1-1

Chapter 1

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 Cost Management and
1
Strategic Decision Making
Evaluating Opportunities
and Leading Change

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 1-3

Characteristics of Cost Management

What
What is
is Cost
Cost Management?
Management?

In
In addition
addition toto measuring
measuring

?
and
and reporting
reporting costs,
costs, itit is
is
aa philosophy,
philosophy, an an attitude,
attitude,
and
and aa set
set of
of techniques
techniques to to
create
create more
more customer
customer
value
value at
at aa lower
lower cost.
cost.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 1-4

Characteristics of
Cost-Management Analysts

Cost analysts use cost

accounting and other data to:

Improve Improve Improve

products resource use services

Support Reduce
strategies costs
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 1-5

Characteristics of
Cost-Management Analysts

Integrity

Broad knowledge
of the business

Ability to work
in cross-functional
teams

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 1-6

Ethical Standards for Cost-

Management Analysts
Cost-management
Cost-management analysts
analysts must
must maintain
maintain high
high
standards
standards ofof ethical
ethical behavior
behavior because
because they
they can
can
control
control the
the information
information used
used for
for important
important
strategic
strategic management
management decisions.
decisions.

The
The Institute
Institute of
of Management
Management Accountant’s
Accountant’s Standards
Standards of
of
Ethical
Ethical Conduct
Conduct forfor Practitioners
Practitioners of
of Management
Management
Accounting
Accounting offer
offer guidelines
guidelines for
for ethical
ethical behavior
behavior
applicable
applicable to
to cost-management
cost-management analysts.
analysts.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 1-7

IMA Guidelines for Ethical

Behavior
Follow
Follow applicable
applicable laws,
laws,
regulations
regulations and
and
standards.
standards.

Maintain
Maintain
professional
professional Competence
competence.
competence.

Prepare
Prepare complete
complete and
and clear
clear
reports
reports after
after appropriate
appropriate
analysis.
analysis.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 1-8

IMA Guidelines for Ethical

Behavior
Do
Do not
not disclose
disclose confidential
confidential
information
information unless
unless legally
legally
obligated
obligated to
to do
do so.
so.

Do
Do not
not use
use
confidential
confidential
information
information for
for Confidentiality
personal
personal
advantage.
advantage.

Ensure
Ensure that
that subordinates
subordinates do
do
not
not disclose
disclose confidential
confidential
information.
information.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 1-9

IMA Guidelines for Ethical

Behavior
Avoid
Avoid conflicts
conflicts of
of interest
interest
and
and advise
advise others
others of
of
potential
potential conflicts.
conflicts.

Do
Do not
not subvert
subvert
organization’s
organization’s
legitimate
legitimate
Integrity
objectives.
objectives.

Recognize
Recognize and
and
communicate
communicate personal
personal and
and
professional
professional limitations.
limitations.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
1-10

IMA Guidelines for Ethical

Behavior
Avoid
Avoidactivities
activitiesthat
thatcould
could
affect
affectyour
yourability
abilityto
to
perform
performduties.
duties.

Refrain
Refrainfrom
from Refuse
Refusegifts
gifts
activities
activities or
orfavors
favors
that
thatcould
could Integrity that
thatmight
might
discredit
discreditthethe influence
influence
profession.
profession. behavior.
behavior.
Communicate
Communicate
unfavorable
unfavorableasaswell
well as
as
favorable
favorableinformation.
information.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
1-11

IMA Guidelines for Ethical

Behavior
Communicate
Communicateinformation
information
fairly
fairlyand
andobjectively.
objectively.

Objectivity

Disclose
Discloseall
all information
information
that
thatmight
mightbebeuseful
useful to
to
management.
management.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

1-12

Strategic Decision Making

Strategy

An organization’s overall plan

or policy to achieve its goals.

Key
questions

Where
Where dodo we
we How
How dodo we
we want
want
want
want to
to go?
go? to
to get
get there?
there?
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 Exh.
1-13 1.1

Where do We Want to Go? – Strategic

Missions • New market potential
• Be early entrant
• Achieve growth
• Capture market share Build
High
• Continuing market
• Maintain growth
• Be a major player
Hold
REWARDS

• Protect market share

• Continuing market
Medium • Maintain cash flow
• Maintain volume
Harvest • Cut costs
• Declining market
• Exit at lowest cost
• Minimize losses
Low Divest • Find a buyer quickly

Low Medium High

RISK
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
1-14

How Do We Want to Get There?

Managers
Managers are are more
more successful
successful
in
in attaining
attaining objectives
objectives ifif they:
they:

Understand
Understand sources
sources Use
Use effective
effective
and
and threats
threats to
to decision
decision making
making
competitive
competitive advantages.
advantages. techniques.
techniques.

Competitive
Competitive advantages
advantages exist
exist in
in aa value
value chain
chain
that
that enables
enables an an organization
organization to to provide
provide
more
more value
value at
at aa lower
lower cost
cost than
than its
its competitors.
competitors.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

 Exh.
1-15 1.2

The Value Chain

Where
Wheredodowe
wewant
wanttotogo?
go?
How
Howdo
dowewewant
wantto
toget
getthere?
there?

Physical
Physical Human
Human
resources
resources resources
resources
Support
Supportservices
services
••Accounting
Accounting
••Human
Humanresources
resources
••Legal
Legalservices
services
••Information
Informationsystems
systems
••Telecommunications
Telecommunications

Value
Valueofof
Distri- Customer products
products
R&D Design Supply Production Marketing
bution service and
and
services
services

McGraw-Hill/Irwin
Primary processes The McGraw-Hill Companies, Inc. 2006
1-16

Outsourcing and the Value Chain

Focus
Focusresources
resourceson
on Outsource
Outsourcethose
thosevalue
value
parts
partsofofthe
thevalue
valuechain
chain chain
chainprocesses
processesthat
that
that
thatare
aremost
mostimportant
important can
canbebedone
donemore
more
to
tocompany
companygoals.
goals. efficiently
efficientlyby
byothers.
others.

What
Whatisismost
mostlikely
likely
to
tobe
beoutsourced?
outsourced? Potential problem
Information
Informationservices,
services, Loss of control
legal,
legal, logistics,
logistics, human
human and
resources,
resources, payroll,
payroll, internal expertise.
accounting,
accounting, tax.
tax.
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
 Exh.
1-17 1.3

Competitive Advantages, Sources

and Threats
Co Exis
Product mp tin w rs Business
eti g Ne etito
Strategy tor
s omp Unit Strategy
Source of C
Low Cost Capability Build
Production
Create New
Knowledge Hold

Product
Differentiation Harvest
Imitate
Others
Divest
Market Focus
rs

Su
Suppliers
me

bs
sto

titu
Cu

est
McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006
1-18

Formulation of Strategic Action Plans

An 8-step process at Pursuit Data

1.
1. Identify
Identifyneed
needforforchange.
change.
2.
2. Create
Createteam
teamto tolead
leadandandmanage
managechange.
change.
3.
3. Create
Createvision
visionofofthe
thechange
changeand
andstrategy
strategyfor
forachieving
achievingvision.
vision.
4.
4. Communicate
Communicatevisionvisionandandstrategy
strategyfor
forchange
changeandandhave
havechange
changeteam
team
act
actas
asaarole
rolemodel.
model.
5.
5. Encourage
Encourageinnovation
innovationand andremove
removeobstacles
obstaclesto tochange.
change.
6.
6. Ensure
Ensurethat
thatshort-term
short-termachievements
achievementsarearefrequent
frequentand
andobvious.
obvious.
7.
7. Use
Usesuccesses
successesto tocreate
createopportunities
opportunitiesfor
forimproving
improvingentire
entire
organization.
organization.
8.
8. Reinforce
Reinforceculture
cultureof ofmore
moreimprovement,
improvement,better
betterleadership,
leadership,more
more
effective
effectivemanagement.
management.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

1-19

Evaluating Plans and Outcomes

Operational Strategic
performance performance
analysis analysis

Has short-run Has long-run

performance met performance met
expectations? expectations?

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

1-20

Evaluating Plans and Outcomes

Variance
Analysis

Cost
Variances are the
Benefit differences between
Analysi a plan’s actual and
s expected quantities.

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006

1-21

End of Chapter 1

McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2006