Strategic

Cost
Management
April 25, 2022
REFERENCE Books
Textbook

STUDENT
RESOURCES
https://www.swlearning.com/accounting/hansen/cost_4e/student_resources.html
 Date Day Time Modul Topics
e
1. April 25 Mon 9-11am 1 • Introduction to Cost
Zoom Meetings Management
• Basic Cost Management
Concepts
2. April 27 Wed 9-11am 2 • Cost Behavior
• Activity-Based Costing
3. May 2 Mon 9-11am 3 • Job Order Costing
• Process Costing
4. May 4 Wed 9-11am 4 • Allocating Cost
• Budgeting
5. May 9 Mon 9-11am 5 • Standard Costing
6. May 11 Wed 9-11am 6 • Transfer Pricing
• Strategic Cost
Management
• Balanced Score Card
7. May 16 Mon 9-11am 7 • Cost-Volume Profit
4 Analysis
 Date Da Coverage
y
1. Quiz 1 Apr Sat Modules 1-2
30
2. Midter May 7 Sat Modules 1-4
m
3. Quiz 2 May Sat Modules 5-6
14
4. Finals May Sat All Modules
21
 Grading System
45% - Exams
45% - Assign./Quizzes/CP
10% - Attendance/Decorum
100%
Introduction to
Cost
Management
 Financial
Financial Accounting
Accounting Versus
Versus
Cost
Cost Management
Management
Financial accounting is devoted to providing
information for external users; these users
include investors, government agencies, and
banks.
Cost management identifies, collects,
measures, classifies, and reports information
that is useful to managers in costing
(determining what something costs), planning,
controlling, and decision making.
 Financial
Financial Accounting
Accounting Versus
Versus
Cost
Cost Management
Management
 Cost accounting attempts to satisfy costing
objectives for both financial and management
accounting.
 Management accounting is concerned
specifically with how cost information and
other financial and nonfinancial information
should be used for planning, controlling, and
decision making.
 RELATIONSHIP

COST
FINANCIAL ACCOUNTING MANAGEMENT
ACCOUNTING ACOUNTING
Current
Current Factors
Factors Affecting
Affecting Cost
Cost
Management
Management
Global Competition
• The new competitive
environment has increased the
demand not only for more cost
information but also for more
accurate information.
• Vastly imported transportation
and communication has led to a
global market for many
manufacturing and service firms.
 Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
Growth of the Service Industry
 As the traditional industries has
declined in importance, the
service sector of the economy
has increased in importance.
 Deregulation of many services
has increased competition in the
service industry.
 Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
Advances in Information Technology
 Computers are used to monitor and
control operations, which allows for a
considerable amount of useful
information to be collected and
provided to management
instantaneously.
 The emergence of electronic
commerce which allows buyers and
sellers to come together electronically.
 Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
Advances in Management Environment
The theory of constraints is a method used to continuously
improve manufacturing activities and nonmanufacturing
activities.
Just-in-time manufacturing is a demand-pull system that
strives to produce a product only when it is needed and
only in the quantities demanded by customers.
Computer-integrated manufacturing is the automation of the
manufacturing environment.
Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
Customer Orientation
 Firms are concentrating on the
delivery of value to the customer
with the objective of establishing a
competitive advantage.
 Companies must compete not only
in technological and manufacturing
terms but also in terms of the speed
of delivery and response.
 Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
New Product Development
 Management recognizes that a high
proportion of production costs are
committed during the development
and design stage of a new product.
 The requirement to control cost
encourages the use of target costing
and activity-based management.
 Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
Total Quality Management
 Continual improvement and elimination of waste are
the two foundation principles that govern a state of
manufacturing excellence.
 A philosophy of total quality management, in which
managers strive to create an environment that will
enable organizations to manufacture perfect products,
has replaced the acceptable quality attitudes of the
past.
 Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
Time as a Competitive Element
 Time is the crucial
element in all phases of
the value chain.
 Decreasing non-value-
added time appears to go
hand-in-hand with
increasing quality.
 Current
Current Factors
Factors Affecting
Affecting
Cost
Cost Management
Management
Efficiency

While quality and time are

important, improving these
dimensions without
corresponding improvements
in financial performance may
be futile, if not fatal.

.
 Line
Line and
and Staff
Staff Positions
Positions
Line positions are positions
that have direct responsibility
for the basic objectives of an
organization.
Staff positions are positions
that are supportive in nature
and have only indirect
responsibility for an
organization’s basic objectives.
 Partial Organization Chart,
Manufacturing Company
President
Line Function Staff Function

Production Vice- Financial Vice-

President President

Production
Supervisor Controller Treasurer

Machining Assembly Interna

Cost Financial Systems Tax
Foreman Foreman l Audit
 Role
Role of
of Controller
Controller and
and Treasurer
Treasurer
Controller
1. Financial reports
2. SEC reporting
3. Tax planning and reporting
4. Performance reporting
5. Internal auditing
6. Budgeting
7. Accounting systems and
internal controls
 Role
Role of
of Controller
Controller and
and Treasurer
Treasurer
Treasurer
1. Collection of cash
2. Monitoring of cash
payments
3. Monitors cash availability
4. Short-term investments
5. Short and long-term
borrowing
6. Issuing of capital stock
 The
The Management
Management Process
Process

Planning is the detailed

formulation of future
actions to achieve a
particular end.
Planning requires
setting objectives and
identifying methods to
achieve those
objectives.
 The
The Management
Management Process
Process

Controlling is the
managerial activity of
monitoring a plan’s
implementation and
taking corrective
action as needed.

Feedback
Control
Controlisisis
Feedback usually
is information
usually achieved
information that
achieved with
that can
canthe
with be
beuse
the used
use
usedof
oftofeedback.
to evaluate
feedback.
evaluate
or
orcorrect
correctthe thesteps
stepsbeing
beingtaken
takento toimplement
implementaa
plan.
plan.
The
The Management
Management Process
Process

Continuous
improvement is
required in a dynamic
environment if a firm is
to remain competitive
or to establish a
competitive advantage.
 The
The Management
Management Process
Process

Decision making is
the process of
choosing among
competing
alternatives.
 Standards
Standards of
of Ethical
Ethical Conduct
Conduct
for
for Management
Management Accountants
Accountants
Competence: Management accountants have a
responsibility to--
1. Maintain an appropriate level of professional competence
by ongoing development of their knowledge and skills.
2. Perform their professional duties in accordance with
relevant laws, regulations, and technical standards.
3. Prepare complete and clear reports and recommendations
after appropriate analysis of relevant and reliable
information.
 Standards
Standards of
of Ethical
Ethical Conduct
Conduct
for
for Management
Management Accountants
Accountants
Confidentiality: Management accountants have a
responsibility to--
1. Refrain from disclosing confidential information acquired in the
course of their work except when authorized, unless legally
obligated to do so.
2. Inform subordinates as appropriate regarding the confidentiality
of information acquired in the course of their work and monitor
their activities to ensure the maintenance of that confidentiality.
3. Refrain from using or appearing to use confidential information
acquired in the course of their work for unethical or illegal
advantage either personally or through a third party.
 Standards
Standards of
of Ethical
Ethical Conduct
Conduct
for
for Management
Management Accountants
Accountants
Integrity: Management accountants 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
their actions.
 Refrain from either actively or passively subverting the
attainment of the organization’s legitimate and ethical
objectives. Continued
Continued
 Standards
Standards of
of Ethical
Ethical Conduct
Conduct
for
for Management
Management Accountants
Accountants
Integrity: Management accountants have a
responsibility to--
 Recognize and communicate professional limitations or
other constraints that would preclude responsible
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.
 Standards
Standards of
of Ethical
Ethical Conduct
Conduct
for
for Management
Management Accountants
Accountants
Objectivity: Management accountants have a
responsibility to--
1) Communicate information fairly and objectively.
2) Disclose fully all relevant information that could
reasonably be expected to influence an intended user’s
understanding of the reports, comments, and
recommendations presented.
 Professional
Professional Certifications
Certifications
 CMA: One of the main purposes of the CMA was to
establish management accounting as a recognized,
professional discipline, separate from the profession
of public accounting.
 CPA: The responsibility of a CPA is to provide
assurance concerning the reliability of financial
statements.
 CIA: The focus of the CIA is to recognize
competency in internal auditing rather than external
auditing as with the CPA.
 The
The CMA
CMA

Four areas emphasized on the exam:

1) Economics, finance, and management
2) Financial accounting and reporting
3) Management report, analysis, and behavioral
issues
4) Decision analysis and information systems
 Basic Cost
Management
Concepts
 Basic
Basic Cost
Cost Concepts
Concepts
A cost object is any item, such as products, customers,
departments, projects, activities, and so on, for which
costs are measured and assigned.
Example: A bicycle is a cost object when you are
determining the cost to produce a bicycle.
An activity is a basic unit of work performed within an
organization.
Example: Setting up equipment, moving materials,
maintaining equipment, designing products, etc.
 Basic
Basic Cost
Cost Concepts
Concepts
Traceability is the ability to assign a cost to a
cost object in an economically feasible way by
means of a causal relationship.
Direct costs are those costs that can be easily
and accurately traced to a cost object.
Example: The salary of a supervisor of a department, where
the department is defined as the cost object.
 Basic
Basic Cost
Cost Concepts
Concepts
Indirect costs are those costs that cannot be traced
easily and accurately to a cost object.
Example: The cost of heating and cooling a plant that
manufactures five products.
 Manufacturing
Manufacturing Costs
Costs

Direct materials are those materials that are directly traceable to the
goods or services being produced.
Example: The cost of wood in furniture.
Direct labor is the labor that is directly traceable to the goods or
services being produced.
Example: Wages of assembly-line workers.
Overhead are all other manufacturing costs.
Example: Plant depreciation, utilities, property taxes, indirect materials,
indirect labor, etc.
 Nonproduction
Nonproduction Costs
Costs
Marketing (selling) costs are the costs necessary to
market, distribute, and service a product or service.
Example: Advertising, storage costs, and freight out.
Administrative costs are the costs associated with
research, development, and general administration of
the organization that cannot reasonably be assigned to
either marketing or production.
Example: Legal fees, salary of the chief executive officer.
Nonproduction
Nonproduction Costs
Costs
For
For external
external financial
financial
reporting,
reporting, marketing
marketing and
and
administrative
administrative costs
costs are
are not
not
inventoried.
inventoried. They
They are
are
referred
referred to
to as
as period
period costs.
costs.
 Production and Non Production Costs

Direct
R and D Expense
Materials
Prime Cost
Direct Labor Marketing (Selling)
Expense
Conversion
Cost Administrative
Overhead
Expense
 Manufacturing Organization
Income Statement
For the Year Ended December 31, 2004
Sales $2,800,000
Less: Cost of goods sold 1,300,000
Gross margin $ 700,000
Less operating expenses:
Selling expenses $300,000
From
Fromthe
theCost
Cost
Administrative expenses 150,000
of
ofGoods450,000
Goods Sold
Sold
Operating income Schedule
$ 250,000
Schedule
 Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2004
Direct materials:
Beginning inventory $200,000
Add: Purchases 450,000
Materials available $650,000
Less: Ending inventory 50,000
Direct materials used in production $ 600,000
Direct labor 350,000
Manufacturing overhead:
Indirect labor $122,500
Depreciation 177,500
Rent 50,000
Utilities 37,500
Property taxes 12,500
Maintenance 50,000 450,000
Total manufacturing costs continued
added $1,400,000
Total manufacturing costs added $1,400,000
Add: Beginning work in process 200,000
Less: Ending work in process 400,000
Cost of goods manufactured $1,200,000

Work in process consists of all

partially completed units found in
production at a given point in time.
 Cost of Goods Sold Schedule
For the Year Ended December 31, 2004

Cost of goods manufactured $1,200,000

Add: Beginning inventory finished goods 250,000
Cost of goods available for sale $1,450,000
Less: Ending inventory finished goods 150,000
Cost of goods sold $1,300,000

From
Fromthe
the
Statement
Statementof
of
Cost
Costof
ofGoods
Goods
Manufactured
Manufactured