STRATEGIC COST MANAGEMENT

CHAPTER 1 – OVERVIEW OF STRATEGIC COST MANAGEMENT

Introduction

With the fast paced of almost everything relating to business – technology, innovation and
business processes, it is now more than ever that businesses need to step up their future plans. In order
to catapult their position into the industry they belong to, businesses need a good strategy and a person
to formulate this for them.

Strategy – a set of policies, procedures and approaches to business the produce long-term success.

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 – information that the manager needs to effectively manage the firm.

- Includes both financial (cost and revenues) and non- financial information (productivity,
quality, and other key success factors).

Cost Management – is the practice of accounting in which the accountant develops and uses cost
management information.

- In cost management one should not focus on financial information alone since this may lead
to decisions by the management to stress out on cost reduction. Same goes, it should also
not just focus on non-financial information such as product quality because this may lead to
much investment to increase product quality.

Users of Cost Management Information

1. Business Firms
2. Governmental Units
3. Not-for-profit Organizations

Uses of Cost Management Information

1. Strategic Management – is a management function that involves development of a sustainable

competitive position. This function involves creating strategies and identifying and implementing
these strategies (goals and action plans).
2. Planning and Decision Making - involves budgeting and profit planning, cash flow management
and other decision related to firm’s operation.
3. Management and Operational Control
a. Operational Control – takes place when mid-level managers monitor the activities of
operating-level managers and employees.
b. Management Control – is the evaluation of mid-level manager by upper-level manager.
4. Reportorial and Compliance to Legal Requirements – require management to comply with the
financial reporting requirements to regulatory agencies.

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Management Accountants – are the accounting professionals who develop and analyze cost
management information.

- Are concerned with providing information to managers, that is, people inside an organization
who direct and control operations.

Management Accounting – involves the application of appropriate techniques and concepts of 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.

- Its is a 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.

Tasks of Management Accountants

1. Scorekeeping or data accumulation – enables both internal and external parties to evaluate
organizational performance and position.
2. Interpreting and reporting of information – helps manager to focus on operating problems,
opportunities as well as inefficiencies.
3. Problem-solving – quantification of the relative merits of possible courses of action as well as
recommendations as to the best procedure.

In doing the tasks mentioned above, here are some guidelines that a management accountant needs
to provide most value to management:

1. Employ a cost-benefit approach

2. Recognize behavioral as well as technical considerations, and
3. Use appropriate cost concepts for different purpose

Cost benefit approach – resources should be spent if they are expected to better attain company goals in
relation to the expected cost of those resources. The expected benefits from spending should exceed the
expected costs.

Management Administrative Functions

1. Planning – involves identifying alternatives and selecting a course action and specifying how the
action will be implemented to further the organization’s objective. The plans are often expressed
formally in budgets which is often used for resource planning, while break-even analysis,
projected income statements are used in profit planning.
2. Control – achieved by evaluating performance of managers and the operations for which they
are responsible.
a. Accounting Control Reports – (Ex: cost variance analysis, financial statement analysis,
gross profit variance analysis) used to inform managers when activities which are part of
their responsibility are deviating from the plan.
b. Performance Reports – reports used to evaluate the performance of managers and the
operations they control.

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 3. Decision Making – is an integral part of the planning and control process, how well they make
these decisions will determine future profitability and, possibly, the survival of the company.

Figure 1-1: Planning and Control Process

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 management with
information that aids decision.

Basic Cost Management Perspective

a. A Strategic Management Perspective

3 Categories of Customer Value Premises
i. Customer Intimacy Strategy – companies that adopt a customer intimacy
strategy are in essence saying…

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 “You should choose us because we can customize our products and
services to meet your individual needs better than our competitors.”

ii. Operational Excellence – says to their target customer…

“You should choose us because we deliver products and service faster,
more conveniently, and at a lower price than our competitors.”
iii. Product Leadership – says to their target customer…
“You should choose us because we offer higher quality products than our
competitors.”
b. An Enterprise Risk Management Perspective
A simplified framework for an Enterprise-wide Risk Management Process follows:

Top Management's
Risk Management System
Involvement

Oversight Activities:
Establish goals and objectives, roles Set management policy,
and responsibilities, common establish context, set limits and
language and oversight structure tolerance, etc.

Risk Management Process:

Step 1: Assess Risks Ensure that process captures
Identify source, measure all business risks

Step 2: Develop / Design Ensure that all available tools

Action Plans: and methodologies are used
Reduce, avoid, retain,
transfer, exploit

Step 3: Implement Action Plans Review effectiveness of plans.

Check capabilities.

Step 4 : Monitor and report risk Review and evaluate regular

management reports on performance
performance

Step 5 : Continuously improve Evaluate recommendations for

risk management improvement
capabilities

Enterprise Risk Management – is a process used by an entity to identify those risks and develop
responses to them that enable it to be assured of meeting its goals.

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 c. A Corporate Social Responsibility Perspective

Corporate Social Responsibility (CSR) – is a concept where business organizations

consider the needs of all stakeholders when making decisions.

d. A Process Management Perspective

Business Process – is a series of steps that are followed in order to carry out some tasks
in a business.

Value Chain – used to describe how an organization’s functional departments interact

with one another to form business processes.

Sample Value Chain:

Research and Product Manufacturing Distrbution Customer
Development Design Service

Lean Production – a management approach that organizes resources such as people and machines
around the flow of business processes and that only produces units in response to customer orders.

e. Leadership Perspective – organizational leaders must be able to unite the behaviors of

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.
i. Internal Motivation – motivation that comes from within one’s self.
ii. External Incentives – are given by many organizations to highlight important
goals and to motivate employees to achieve them.
iii. Cognitive Bias – leaders should be aware that 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.
f. An Ethics Perspective
Ethical behavior is the lubricant that keep the economy running smoothly.

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