1

Cost Management
and Strategic
Decision Making
Evaluating
Opportunities and
Leading Change

1-2

Characteristics of Cost Management

What
What is
is Cost
Cost Management?
Management?
ItIt goes
goes beyond
beyond historical
historical
measurement
measurement and
and reporting.
reporting.
ItIt assesses
assesses the
the impacts
impacts of
of
current
current or
or proposed
proposed decisions.
decisions.
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 and
and achieve
achieve lower
lower cost.
cost.

1-3

Characteristics of
Cost-Management Analysts
Cost analysts use cost
accounting and other data to:

Improve
products

Improve
resource use

Support
strategies

Improve
services

Reduce
costs

1-4

Characteristics of
Cost-Management Analysts
Integrity
Broad knowledge
of the business

Ability to work
in cross-functional
teams

1-5

Ethical Standards for CostManagement Analysts

Cost-management
Cost-management analysts
analysts must
must maintain
maintain high
high
standards
standards of
of 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 IMA
IMA(Institute
(Institute of
of Management
Management Accountants)
Accountants) Statement
Statement
of
of Ethical
Ethical Professional
Professional Practice,
Practice, published
published for
for its
its
management
management accountant
accountant membership,
membership, offers
offers guidance
guidance for
for
ethical
ethical behavior
behavior applicable
applicable to
to cost-management
cost-management analysts.
analysts.

1-6

IMA Overarching Ethical Principles

Honesty

Fairness

PRINCIPLES

Responsibility

Objectivity

1-7

IMA Standards for Ethical Behavior

Follow
Follow applicable
applicable laws,
laws,
regulations
regulations and
and
standards.
standards.
Maintain
Maintain
professional
professional
expertise,
expertise, and
and
communicate
communicate any
any
limitations
limitations or
or
constraints.
constraints.

Competence

Provide
Provide decision
decision support
support
information
information and
and
recommendations
recommendations that
that are
are
accurate
accurate and
and timely.
timely.

1-8

IMA Standards 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
personal
personal
advantage.
advantage.

Confidentiality
Inform
Inform relevant
relevant parties
parties
about
about the
the proper
proper use
use of
of
confidential
confidential information.
information.

1-9

IMA Standards for Ethical Behavior

Avoid
Avoid conflicts
conflicts of
of interest
interest
and
and advise
advise others
others of
of
potential
potential conflicts.
conflicts.
Refrain
Refrain from
from
conduct
conduct that
that could
could
compromise
compromise ethical
ethical
performance.
performance.

Integrity
Abstain
Abstain from
from activities
activities that
that
might
might discredit
discredit the
the
profession.
profession.

1-10

IMA Standards for Ethical Behavior

Communicate
Communicateinformation
information
fairly
fairlyand
andobjectively.
objectively.

Credibility

Disclose
Discloseall
allinformation
information
that
thatshould
shouldinfluence
influencean
an
intended
intendedusers
users
understanding
understandingof
ofreports
reports
and
andanalyses.
analyses.

Disclose
Disclosedelays
delaysor
or
deficiencies
deficienciesin
in
information
information and
and
its
itsprocessing.
processing.

1-11

Sarbanes-Oxley Act (SOX)

(Section 404)

The CEO and CFO

are now personally
responsible for their
companys financial
statements.
They must sign the
statements and take
responsibility for
their accuracy.

The CEO and CFO

are responsible for
their companys
system of internal
controls over its
financial reporting.
Accurate cost
measurement has
gained in
importance.

1-12

Internal Control System

(to assure that a company achieves)

Effectiveness and
efficiency in its
operations

Compliance with
laws and
regulations

Reliability in its
financial reporting

1-13

Strategic Decision Making

Strategy
An organizations overall plan
or policy to achieve its goals.
Key
questions

Where
Where do
do we
we
want
want to
to go?
go?

How
How do
do we
we want
want
to
to get
get there?
there?

Exh.
1.1

1-14

Where do We Want to Go? Strategic

New market potential
Missions
Be early entrant
Achieve growth
Capture market share

REWARDS

High

Hold
Medium

Harvest

Low

Divest
Low

Build
Continuing market
Maintain growth
Be a major player
Protect market share

Continuing market
Maintain cash flow
Maintain volume
Cut costs

Declining market
Exit at lowest cost
Minimize losses
Find a buyer quickly

Medium

RISK

High

1-15

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
and
and threats
threats to
to
competitive
competitive advantages.
advantages.

Use
Use effective
effective
decision
decision making
making
techniques.
techniques.

Competitive
Competitive advantages
advantages result
result from
from achieving
achieving aa value
value chain
chain
that
that enables
enables an
an organization
organization to
to provide
provide more
more value
value
(perhaps
(perhaps at
at aa lower
lower cost)
cost) than
than its
its competitors.
competitors.

1-16

Cost Leadershipoutperform
competitors by producing at the lowest cost,
consistent with quality demanded by the
consumer
Differentiationcreating value for the
customer through product innovation,
product features, customer service, etc. that
the customer is willing to pay for

1-17

Competitive Strategies (continued)

Aspect

Cost Leadership

Differentiation

Strategic
Target

Broad cross section

of the market

Focused cross
section of the market

Basis of
competitive
advantage

Lowest cost in the

industry

Unique product or
service

Product line Limited selection

Wide variety

Production
emphasis

Lowest possible cost Innovation in

and essential
differentiating
features
products

Marketing
emphasis

Low price

Premium price and

innovative features

1-18

Exh.
1.2

The Value Chain

Where
Wheredo
dowe
wewant
wantto
togo?
go?
How
Howdo
dowe
wewant
wantto
toget
getthere?
there?

Physical
Physical
resources
resources

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

R&D

Design

Supply

Production Marketing

Primary processes

Distribution

Customer
service

Value
Valueofof
products
products
and
and
services
services

1-19

Outsourcing and the Value Chain

Focus
Focusresources
resources on
on
parts
partsof
ofthe
thevalue
value chain
chain
that
that are
aremost
mostimportant
important
to
tocompany
companygoals.
goals.
What
What is
ismost
mostlikely
likely
to
tobe
beoutsourced?
outsourced?
Information
Informationservices,
services,
legal,
legal, logistics,
logistics,human
human
resources,
resources,payroll,
payroll,
accounting,
accounting,tax.
tax.

Outsource
Outsourcethose
thosevalue
value
chain
chainprocesses
processesthat
that
can
canbe
bedone
done more
more
efficiently
efficientlyby
byothers.
others.

Potential problem
Loss of control
and
internal expertise.

1-20

Competitive Advantages, Sources

and Threats
Product
Strategy
Low Cost
Production

Co Exis
mp tin
eti g
tor
s

Source of
Capability

w tors
e
N eti
mp
o
C

Create New
Knowledge
Product
Differentiation

Build

Harvest

es

Suppliers

tut

Cu
sto
me
rs

Divest
ti
bs
Su

Market Focus

Business
Unit Strategy

Hold

Imitate
Others

Exh.
1.3

1-21

Formulation of Strategic Action Plans

An 8-step process at Pursuit Data

1.
1. Identify
Identifyneed
needfor
forchange.
change.
2.
2. Create
Createteam
teamto
tolead
leadand
andmanage
managechange.
change.
3.
3. Create
Createvision
visionof
ofthe
thechange
changeand
andstrategy
strategyfor
forachieving
achievingvision.
vision.
4.
4. Communicate
Communicatevision
visionand
andstrategy
strategyfor
forchange
changeand
andhave
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
achievementsare
arefrequent
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.

1-22

Evaluating Plans and Outcomes

Operational
performance
analysis

Has short-run
performance met
expectations?

Strategic

performance
analysis

Has long-run
performance met
expectations?

1-23

Evaluating Plans and Outcomes

Quantitative information
and qualitative information
about a proposed plan

Cost
Benefit
Analysi
s

Variance
Analysis

Differences between
the expected and
actual costs of
business operations

1-24

End of Chapter 1