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Managing Costs & Revenues. Professor William F. O’Brien, MBA, CPA. Spring 2010. Session 2. Strategic Cost Management/Measurement Tools and Systems Activity Based Costs and Management The Balanced Scorecard Tiajuana Bronze Case. Cost Measurement Systems.

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Managing costs revenues

Managing Costs & Revenues

Professor William F. O’Brien, MBA, CPA

Spring 2010

Session 2

Session 2

Strategic Cost Management/Measurement Tools and Systems

Activity Based Costs and Management

The Balanced Scorecard

Tiajuana Bronze Case

Cost measurement systems

Cost Measurement Systems

  • Focus on “…operating information for results.”

Strategic mgt actg system

Strategic Mgt. Actg. System

  • Competitor cost information

  • Value Chain analysis

  • Strategic cost analysis…ABM

  • And others...

Ansari moa

Ansari: MOA

  • Strategic Implications

    • Info @ the cost of value-added features

    • Info @ the overall cost of the product

    • Reflects time considerations in the attribution process

Moa cont

MOA, cont.

  • Attribute Implications

    • Technical

      • Provides decision relevant information

      • Enhances process understanding

    • Behavioral

      • Cost structure visibility

      • Facilitates communication

      • Empowers employees

      • Risk of “failed expectations” re: “true” cost

    • Cultural

      • Supports process focus

      • Encourages cross-functional participation

Attribution vs allocation

Attribution vs. Allocation

  • “The Scarlet Letter” revisited

  • Attributions promote ownership and cost relationship understanding

  • Arbitrary allocations do not reflect direct consequences and, therefore, are often ignored.

Arbitrary allocations

Arbitrary Allocations

  • When all else fails…at least it forces managerial discussions and negotiations.

Activity based costing

Activity Based Costing

  • Application to Final Cost Objectives (FCO’s) on the basis of actual activities employed

  • Estimations of actual, causal relationships are used…reasonably accurate costs of products, services and customers

  • Can include fixed and variable amts.

Types of activities

Types of Activities

  • Transaction…# of events

  • Time or duration…time of events

  • Cost per event

Hints for implementation

Hints for Implementation

  • K.I.S.S.

  • Focus on estimates

  • Start small

  • Close enough is good enough

  • Use Pareto’s law

Abc implementation

ABC Implementation

  • Select an area

  • Identify primary activities (5-10)

  • Cost each activity

  • Determine one driver for each activity

  • Apply the costs to the final cost objectives on the basis of the drivers.

Abc abm case gulfstream recreation

ABC/ABM Case-Gulfstream Recreation

Gulf Stream Recreation, a major sporting goods firm in California has two major

products--the Bobcat Racer and the Snidley Whiplash Cruiser. For the current year, overhead

was planned at $850K. Overhead is applied on the basis of machine hours. Each racer uses 2 machine hours and each cruiser uses 1 machine hour. GSR planned to build 10K racers and 50K cruisers. The cost structure for each product is as follows:


Direct Material$35$50

Direct Labor 25 13

Machine Hours 2 1

GSR is considering some type of activity based costing system. Sandra Jones, the cost accounting manager, suggested the following drivers:

Driver Relationship to FCO

DriverTotal Activity CostTotalRacerCruiserActivity

P.O.'s(#)$300K 2000 1250 750Purchasing

Rework Hrs. (Hrs)$200 450 200 250 Quality Control

Invoices (#)$200 600 150 450 Billing

Change Orders (#)$150 300 150 150 Mfg. Eng.

1.Calculate the unit costs of each product under the traditional method.

2.Calculate the unit costs of each product under activity based costing.

3.What pricing implications are inherent in this example.

Gulfstream recreation solution

Gulfstream Recreation Solution

Standard Overhead Rate:

$850K/70K Mhrs. = $12.14 per machine hour

Traditional Cost Structure:


Direct materials$35$50

Direct labor$25$13



Gulfstream solution continued

Gulfstream Solution, continued

ABC Overhead Rate:



Quality control$ 88.9$111.1

Billing$ 50.0$150.0

Mfg. Engineering$ 75.0$ 75.0


Per unit$40.10$ 8.97

Traditional Cost Structure:


Direct materials$35$50

Direct labor$25$13

Overhead$40$ 9

Total $100$72



  • ABC does NOT yield “true” costs!

Ansari abm

Ansari: ABM

  • Strategic Implications

    • Visibility on the efficiency & effectiveness (the quality) of activities

    • Visibility of costs for process redesign

    • Insight into timing consideration of actions

Abm cont

ABM, cont.

  • Attribute Implications

    • Technical

      • Greater focus on work

      • Provides cross-functional cost impact

      • Highlights operational interdependencies

    • Behavioral

      • Heightens importance of process knowledge

      • Reinforces continuous improvement

      • Empowers employees--be careful of “non-value” terminology

    • Cultural

      • Reorients focus on process not people

      • Challenges current thinking

      • May add cultural conflict

Abm cont1

ABM, cont.

  • ABM Process (one approach)

    • Obtain existing cost information

    • Determine the major processes

    • Identify process inputs and outputs

    • Determine the specific activities

    • Identify the resources used

    • Define output measures (what we measure)

    • Define performance measures (how we measure it)

    • Assess performance through benchmarking

    • Brainstorm improvements

Balanced scorecard analysis

Balanced Scorecard Analysis

Managing costs revenues

Balanced Scorecard Model

Financial Perspective

Learning & Growth




Internal Business

Process Perspective

Balanced scorecard components

Balanced Scorecard Components

  • Financial Perspective

  • Customer Perspective

  • Internal Business Process Perspective

  • Learning and Growth Perspective

The measures

The Measures

  • Approximately 5-7 per section

  • Link the measures…cause & effect

  • Include outcomes and drivers

  • Strategic measures become part of the bal. scorecard; control system measures become “critical success factors” (or everyday measures)

Features of a good balanced scorecard

Features of a Good Balanced Scorecard

  • It tells a story.

  • It helps communicate a strategy.

  • It preserves a financial focus.

  • It provides for metric focus.

  • It highlights sub-optimal tradeoffs.

Balanced scorecard pitfalls

Balanced Scorecard Pitfalls

  • Failure to allow the scorecard to evolve.

  • Emphasizing across the board improvement.

  • Focus on only objective measures.

  • Failure to focus on both costs and benefits.

  • Failure to include non-financial measures in evaluating employees.

Bsc future options

BSC Future Options

  • BSC format as Management by Objective tool

  • Personal BSC

    • 4 F’s

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