effectively manage 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 factors 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 managers to stress cost reduction (a financial measure) while ignoring or
even lowering quality standards (a nonfinancial measure). This decision could be a critical mistake which
could lead to the loss of customers and market share in the long run. If a firm is to compete successfully,
importance should be given to nonfinancial and long-term measures of operating performance such as
product and manufacturing advances, product quality and customer loyalty. Cost management
information is thus a value-added concept. It adds value by helping a firm be more competitive.
Effective strategic management is very important to the success of every firm or organization and is thus
the pervasive theme of this book.
Strategic thinking involves anticipating changes. Products and production processes are designed to
accommodate expected changes in customer demands. Flexibility is important. The ability to make fast
changes is critical as a result of the demand of the new management concepts of e-commerce, speed to
market, and flexible manufacturing. Product life cycle - the time from the introduction of a new product
to its removal from the market - is expected to become shorter and shorter. Success in the recent past days
or months is no longer a measure of ultimate success; the manager must be “driving" the firm by using the
windshield, not the rear-view mirror.
The strategic emphasis also requires creative and integrative thinking, that is, the ability to identify and
solve problems from a cross-functional view. The business functions are often identified as marketing,
production, finance, and accounting / controllership. Instead of viewing a problem as a production
problem, a marketing problem, or a finance and accounting problem, cross-functional teams view it from
an integrative approach that combines skills from all functions simultaneously. The integrative approach
is necessary in a dynamic and competitive environment. The firm's attention is focused on satisfying the
customers' needs; all of the firm's resources, from all functions, are directed to that goal.
Cost management information is useful in all organizations: business firms, governmental units, and not-
for-profit organizations. Business firms are usually categorized by industry, the main categories being
merchandising, manufacturing, and service. Merchandising firms purchase goods for resale.
Merchandisers that sell to other merchandisers are called wholesalers; those selling directly to consumers
are retailers.
Governmental and not-for-profit organizations provide services, much like the firms in service industries.
However, these organizations provide the services for which no direct relationship exists between the
amount paid and the services provided. Instead, both the nature of these services and the customers to
receive them are determined by government or philanthropic organizations. The resources are provided by
governmental units and/or charities. The services provided by these organizations are often called public
goods to indicate that no typical market exists for them. Public goods have a number of unique
characteristics, such as the impractically of limiting consumption to a single customer (clean water and
police and fire protection are provided for all residents).
1. Strategic Management
Strategic management involves the development of a sustainable competitive position in which
the firm's competitive advantage spells continued success. A strategy is a set of goals and specific
action plans that if achieved, provide the desired competitive advantage. Strategic management
involves identifying and implementing these 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.
The strategic emphasis requires an integrative approach which combines skills from all business
function, namely, marketing, production, finance and accounting/controllership, is necessary in a
dynamic and competitive environment.
Due to increasing strategic issues, cost management has moved from a traditional role of product
costing and operational control to a broader strategic focus: strategic cost management.
Strategic cost management is the development of cost management information to facilitate the
principal management function, strategic management.
Planning and decision-making involves budgeting and profit planning, cash flow management
and other decisions related to the firm's operation such as deciding whether to lease or buy a
facility, whether to replace or just repair as equipment, when to change a marketing plan or when
to begin new product development.
Operational Control takes place when mid-level manages (e.g., product managers, regional
managers) monitors the activities of operating-level managers and employers (e.g., production
supervisions, department heads). Management control on the other hand, is the evaluation of
midlevel manager by upper-level manager (e.g., Controller or the Chief Financial Officer (CFO)).
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.
The financial statement information also serves the other three management functions as this
information is often an important part of planning and decision making, control and strategic
management,
Cost Management is the practice of accounting in which the accountant develops and uses cost
management information. This area of accountancy practice is performed by management accountants.
Management accountants are the accounting professionals who develop and analyze cost management
information and other accounting information.
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 decisions with a view toward achieving these objectives. It is the process of
identification, measurement, accumulation, analysis, preparation, interpretation, and communication of
financial information, which is used by management to plan, evaluate and control activities within an
organization. It also comprises the preparation of financial reports for non-management groups such as
shareholders, creditors, regulatory agencies and tax authorities.
Management accountants (including cost accountants) are concerned with providing information to
managers, that is, people inside an organization who direct and control the operations. They provide a
variety of reports. Some reports focus on how well managers and business units have performed while
other reports provide timely and frequent updates on key indicators, analysis of business situation or
opportunity and analytical reports that are needed to investigate specific problems.
Management accountants at appropriate levels are involved actively in the process of managing the entity.
The process includes making strategic, tactical and operating decisions and helping to coordinate the
efforts of the entire organization. The management accountant participates, as part of management, in
assuring that the organization operates as a unified whole in its long-run intermediate and short-run best
interests.
Management accounting 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. This is commonly associated with current planning and
control and the analysis and investigations of recurring routine internal accounting reports to
signal situations in which management action may be required.
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.
Three important guidelines help management accountants provide the most value when scorekeeping
provide the most value when scorekeeping, problem-solving and attention directing (interpreting and
reporting). These are
1. Employ a cost-benefit approach
2. Recognize behavioral as well as technical considerations and
3. Use appropriate cost concepts for different purpose
Specifically, the management accountant provides a system which allows management to receive the
necessary information used in performing its administrative functions of:
a. planning which involves setting of goals for the firm, evaluating the various ways to meet the
goals and picking out what appears to be the best way to meet the goals;
b. controlling which involves the evaluation of whether actual performance conforms with planned
goals; and
c. decision making which involves determination of predictive information (e.g. relevant costs) for
making important business decisions.
Planning
A key activity for all companies is planning. Planning 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. Cash budgets, capital budgets,
and projected statements of financial position are examples of contributions which accounting can make
in resource planning while break-even analysis, projected income statements are examples of useful tools
in profit planning.
Control
Control of organizations is achieved by evaluating the performance of managers and the operations for
which they are responsible. The distinction between evaluating managers and evaluating the operations
they control is important. Managers are evaluated to determine how their performance should be
rewarded or punished, which in turn motivates them to perform at a high level. Based on an evaluation
indicating good performance, a manager might receive substantial bonus compensation. An evaluation
indicating a manager performed poorly might - lead to the manager being fired. In part because
evaluations of managers are typically tied to compensation and promotion opportunities, managers work
hard to ensure that they will receive favorable evaluations.
Cost variance analysis, financial statements analysis, gross profit variance analysis are some of the
accounting control reports used to inform managers when activities which are part of their responsibility
are deviating from the plan. The reports used evaluate the performance of managers and the operations
they control are referred to as performance reports.
Although there is no generally accepted method of preparing a performance report, such reports
frequently involve a comparison of current period performance with performance in a prior period or with
planned (budgeted) performance.
Performance reports may not provide definitive answers, but they are still extremely useful. Managers can
use them to “flag” areas that need closer attention and to avoid areas that are under control. It would not
seem necessary, for example, to investigate labor, rent, depreciation, or other costs, because these costs
are either equal to or relatively close to the planned level of cost. 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). An evaluation of an operation can be negative even
when the evaluation of the manager responsible for the operation is basically positive.
Company plans often play an important role in the control process. 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.
Figure 1-1 presents the major steps in the planning and control process. Once a plan has been made,
actions are taken to implement it. These actions lead to results, which are compared with the original plan.
Based on this evaluation, managers are rewarded (e.g., given substantial bonuses or promoted if
performance is judged to be good) or punished (e.g., given only a small bonus, given no bonus, even fired
if performance is judged to be poor). Also, based on the evaluation process, operations may be changed.
Changes may consist of expanding (e.g., a second shift), contracting (e.g., closing a production plant), or
improving operations (e.g., training employees to do a better job answering customer product inquiries).
Changes may also consist of revising an unrealistic plan.
Thus, accounting serves management at all stages of the management process, from the formulation of
objectives and so on up to the feedback of performance information which in turn helps in the
reformulation of objectives.
Decision Making
As indicated in Figure 1-1, decision making is an integral part of the planning and control process -
decisions are made to reward or punish managers, and decisions are made to change operations or revise
plans. Should a firm add a new product? Should it drop an existing product? Should it manufacture a
component used in assembling its major product or contract with another company to produce the
component? What price should a firm charge for a new product? These questions indicate just a few of
the key decisions that confront companies. And how well they make these decisions will determine future
profitability and, possibly, the survival of the company. Recognizing the importance of making good
decisions, we will devote all of Chapter 11 to the topic.
In summary, the management accountant develops cost management information for the Chief Financial
Officer, other managers and employee teams to use to manage the firm and make the firm more
competitive and successful.
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.
The accounting function is usually “staff”, with responsibility for providing line managers and also other
staff managers, with specialized services. This includes advice and help in the areas of budgeting,
controlling, pricing and special decisions.
Line authority is the authority to command action or give orders to subordinates. Line managers are
directly responsible for attaining the objectives of the business firm as efficiently as possible. Sales and
production managers typically have line authority. Staff authority is the authority to advise but not
command others; it is exercised laterally or upward. Staff managers give support, advice and service to
line departments. Examples of staff authority are found in personnel, purchasing, engineering and
accounting.
Except for exercising line authority over his department, the chief accounting officer usually the
controller generally fills the staff role in his company as contrasted with the line roles of sales and
production executives. Theoretically, the controller transmits the best accounting procedures to be
followed by the line people to the President who will communicate such through a manual of instructions.
In practice however, the controller holds delegated authority from top line management to direct the line
people on how to apply these procedures. This is known as functional authority which is the right to
command action, laterally or downward, with regard to a specific function or specialty.
In some organizations, the CFO is also responsible for information systems. In other organizations, an
officer of equivalent rank to the CFO - called the chief information officer – is responsible for
information systems.
The controller (also called the chief accounting officer) is the financial executive primarily responsible
for management accounting and financial accounting. This book focuses on the controller as the chief
management accounting executive. Modern controllers do not do any controlling in terms of line
authority except over their own departments. Yet, the modern concept of controllership maintains that the
controller does control in a special sense. That is, by reporting and interpreting relevant data (problem-
solving and attention-directing roles), the controller exerts a force or influence that impels management
toward making better-informed decisions.
Figure 2-1: Reporting Relationships for the CFO and the Corporate Controller
In most organizations, the top managerial accounting position is held by the controller. The controller
provides reports for planning and evaluating company activities (e.g., budgets and performance reports)
and provides the information needed to make management decisions (e.g., decisions related to
construction of a new factory or decisions related to adding or dropping a product). The controller also
has responsibility for all financial accounting reports and tax filings with the Bureau of Internal Revenue
and other taxing agencies, as well as coordinating the activities of the firm's external auditors.
A simplified illustration of the organization chart for the controller's office is shown in Figure 2+2. Note
that one of the areas reporting to the controller is cost accounting. Most medium-sized and large
manufacturing companies have such a department. Cost accountants estimate costs to facilitate
management decisions and develop cost information for purposes of valuing inventory.
The controller is an integral part of the top management team. If one wants a high accounting skills but
also skills required of all high-level executives. These skills include excellent written and oral
communication skills, solid interpersonal skills and a deep knowledge of the industry in which the firm
competes.
The controller's authority is basically staff authority in that the controller's office gives advice and service
to other departments. However, in his own department, he has line authority. In the modern concept of
controllership, it is maintained that the controller does control in a special sense. That is, by reporting and
interpreting toward logical decisions consistent with objectives.
Figure 2-2: A Typical Organization Chart Showing the Functions of the Controller
As circumstances warrant, there may be many deviations from the basic functions just described. It
should be pointed out that the controller's efforts should not be diluted and render him less effective by
assigning to him unrelated functions of an operational nature. The financial planning and control
functions are too important to the success of the business enterprise to burden the controller with activities
that others can perform.
The controller may have the technical capability and be able to lay out the assigned tasks as well as
supervise and direct his personnel, but he must also have integrity and the ability to communicate if he is
to succeed. He must be fair, reasonable, and sincere with all concerned if he is to be recognized for the
importance of the controllership function.
As in any executive position, the controller must be able to work with people at all levels, have respect for
the ideas and opinions of others, and have the resourcefulness, to meet all challenges.
Treasurership
Treasurership is concerned with the acquisition, financing and management of assets of a business
concern to maximize the wealth of the firms for its owners.
In addition to the position of the controller, many companies have a position called treasurer. The
treasurer has custody of cash and funds invested in various marketable securities. In addition to money
management duties, the treasurer is other creditors. Thus, the treasurer plays a major role in managing
cash and marketable securities, preparing cash forecasts and obtaining financing from banks and other
lenders. Both the controller and the treasurer report to the chief financial officer (CFO) who is the senior
executive responsible for both accounting and financial operations.
3. Investment of Funds
This involves management of the company's placements and securities or purchase of debt or
equity instruments such as ordinary or preference shares in other corporate entities. This
responsibility also includes analysis of decisions related to investment in property, plant and
equipment.
The second part of the standards gives specific guidance concerning what should be done if an individual
finds evidence of ethical misconduct within an organization.
The ethical standards provide sound, practical advice for management accountants and managers. They
require professional behavior, especially in avoiding conflicts of interest. They require management
accountants to bring bad news to the attention of their supervisors, and to work competently.
Most of the rules in the ethical standards are motivated by a very practical consideration – if these rules
were not generally followed in business, then the economy could come to a halt. The following are
examples of the consequences of not abiding by the standards:
1. Suppose employees could not be trusted with confidential information. Top managers would
therefore be reluctant to distribute confidential information within the company. This could result
to decisions being made based on incomplete information and could lead to deterioration of
operations.
2. Suppose employees accept bribes from suppliers. Then contracts would tend to go to suppliers
who pay the highest bribe rather than to the most competent suppliers. Would you like to fly in an
airplane whose wings were made by the subcontractor who was willing to pay the highest bribe to
a purchasing agent?
3. Suppose the CEOs or presidents of companies routinely lied in their annual reports to
shareholders and grossly distorted financial statements. If the basic integrity of the company's
financial statement could not be relied on, investors and creditors would have little basis for
making informed decisions. Rational investors would suspect the worst and would pay less for
securities issued by companies. As a result, less funds would be available for productive
investments and many firms might be unable to raise any funds at all. This ultimately, would lead
to slower economic growth, fewer goods and services, and higher prices.
As these examples suggest, if ethical standards were not generally adhered to, there would be undesirable
consequences for everyone. Following ethical rules such as those in the Standards of Ethical Conduct for
Practitioners of Management Accounting and Financial Management is not just a matter of being "nice";
it is absolutely essential for the smooth functioning of an advanced market economy.
Figure 2-3: Standards of Ethical Conduct for Practitioners of Management Accounting and
Financial Management
Practitioners of management accounting and financial management have an obligation to the public,
their profession, the organization they serve, and themselves, to maintain the highest standards of
ethical conduct. In recognition of this obligation, the Institute of Management Accountants has
promulgated the following standards of ethical conduct for practitioners of management accounting and
financial management. Adherence to these standards, both domestically and internationally, is integral
to achieving the Objectives of Management Accounting. Practitioners of management accounting and
financial management shall not commit acts contrary to these standards nor shall they condone the
commission of such acts by others within their organizations.
Integrity. Practitioners of management accounting and financial management have a responsibility to:
● Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential
conflict.
● Refrain from engaging in any activity that would prejudice their ability to carry out their duties
ethically
● Refuse any gift, favor, or hospitality that would influence or would appear to influence their
actions.
● Refrain from either actively or passively subverting the attainment of the organization's
legitimate and ethical objectives.
● Recognize and communicate professional limitations or other constraints that would preclude
responsibility judgment or successful performance of an activity.
● Communicate unfavorable as well as favorable information and professional judgments or
opinions. Refrain from engaging in or supporting any activity that would discredit the
profession.
“Employees like to work for a company that they can trust. Customers like to deal with an ethically
reliable business. Suppliers like to sell to firms with which they can have a real partnership. Communities
are more likely to cooperate with organizations that deal honestly and fairly with them. If the business
community is to function effectively, all of the players need to act ethically."
It is unfortunate though, that some companies place so much emphasis on short-term profits that may
make it seem like the only way to get ahead is to act unethically. Those who engage in unethical behavior
often justify their actions with one or more of the following reasons:
1. the organization expects unethical behavior,
2. everyone else is unethical, and/or
3. behaving unethically is the only way to get ahead.
To counter the first justification for unethical behavior, many companies have adopted formal ethical
codes of conduct. These codes are generally broad-based statements of a company's responsibilities to its
employees, its customers, its suppliers and the community in which the company operates. Codes give
broad guidelines rather than that spell out specific do's and don'ts or suggest proper behavior in a specific
situation. Companies with a strong code of ethics can create strong customer and employee loyalty. While
liars and cheats may win on occasion, their victories are often short-term. Companies in business for the
long term find that it pays to treat all of their constituents honestly and loyally.
In both cases, the management accountant is faced with an ethical dilemma. Case A involves competence,
objectivity, and integrity. The management accountant should request that the division manager provide
credible evidence that the new product is commercially viable. If the manager does not provide such
evidence, expensing R&D costs in the current period is appropriate. Case B involves confidentiality and
integrity. Ethical issues are not always clear-cut. The supplier in Case B may have no intention of raising
issues associated with the bid. However, the appearance of a conflict of interest in Case B is sufficient for
many companies to prohibit employees from accepting “favors” from suppliers. Figure 2-3 includes the
IMA's guidance on “Resolution of Ethical Conflict.” The accountant in Case B should discuss the
invitation with his immediate supervisor. If the visit is approved, the supplier should be informed that the
invitation has been officially approved subject to his following corporate policy (which includes the
confidentiality of information).
The Board of Accountancy of the Professional Regulation Commission approved the implementation of
the Revised Code of Ethics for Professional Accountants in the Philippines effective January 1, 2016.
INTERNATIONAL CERTIFICATIONS
The three certifications available to management accountants are as follows:
● Certificate of Management Accounting (CMA) .
● Certificate in Public Accounting (CPA)
● Certificate in Internal Auditing (CIA)
CMA. A Certified Management Accountant is one who has passed the rigorous qualifying
examination, has met an experience requirement, and participates in continuing educations. The CMA
Certificate is granted by the Institute Management Accountants (IMA).
CPA. A Certified Public Accountant is one who has met the pre-qualification educational requirements,
passed the CPA licensure examinations given by the Professional Regulatory Board of Accountancy and
has satisfied all other legal and regulatory requirements of a public accountant. The CPAs main
responsibility is to provide assurance concerning the reliability of the information contain in the firm's
financial statements.
CIA. Since one of the management control responsibilities of the management accountant is to develop
effective systems to detect and prevent errors and fraud in the accounting records, it is common for the
management accountant to have strong ties to the control-oriented organization such as the Institute of
Internal Auditors (IIA) granting Certification in Internal Auditing (CIA). To attain the status of Certified
Internal Auditor an individual must pass a comprehensive examination designed to ensure technical
competence and have the required number of years of work experience.
INSTITUTE OF MANAGEMENT ACCOUNTANTS (IMA)
Management accountants have gained status in recent years as they now spend more time analyzing a
company's operations and less with the problems of recording and computing costs of products. The
Institute of Management Accountants (IMA), the principal organization of management accountants in
the United States, has instituted a program to provide certifications for management accountants and
financial managers. The Certified Management Accountant (CMA) examination was first given in 1972.
A listing of the required subject areas in the CMA examination indicates the breadth of knowledge
expected of the professional management accountant. The examination consists of the following four
parts: Economics, Finance, and Management; Financial Accounting and Reporting; Management
Reporting, Analysis and Behavioral Issues; and Decision Analysis and Information Systems. The
Certified in Financial Management (CFM) examination was first given in 1996. The CFM examination is
similar to the CMA examination with one major difference: the Financial Accounting and Reporting
section is replaced with Corporate Financial Management. The IMA also promulgated a code of ethics for
management accountants, with is discussed in the previous section.
The Institute of Management Accounting (IMA) is a professional organization that publishes the monthly
magazine Strategic Finance. Since 1973, the IMA has conducted a comprehensive examination to test the
knowledge a management accountant must have to be successful in a complex and fast-changing business
world. More than 3,000 individuals take the exam each year. Those who pass the exam are issued a
Certificate in Management Accounting and are proud to indicate the designation CMA on resumes and
business cards. For details on student and professional memberships in the IMA and for information on
the CMA examination, visit the IMA Web site.
One of contributions of the IMA is the development of standards of ethical conduct and maintenance of
an ethics hotline that members can call to discuss ethical conflicts. One may also visit the IMA website to
review these ethical standards.
PAMA was established in 1972 as the National Association of Accountants (NAA) Philippine Chapter,
Inc. It is affiliated with NAA in New York. It was founded primarily to provide its members with
educational and professional activities that supplement in the knowledge of management accounting
practices and methods. Monthly technical meetings, seminars and workshops are held to present relevant
and current topics by leading speakers from the government, private and educational sectors. The open
forum provides the nerve for the exchange of ideas and experiences among the participants and the
speakers. Publication of technical materials is also part of the Association's efforts to service its members.
To propagate and professionalize Management Accounting in the Philippines, PAMA conducts the
Certificate in Management Accounting (CMA) Program through its continuing education arm, the
Philippine Institute of Management Accounting (PIMA). Basic objectives of the program are:
1. To establish management accounting as a recognized profession by identifying the role of the
management accountant and the underlying body of knowledge, and by outlining a course of
study by which such knowledge can be acquired.
2. To foster higher educational standards in the field of management accounting
3. To assist employees, educators and students by establishing an objective measure of an
individuals' knowledge and competence in the field of management accounting.
LECTURE: DEVELOPING A COMPETITIVE STRATEGY; CONTEMPORARY COST
MANAGEMENT TECHNIQUES
Finding a strategy begins with determining the purpose and long-range direction or on in other words, the
mission of the company. The mission is developed into specific performance objectives which are then
implemented by specific corporate or company's strategies, that is, specific actions to achieve the
objectives that will fulfill the mission. A firm succeeds by implementing a strategy.
Strategy specifies how an organization matches its own capabilities with the opportunities in the market
place to accomplish its objectives. In other words, strategy describes how a compete will compete and the
opportunities its employee should seek and pursue. Companies follow one of two broad strategies. Some
companies such as Jollibee, Pure Gold and Cebu Pacific Airline compete on the basis of providing a
quality product or service at low prices. This is also known as “Cost Leadership” strategy. Other
companies such as Rustan’s Department Store and BGC Shangri-La Hotel compete on their ability to
offer unique products or services that are often priced higher than the products or services of competitors.
This is known as “Product Differentiation strategy.
Deciding between these strategies is a big part of what managers do. Management accountants work
closely with managers in formulating strategy by providing information about the sources of competitive
advantage – for example, the cost, productivity, or efficiency advantage of their company relative to
competitors or the premium prices a company can charge relative to the costs of adding features that
make its products or services distinctive. The management accountant also helps formulate a strategy by
answering questions such as:
● Who are our most important customers?
● How sensitive are their purchases to price, quality, and service?
● Who are our most important suppliers?
● What substitute products exists in the marketplace, and how do they differ from our product in
terms of price and quality?
● Is the industry demand growing or shrinking?
● Is there overcapacity?
Strategic cost management is often used to describe Cost Management that specifically focuses on
strategic issues such as these.
They show the impact of the firm's policies and procedures in the firm's current financial position and
therefore, its current return to the shareholders.
The nonfinancial factors show the firm's current and potential competitive position as measured from
three additional perspective, namely:
1. the customer
2. The internal business and process
3. innovation and learning
Strategic financial and nonfinancial measures of success are also commonly called: Critical Success
Factors (CSFs)
COMPETITIVE STRATEGIES
For a firm to sustain a competitive position, it must purposefully or as result of market forces arrive at one
of the two competitive strategies, namely Cost Leadership and Product Differentiation
Cost Leadership
This is a competitive strategy in which a firm succeeds in producing products or services at the lowest
cost in the industry. A firm that is a cost leader makes sustainable profits at lower prices, thereby limiting
the growth of competitions in the industry through its success in price wars and undermining the
profitability of competitors which must meet the firm's low price..
Product Differentiation
The differentiation strategy is implemented by creating a perception among consumers that the product or
service is unique in some important way, usually by being of higher quality, features or innovation. This
perception allows the firm to charge higher prices and outperform the competition in profits without
reducing cost significantly. Most industries, including automobile, consumer electronics, and industrial
equipment, have differentiated firms. The appeal of differentiation is especially strong for product lines
which the perception of quality and image is important, as in cosmetics, jewelry and automobiles.
Tiffany, Rolex, Ferrari and BMW are good examples of firms that emphasize differentiation.
Basis of competitive advantage Lowest cost in the industry Unique product or service
Looking more closely at differentiated firms, the keys CSFs and execution issues are in marketing and
product development - developing customer loyalty and brand recognition, emphasizing superior and
unique products, and developing and using detailed and timely information about customer needs and
behavior. This is where the marketing and product development within the firm provide leadership and
the management accountants support these efforts by gathering, analyzing, and reporting the relevant
information.
The basic concepts of these cost management techniques are discussed in the succeeding section:
A. Total Quality Management
To survive in an increasingly competitive environment, firms realize that they must produce high-
quality products. As a result, an increasing number of companies have instituted total quality
management programs to ensure that their products are of the highest quality and that production
processes are efficient.
Total quality management (TQM) is a technique in which management develops policies and
practices to ensure that the firm's products and services exceed customers' expectations.
Currently, there is no generally agreed upon "perfect way to institute a TQM program. But most
companies with TQM develop a company that stresses listening to the needs of customers,
making products right the first time, reducing defective products that must be reworked, and
encouraging workers to continuously improve their production process. That is why some TQM
programs are referred to as continuous quality improvement programs.
TQM affects product costing by reducing the need to track the cost of scrap and rework related to
each job. If TQM is able to reduce these costs to a very low level, the benefit of tracking the costs
is unlikely to exceed the cost to the accounting system.
B. Just-In-Time (JIT)
Just-in-Time (JIT) is the philosophy that activities are undertaken only as needed or demanded.
JIT is a production system also known as pull-it through approach, in which materials are
purchased and units are produced only as needed to meet actual customer demand. 'In a JIT
system, inventories are reduced to the minimum and in some cases, zero.
C. Process Reengineering
Reengineering is a process for creating competitive advantage in which a firm reorganizes its
operating and management functions, often with the result that jobs are modified, combined, or
eliminated. It has been defined as the “fundamental rethinking and radical redesign of business
processes to achieve dramatic improvements in critical, contemporary measures of performance,
such as cost, quality, service, and speed.
The main objective of this approach is the simplification and elimination of wasted effort and the
central idea is that all activities that do not add value to product or service should be eliminated.
In its most simplified version, the steps used in process reengineering are
1. A business process is diagrammed in detail.
2. Every step in the business process must be analyzed and justified.
3. The process is redesigned to include only those steps that make the product or service
more valuable.
Process reengineering has one basic recurrent problem, that is - employee resistance. As with other
improvement projects, employees fear 10ss o jobs which may lead to lost morale and failure to improve
the bottom line (i.e., profits). For the process to prosper and succeed, employees must be convinced that
the end result of the improvement will be more secure, rather than less secure jobs. They can be made to
understand that improving the processes, the company can generate more business, produce a better
product at lower cost and will have the competitive strength to prosper.
D. Benchmarking
Benchmarking is a process by which a firm
● determines its critical success factors
● studies the best practices of other firms (or other units within a firm) for achieving these
critical success factors, and
● then implements improvements in the firm's processes to match or beat the performance
of those competitors.
Today benchmarking efforts are facilitated by cooperative networks of noncompeting firms that exchange
benchmarking information.
E. Mass Customization
Many manufacturing and service firm's increasingly find that customers needs. And many firms
have been successful with a strategy that targets customer's unique needs.
The growth of mass customization is in effect another indication of the increased attention given
to satisfying the customer.
F. Balanced Scorecard
The balanced scorecard is an accounting report that includes the firm's critical success factors in
four areas
a. financial performance,
b. customer satisfaction,
c. internal business process, and
d. innovation and learning.
The concept of balance captions the intent of broad coverage, financial and nonfinancial of all the factors
that contribute to the success of the firm in achieving its strategic goals. The use of the balanced scorecard
is thus a critical ingredient of the overall approach that firms take to become and remain competitive.
G. Activity-based Costing and Management
Activity analysis is used to develop a detailed description of the specific activities performed in
the operation of the firm. Many firms have found that they can improve planning, product
costing, operational control, and management control by using activity analysis to develop a
detailed description of the specific activities performed in the firm's operations. The activity
analysis provides the basis for activity-based costing and activity-based management.
Activity-based costing (ABC) is used to improve the accuracy of cost analysis by improving the
tracing of costs to products or to individual customers. Activity-based management (ABM) uses
activity analysis to improve operational control and management control. ABC and ABM are key
strategic tools for many firms, especially those with complex operations, or great diversity of
products.
The Theory of Constraints emphasizes the importance of managing the organization's constraints
or barriers that hinder or impede progress toward an objective. Since the constraint is whatever is
holding back the organization, improvement efforts usually must be focused on the constraint to
be really effective.
The Theory of Constraints approach is a perfect complement to Total Quality Management and Process
Reengineering - it focuses improvement efforts where they are likely to be most effective.
J. Target Costing
Target costing involves the determination of the desired cost for a product or the basis of a given
competitive price so that the product will earn a desired profit. The basic relationship that is
observed in this approach is
Target cost = Market determined price - Desired profit
The entity using target costing must often adopt strict cost-reduction measures to meet the market price
and remain profitable. This is a common strategic approach used by intensely competitive industries
where even small price differences attract consumers to the lower-priced product.
Computer-aided design (CAD) is the use of computers in product development, analysis, and
design modification to improve the quality and performance of the product. Computer-aided
manufacturing (CAM) is the use of computers to plan, implement, and control production.
L. Automation
Automation involves and requires a relatively large investment in computers, computer
programming, machines, and equipment. Many firms add automation gradually, one process at a
time. To improve efficiency and effectiveness continuously, firms must integrate people and
equipment into the smoothly operating teams that have become a vital part of manufacturing
strategy. Flexible manufacturing systems (FMS) and computer-integrated manufacturing (CIM)
are two integration approaches.
The major characteristics of modern manufacturing companies that are adopting FMS and CIM
are production of high-quality products and services, low inventories, high degrees of automation,
quick cycle time, increased flexibility, and advanced information technology. These innovations
shift the focus from large production volumes necessary to absorb fixed overhead to a new
emphasis on marketing efforts, engineering, and product design.
M. E-Commerce
A number of internet-based companies have emerged and been proven successful in last decade.
This E-Commerce business model adopted by Amazon.com and eBay has also attracted many
investors to pursue the use of Internet in conducting business. Established companies will
undoubtedly continue to expand into cyberspace - both for business-to-business transactions and
for retailing. The Internet has important advantages over more conventional marketplaces for
some kinds of transaction such as mortgage banking. It is also very likely that a blockbuster
business may be built around the concept of selling low-value, low-margin and bulky items like
groceries over the Internet.
The value chain is an analysis tool that firms use to identify the specific steps required to provide
a product or service to the customer. The key idea of this concept is that the firm studies each step
in its operation to determine how each activity contributes to the firm's competitiveness and
profits.
When properly implemented, these approaches can (a) enhance quality cost, (c) increase output, and (d)
eliminate delays in responding to custom techniques are introduced here and most are covered more fully
in later Chapters.
Internal value chain is the set of activities required to design, develop, produce and deliver products or
services to customers. If customer values are emphasized, managers are forced to determine which
activities in the value chain are im customers. A management accounting system should track information
about a wide variety of activities than span the internal value chain.
.28 Ticket sales: local sporting goods stores and at the ballpark .25
Required:
Develop an analysis of the value chain to help Jack better understand the nature the competition between
the Archers and the Lions, and to identify opportunities for adding value and/or cost reduction at each
step.
To begin to compete more effectively and profitability, Archers might consider additional value-added
services, such as game-day activities similar to those offered in Lions. While Archers costs per person are
somewhat lower than Lion's, the cost savings are not enough to offset the loss in revenues.
On the cost side, the comparison with Lions shows little immediate promise for cost reduction; Archer
spends on the average less than Lions in every category except management compensation. Perhaps this is
a further indication that instead of reducing costs, Archer should spend more on fan development. The
next step in Jack's analysis might be survey of Archer fans to determine the level of satisfaction and to
identify desired services that are not currently provided.