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Cost Management

Cost Management. A Strategic Emphasis 2nd edition by Edward J. Blocher Kung H. Chen Thomas W. Lin. Cost Management An Overview. Financial information about costs and revenues. Nonfinancial information about productivity and quality. The Uses of Cost Management Information.

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Cost Management

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  1. Cost Management A Strategic Emphasis 2nd edition by Edward J. Blocher Kung H. ChenThomas W. Lin

  2. Cost ManagementAn Overview

  3. Financialinformationabout costsand revenues. Nonfinancialinformationabout productivityand quality. The Uses of CostManagement Information Information managers need toeffectively manage an organization.

  4. Slide 1-3 A Typical Organization Chart Chief Executive Officer Chief Financial Officer Vice President for Marketing Vice President for Operations Controller Treasurer Chief InformationOfficer Cost Management Financial Systems Financial Reporting Other Reporting Obligations

  5. Four Functions of Management Strategicmanagement Planning anddecision making STRATEGIC MANAGEMENT IS THE MOST IMPORTANT. Management and operational control Preparation offinancial statements

  6. Four Functions of Management Strategicmanagement Planning anddecision making Identification and implementationof specific goals and objectives thatprovide a competitive advantage. Management and operational control Preparation offinancial statements

  7. Four Functions of Management Strategicmanagement Planning anddecision making Budgeting and profit planning, cashflow management, lease or buydecisions, repair or replace decisions,product development decisions,and marketing decisions Management and operational control Preparation offinancial statements

  8. Four Functions of Management Monitoring the activitiesat all levels to insure thatgoals and objectives are achieved. Strategicmanagement Planning anddecision making Management and operational control Preparation offinancial statements

  9. Four Functions of Management Compliance with reporting requirementsof groups such as theFASB, IRS, SEC. Strategicmanagement Planning anddecision making Management and operational control Preparation offinancial statements

  10. Strategic Management and Strategic Cost Management • Strategic management requires: • Anticipating changes. • Understanding the business and competitive environment. • Ability to make changes quickly. • Ability to identify and solve problems from a cross-functional view. Strategic cost management is the development of costmanagement information to facilitate strategic management.

  11. Wholesalers Retailers Types of Organizations Manufacturers Merchandisers Servicefirms Government and Not-for-profit

  12. Contemporary Business Environment Advances inmanufacturingtechnologies Increasedglobalcompetition Advances ininformationtechnologies Social,political, and cultural changes Focuson thecustomer New forms ofmanagementorganization

  13. Contemporary Business Environment Advances inmanufacturingtechnologies Better cost managementinformation is neededto remain competitive. Increasedglobalcompetition Advances ininformationtechnologies Social,political, and cultural changes Focuson thecustomer New forms ofmanagementorganization

  14. Contemporary Business Environment Advances inmanufacturingtechnologies Increasedglobalcompetition Advances ininformationtechnologies • Just-in-time inventory • Quality improvements • Flexible manufacturing • Increased facilities costs relative to costs of labor and material Social,political, and cultural changes Focuson thecustomer New forms ofmanagementorganization

  15. Contemporary Business Environment Advances inmanufacturingtechnologies • Computerization • Specialized software • Internet • E-commerce • Telecommunications Increasedglobalcompetition Advances ininformationtechnologies Social,political, and cultural changes Focuson thecustomer New forms ofmanagementorganization

  16. Contemporary Business Environment Advances inmanufacturingtechnologies Increasedglobalcompetition Advances ininformationtechnologies Changing emphasis from low-costproduction of large quantities to quality, service, timely delivery, response to customer requests for specific features. Social,political, and cultural changes Focuson thecustomer New forms ofmanagementorganization

  17. Contemporary Business Environment Advances inmanufacturingtechnologies Change fromcommand-and-controlorganization to aflexible form thatencourages teamworkand coordinationacross functions. Increasedglobalcompetition Advances ininformationtechnologies Social,political, and cultural changes Focuson thecustomer New forms ofmanagementorganization

  18. Contemporary Business Environment Advances inmanufacturingtechnologies Increasedglobalcompetition Advances ininformationtechnologies • Ethnically and racially diverse workforce • Renewed sense of ethical responsibility • Government deregulation of business Social,political, and cultural changes Focuson thecustomer New forms ofmanagementorganization

  19. Business Environment Comparison Manufacturing

  20. Business Environment Comparison Prior Business Contemporary EnvironmentBusiness Environment Basis of Economies of scale, Quality, Competitionstandardization functionality, customer satisfaction Manufacturing High value, long Low volume, short Processproduction runs, production run, focus significant levels of on reducing inventory in-process and levels and other non- finished inventory value added activities and costs

  21. Business Environment Comparison Prior Business Contemporary EnvironmentBusiness Environment Manufacturing Assembly-line Robotics, flexible Technology automation, isolated manufacturing technology systems, integrated applications technology applications connected by network Required Machine paced, Individual and team Labor Skillslow-level skills paced, high-level skills

  22. Business Environment Comparison Prior Business Contemporary EnvironmentBusiness Environment Emphasis on Acceptance of a Strive for zero Quality normal or usual defects amount of waste

  23. Business Environment Comparison Marketing

  24. Business Environment Comparison Prior Business Contemporary EnvironmentBusiness Environment Products Relatively few Large number of variations, long variations, short product life cycles product life cycles Markets Largely domestic Global

  25. Business Environment Comparison Management Organization

  26. Business Environment Comparison Prior Business Contemporary EnvironmentBusiness Environment Type of Almost exclusively Financial and Information financial data operating data, the Recorded andfirm’s strategic Reported success factors Management Hierarchical, Network-based Organizational command and organization, teamwork Structure controlfocus – employee has more responsibility and control, coaching rather than command and control

  27. Business Environment Comparison Prior Business Contemporary EnvironmentBusiness Environment Management Emphasis on the Emphasis on the long Focus short term, short- term, focus on critical term performance success factors, measures and commitment compensation, to the long-term concern for success of the sustaining the firm, including adding current stock price, shareholder value short tenure and high mobility of top managers

  28. Four Stages in the Developmentof Cost Management Systems • Basic transaction recording systems. • Focus on external reporting. • Track key operating data and develop more accurate and relevant cost information for decision making. • Strategically relevant cost management information is an integral part of the system.

  29. Benchmarking • Identify an activity that needs to be improved. • Find an organization that is the most efficient at this activity. • Study its process, and utilize that process. a Benchm rking

  30. Benchmarking Plan Act is ContinuousImprovement Check Total Quality Management Where are we? Where do we want to go? Do we need to change the plan? How do we start? Do How are we doing?

  31. Activity-Based Costingand Management A product costing method that is useful in industries where overhead is high relative to other costs. Activity-based costing assigns costs to products based on several different activities whereas traditional costing methods only assign costs to products on one ortwodifferent departmentsor allocation bases. ABC

  32. Activity-Based Costingand Management A product costing method that is useful in industries where overhead is high relative to other costs. ABC Traditional method Allocation Bases “cost drivers” Products Products

  33. Reengineering • A business processis diagrammedin detail. • Every step inthe businessprocess mustbe justified. • The process isredesigned to includeonly those steps that makeour product more valuable.

  34. Reengineering • A business processis diagrammedin detail. • Anticipated results: • Process is simplified. • Process is completed in less time. • Costs are reduced. • Opportunities for errors are reduced. • Every step inthe businessprocess mustbe justified. • The process isredesigned to includeonly those steps that makeour product more valuable.

  35. Theory of Constraints A sequential process of identifying and removing constraintsin a system. Restrictions or barriers that impedeprogress toward an objective

  36. Mass Customization Marketing and production processes are designed to meet each customer’s specific needs.

  37. Target Costing Identify product opportunity. Determine price that wouldmake product competitive. Determine if product can be made at cost sufficiently low to provide a desired profit.

  38. Life-Cycle Costing • Identify and monitor costs throughout a product’s life cycle • Research and Development costs • Product design and testing costs • Manufacturing, inspecting, packaging and warehousing costs • Marketing, promotion, and distribution costs • Sales and service costs

  39. The Balanced Scorecard Management translates its strategy into performance measures that employees understand and accept. Customersatisfaction Financial Performancemeasures Innovationand learning Internalbusinessprocesses

  40. The Balanced Scorecard How do we lookto the owners? In which internalbusiness processes must we excel? How can wecontinually innovateand learn? How do we lookto customers?

  41. The Balanced Scorecard Learning improvesbusiness processes. Improved businessprocesses improvecustomer satisfaction. Improving customersatisfaction improvesfinancial results.

  42. IMA Code of Ethics for Management Accountants Competence Confidentiality Integrity Objectivity

  43. IMA Code of Ethics for Management Accountants Follow applicable laws, regulations and standards. Maintain professional competence. Competence Prepare complete and clear reports after appropriate analysis.

  44. IMA Code of Ethics for Management Accountants Do not disclose confidential information unless legally obligated to do so. Do not use confidential information for personal advantage. Confidentiality Ensure that subordinates do not disclose confidential information.

  45. IMA Code of Ethics for Management Accountants Avoid conflicts of interest and advise others of potential conflicts. Do not subvert organization’s legitimate objectives. Integrity Recognize and communicate personal and professional limitations.

  46. IMA Code of Ethics for Management Accountants Avoid activities that could affect your ability to perform duties. Refrain from activities that could discredit the profession. Refuse gifts or favors that might influence behavior. Integrity Communicate unfavorable as well as favorable information.

  47. Objectivity IMA Code of Ethics for Management Accountants Communicate information fairly and objectively. Disclose all information that might be useful to management.

  48. End of Chapter 1

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