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Strategic Cost Management. Professor William F. O’Brien, MBA, CPA. Fall 2004. Session 1A--Introduction & Cost Accounting Review. Cost Management Financial Non-Financial. Financial Management Evolution. DATA. Today’s Corporate Focus is on Results!. INFORMATION. ANALYSIS.

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Strategic cost management l.jpg

Strategic Cost Management

Professor William F. O’Brien, MBA, CPA

Fall 2004


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Session 1A--Introduction & Cost Accounting Review

  • Cost Management

    • Financial

    • Non-Financial

STRATEGIC COST MANAGEMENT-FALL 2004


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Financial Management Evolution

DATA

Today’s

Corporate

Focus is on

Results!

INFORMATION

ANALYSIS

IMPLEMENTATION

STRATEGIC COST MANAGEMENT-FALL 2004


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Financial Accounting Model

(useful &

relevant)

Company

Users

F/S

Financial

Impact

Economic

Decisions

STRATEGIC COST MANAGEMENT-FALL 2004


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Managerial Accounting Model

Communication Environment

Plan

Adjust

Accounting

Information

Implement

Monitor

STRATEGIC COST MANAGEMENT-FALL 2004


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Four Management Functions…another Perspective

  • Strategic Management

  • Planning and Decision Making

  • Management and Operational Control

  • F/S Preparation

  • How is Cost Management Info Used?

STRATEGIC COST MANAGEMENT-FALL 2004


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Factors Influencing Today’s Business Environment

  • Global competition

  • Manufacturing and IT advances

  • Customer focus

  • Revised organizational structures

  • Social, political and cultural changes

STRATEGIC COST MANAGEMENT-FALL 2004


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Contemporary Mgt. Techniques

  • Benchmarking

  • Total Quality Management (TQM)

  • Continuous Improvement

  • Activity-Based Costing (ABC) and Mgt. (ABM)

  • Reengineering

  • Theory of Constraints (TOC)

  • Mass Customization

  • Target Costing

  • Life-cycle Costing

  • The Balanced Scorecard

STRATEGIC COST MANAGEMENT-FALL 2004


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Ethics

  • Lack of ethics--everyone loses

  • Recent examples

    • Enron

    • WorldCom

    • Adelphia

    • Arthur Andersen

STRATEGIC COST MANAGEMENT-FALL 2004


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Ethics and You

  • You will face an ethical challenge

  • It could impact

    • Your job

    • Your family

    • Your relationships

    • Your financial stability

    • Your physical well-being

  • You have only ONE reputation...

STRATEGIC COST MANAGEMENT-FALL 2004


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Cost Actg. Review

  • Cost…an economic sacrifice

STRATEGIC COST MANAGEMENT-FALL 2004


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Critical Cost Terms

  • Fixed vs. Variable

  • Product vs. Period

  • Manufacturing vs. Non-manufacturing

  • Direct vs. Indirect

  • Controllable vs. Uncontrollable

  • Opportunity and Sunk Costs

  • Differential Cost and Revenue

  • Cost Drivers

STRATEGIC COST MANAGEMENT-FALL 2004


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Cost Drivers and Final Cost Objectives

  • Cost Drivers

    • Anything that causes a cost to occur

  • Final Cost Objective (FCO)

  • Generally used in conjunction with Activity Based Costing

STRATEGIC COST MANAGEMENT-FALL 2004


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RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS

BOH

I

O

EOH

B O/H R/M B O/H WIP B O/H F/G

R/M TRANSFERS

DIR. LABOR

MFG OVERHEAD

MANUFACTURING

COSTS

COST OF GOODS

MANUFACTURED

(COGM)

E O/H WIP

COGM

COST OF GOODS

SOLD

(COGS)

E O/H F/G

R/M PURCHASES

TRANSFERS TO

WIP

E O/H R/M

P&L

Manufacturing Cost Flows

STRATEGIC COST MANAGEMENT-FALL 2004


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Direct Costing

  • Also known as “Contribution Margin Format”

  • Direct costing  direct costs

  • P&L format:

    Sales xxx

    Variable costs -xxx

    Contribution margin xxx

    Fixed costs -xxx

    Net income xxx

STRATEGIC COST MANAGEMENT-FALL 2004


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CVP Analysis

  • Uses

    • Revenue planning

    • Cost classification

    • Commission analysis

    • Volume and mix determination

    • ABC modifications

STRATEGIC COST MANAGEMENT-FALL 2004


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Break-even Analysis

  • Sales - variable costs = fixed costs

  • Contribution Margin Approach

    • FC/contribution margin ratio ($)

    • FC/unit contribution margin (units)

  • Equation Approach

    • (Unit SP)x - (unit VC)x = FC (units)

    • X - (VC%)x = FC ($)

  • CM approach is the easier to apply

STRATEGIC COST MANAGEMENT-FALL 2004


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Margin of Safety

  • Actual sales - B/E sales

  • Margin of safety percentage

    • Margin of safety/actual sales

STRATEGIC COST MANAGEMENT-FALL 2004


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Operating Leverage

  • CM/NI

  • Reflects the percentage increase in sales compared to the percentage increase in net income

  • High OL reflects high opportunity and high risk

STRATEGIC COST MANAGEMENT-FALL 2004


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Multiple Product Line Format

STRATEGIC COST MANAGEMENT-FALL 2004


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Behavioral Issues

  • Risk aversion bias

  • Uncertainty

STRATEGIC COST MANAGEMENT-FALL 2004


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CVP Limitations

  • Relevant range assumption

  • Difficulty in cost determination

  • Allocations

    • The “Scarlet Letter” of accounting

STRATEGIC COST MANAGEMENT-FALL 2004


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Scarlet Letter of Accounting

  • Lacks Cost Mgt.

  • Error Prone

  • Distraction

STRATEGIC COST MANAGEMENT-FALL 2004


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Session 1B--Strategic Cost Management & theOrganizational Role of Management Accountants

STRATEGIC COST MANAGEMENT-FALL 2004


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Strategic Cost Management

  • Strategic cost management is the development of cost management information to facilitate the principal management function--strategic management.

STRATEGIC COST MANAGEMENT-FALL 2004


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Ansari: SMA

  • Strategic Triangle (QCT)

    • Competition based on quality, cost & Time

  • Mgt. Acctg. Triangle (TBC)

    • Impacts technical, behavioral & cultural aspects

  • Mgt. Acctg. Links Strategy with Action

    • It is not an end unto itself

    • It is an integrating tool

STRATEGIC COST MANAGEMENT-FALL 2004


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SMA, cont.

  • The two triangles are dependent upon each other

  • This process is a framework to ensure that our management accounting tools possess the attributes necessary to achieve our strategic goals

STRATEGIC COST MANAGEMENT-FALL 2004


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SMA, cont.

  • QCT Triangle

    • Self evident

  • TBC Triangle

    • Provides Technical insight

    • Encourages Behavioral changes

    • Supports Cultural beliefs

STRATEGIC COST MANAGEMENT-FALL 2004


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Accounting Business Skills“The What”

  • Business Perspective

  • Organizational Focus

  • Bias for Action

  • Communication Excellence

  • People Proficiency

STRATEGIC COST MANAGEMENT-FALL 2004


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Financial Management Guidelines“The How”

  • Cc: communication versus control

  • KTT: know the territory

  • MBWA: manage by wandering around

  • R ƒ R3: respect is a function of...

    • responsiveness

    • reliability

    • relevance

STRATEGIC COST MANAGEMENT-FALL 2004


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