Teaching Strategic Cost Management
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Teaching Strategic Cost Management. Ed Blocher University of North Carolina, Chapel Hill. Overview. The Strategic Approach: an Introduction Tools for Integrating Strategy: Value Chain Analysis, The Strategy Map, and the Balanced Scorecard (BSC) Sample Course Outlines

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Teaching Strategic Cost Management

Ed Blocher

University of North Carolina, Chapel Hill


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Overview

  • The Strategic Approach: an Introduction

  • Tools for Integrating Strategy: Value Chain Analysis, The Strategy Map, and the Balanced Scorecard (BSC)

  • Sample Course Outlines

  • Sample Course Topic: Activity-Based Costing (ABC), Time-Drive ABC (TDABC), and ABM

  • Sample Course Topic: Customer Profitability Analysis

  • Sample Course Topic: The Management and Control of Quality and Accounting for Lean

  • Sample Course Topic: Performance Measurement

  • Using Software in the Cost Management Course



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Teaching Strategic Cost Management Accounting Topics—An Introduction

What?

Why?

How?


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Three Accounting Topics—An Introduction Levels to Teaching…

  • First Level: Explain the topic

  • Second Level: As above, plus require homework

  • Third Level: As above, plus include the topic on exams


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Strategic Cost Management Accounting Topics—An Introduction

The Strategic Perspective

Prior Perspective

# View cost management as a tool for developing and implementing business strategy

# The accountant as a business partner

# Focus on cost management

  • Focus on Financial Reporting

  • Common emphasis on standardization and standard costs

  • The accountant as functional expert and financial scorekeeper


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Consequences of Accounting Topics—An IntroductionLack of Strategic Cost-Management Information

  • Decision-making based on guess and intuition

  • Lack of clarity about direction and goals

  • Over time, lack of a clear and favorable perception of the firm by customers and suppliers

  • Incorrect decisions: choosing products, markets, or manufacturing processes that are inconsistent with the organization’s strategy

  • For control purposes, cannot link performance effectively to strategic goals


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Definition of Management Accounting: IMA Accounting Topics—An Introduction

Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organization’s strategy.


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Introducing Accounting Topics—An IntroductionStrategy

Strengths

Weaknesses

OpportunitiesThreats

Strategy

Map

Balanced Scorecard (BSC)


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Michael Porter: Strategic Accounting Topics—An IntroductionPositioning

  • CostLeadership—outperform competitors by producing at the lowest cost, consistent with quality demanded by the consumer

  • Differentiation—creating value for the customer through product innovation, product features, customer service, etc. that the customer is willing to pay for


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Aspects of the Accounting Topics—An IntroductionTwo Competitive Strategies


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Part 2: Tools for Integrating Strategy into Cost Accounting/Cost Management Courses

-- The Value Chain

-- Strategy Maps & the Balanced Scorecard (BSC)


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Value Accounting/Cost Management CoursesChainAnalysis:A Detailed Look at Strategy…

The Value Chain is a linked set of value-adding activities used by an organization to deliver its value proposition to its customers. It consists of:

  • “Upstream” Activities

  • Manufacturing/Operations

  • “Downstream” Activities


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Value-Chain Analysis Accounting/Cost Management Courses

  • Identify value-chain activities

  • Develop competitive advantage by:

    • Identifying opportunities for adding value for the customer

    • Identifying opportunities for eliminating non- value added activities and reducing cost

    • Understand linkages among suppliers, the entity, and customers


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Strategy Maps & Accounting/Cost Management Coursesthe Balanced Scorecard (BSC)

  • The BSC and Strategy Map are used to align the organization’s activities with achieving strategic goals, using the four perspectives:

    • Financial

    • Customer

    • Internal Processes

    • Learning and Growth


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vision & Accounting/Cost Management Courses

mission

Exceed shareholder

expectations

Diversify income

stream

Increase sales

volume

Improve profit

margins

Financial

Diversify

customer base

Increase sales to

existing customers

Customer

Attract new

customers

Internal

Process

Target profitable

market segments

Optimize internal

processes

Develop new

products

Attract new

customers

Learning

& Growth

Develop

employee skills

Integrate

systems


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The Balanced Scorecard (BSC): Accounting/Cost Management CoursesFeedback to Strategy

Strategy

Map

Balanced Scorecard (BSC)


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Educational Resource: Tartan Manufacturing Case Accounting/Cost Management Courses

Key Issues:

  • Tartan emphasizes product leadership and quality

  • Limited manufacturing capacity

  • Fast sales growth in certain lines

  • The “Classic” Line has falling sales and is increasingly difficult to manufacture


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Part 3: Sample Accounting/Cost Management Courses Course Outlines

  • Management Accounting

  • Cost Accounting

  • Advanced Management Accounting


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Introduction to Management Accounting Accounting/Cost Management Courses

·

Strategic Positioning

·

Ethics

Implementing

Product

Cost Behavior

(Planning and

Strategy

Costing

Product Life

Operational

Cycle

Control)

·

·

·

Volume

Cost Estimation

Target

·

The Value

Based

Costing

Chain

·

(Job

CVP Analysis

·

Costing)

Life

·

The

·

Cycle

Master Budget

Balanced

Costing

Scorecard

·

Activity

-

·

Decision

based

Making

Costing

·

Flexible Budget

s

·

Management

Control


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Cost Accounting Accounting/Cost Management Courses

·

Strategic Positioning

·

Ethics

Implementing

Product

Cost Behavior

Product Life

(Planning and

Strategy

Costing

Cycle

Operational

Control)

·

Job Costing

·

Target

·

The Value

·

Cost Estimation

Costing

Chain

·

ABC Costing

·

The

·

CVP Analysis

·

Life Cycle

Balanced

(ABC)

Costing

·

Process Cost

Scorecard

·

Master Budget

(ABC)

·

Joint Costs

·

Decision

Making (ABC)

·

Standard

Costing

  • Managing Constraints


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Advanced Management Accounting Accounting/Cost Management Courses

·

Strategic Positioning

·

Ethics

Implementing

Cost Behavior

Product Life

Strategy

(ABC

-

based)

Cycle

·

The Value Chain

·

Cost Es

timation

·

Target

(Regression)

Costing

·

The Balanced

Scorecard (BSC)

·

CVP Analysis

·

Life

Cycle

·

Master Budget

Costing

·

Management Control (TP)

·

·

Executive Compensation

Decision

Making (LP)

·

Business Valuation



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Evolution of Cost Accounting Systems RCA, and TDABC

ABC

(simple &

minimal)

ABC

(multidimensional)

Traditional

Costing

Resources

Resources

Resources

Consumed

by

Consumed

by

Allocated

to

Activities

Activities

Consumed

by

Consumed

by

outputs

Cost Objects

Cost Objects

channels

Cost

Objects

Users


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ABC/M Framework RCA, and TDABC

What Things

Cost

Resource

Drivers

Resource

Costs

Root

Causes of Costs

Work Activities

Performance

Measures

  • Cost Reduction

  • Process reengineering

  • Cost of quality

  • Continuous improvement

  • Waste elimination

  • Benchmarking

Activity Cost

Assignment

Activity

Drivers

Cost Objects

  • Design for manufacturing

  • Make versus Buy

Why Things

Cost

Better Decision

Making


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Resource Consumption Accounting (RCA) RCA, and TDABC

Resource consumption accounting (RCA) is an adaption of ABC that emphasizes resource consumption by greatly increasing the number of resource cost pools, which allows more direct tracing of resource costs to cost objects than an ABC system with fewer cost centers.8 RCA is particularly appropriate for large organizations with repetitive operations and high-level information systems such as those provided by SAP, Oracle, and SAS.


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Time-Driven ABC RCA, and TDABC

When a substantial amount of the cost of a company’s activities are in a highly repetitive process (much like in the RCA example above), the cost assignment can be based on the average time required for each activity.

Time-Driven Activity-Based Costing (TDABC) assigns resource costs directly to cost objects using the cost per time unit of supplying the resource, rather than first assigning costs to activities and then from activities to cost objects.


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TDABC Example RCA, and TDABC

TDABC computes the cost per minute of the resources performing the work activity. Assume 2 clerical workers paid $45,000 annually perform a certain activity that is expected to require 17 minutes. TDABC calculates the total cost as $45,000 x 2 = $90,000; TDABC then calculates the total time available for the activity as 180,000 minutes (assuming 30 hours per week with two weeks vacation: 2 workers x 50 weeks x 30 hours x 60 minutes per hour = 180,000 minutes per year).

The TDAC rate for the activity is $0.50 per minute ($90,000 / 180,000). The cost of a unit of activity is $0.50 x 17 min = $8.50; if the activity required 20 min, then the allocation would be $.50 x 20 = $10.



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Overview of Customer Profitability Analysis Analysis

  • Activity Based Costing (ABC)

  • Customer Relationship Management (CRM):

    • Customer Lifetime Value (CLV)

    • Customer Equity


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Customer Profitability Analysis: Analysis

The Whale Curve


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What Makes for a Profitable Customer? Analysis

Profitable and unprofitable customers are distinguished

by the demands they place on the organization

  • Less profitable customers

    • Small order quantities

    • Special products ordered

    • Heavy discounting

    • Unpredictable demands

    • Delivery times change

    • High technical support

    • Slow payment (imputed

    • interest)

  • More profitable customers

    • Large order sizes

    • Standard products ordered

    • Little discounting

    • Predictable demands

    • Delivery times standard

    • Low technical support

    • On-time payment (imputed interest)

These demands can be estimated

by activity costs and activity cost drivers


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Migrating Customers to Higher Profitability – A Strategic Analysis

Very

Profitable

Types of Customers

High

(Creamy)

Profitable

Product Mix

Margin

Unprofitable

Low

(Low Fat)

Very

unprofitable

Low

High

Cost-to-Serve

32


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Customer Relationship Management (CRM) Requires Strategic Cost Management Data

  • Who is more important to pursue with the scarce resources of our marketing budget?

  • Our most profitable customers? Our most valuable customers?

  • What is the difference?

  • The “customer lifetime value” (CLV) measure is intended to answer this question.


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You are a pharmaceutical supplier: Cost Management Data

which customer is more important?

Dentist A

Sales = $750,000

profits = $100,000

Age 61

Dentist B

Sales = $375,000

profits = $40,000

Age 25

Which is more profitable?

Which is more valuable?


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Customer Lifetime Value (CLV) Cost Management Data

What is it?

The projected economic value of customer relationships during the whole period of the relationship between the customer and company.

The Measure

The net present value (NPV) of all future profits from that customer; it is a projection, from when the customer is acquired or from the current date.


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Customer Equity Cost Management Data

What is it?

The economic value of ALL customer relationships.

The Measure

The sum of the CLVs for all customers.

How Used

Provides a measure of the value of the company from the perspective of customer profitability.


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Part 6: Sample Course Topic—The Management & Control of Quality (including Six-Sigma and Lean)


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Relationship between TQM & Financial Performance Quality (including Six-Sigma and Lean)


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A Strategic Model for Managing Quality Quality (including Six-Sigma and Lean)


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Lean Manufacturing Quality (including Six-Sigma and Lean)

At the heart of lean manufacturing is the Toyota Production System (TPS):

  • a long-term focus on relationships with suppliers and coordination with these suppliers;

  • an emphasis on balanced, continuous flow manufacturing with stable production levels;

  • continuous improvement in product design and manufacturing processes with the objective of eliminating waste ; and

  • flexible manufacturing systems in which different vehicles are produced on the same assembly line and employees are trained for a variety of tasks


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Accounting for Lean Quality (including Six-Sigma and Lean)

There are three reasons why the improvements in financial results typically appear later than the operating improvements from implementing lean.

  • Customers will benefit from the improved manufacturing flexibility by ordering in smaller, more diverse quantities.

  • Improvements in productivity will create excess capacity; as equipment and facilities are used more efficiently, some will become idle.

  • The decrease in inventory that results from lean means that, using full cost accounting, the fixed costs incurred in prior periods flow through the income statement when inventory is decreasing.


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Accounting for Lean Quality (including Six-Sigma and Lean)

Lean accounting uses value streams to measure the financial benefits of a firm’s progress in implementing lean manufacturing.

Each value stream is a group of related products or services.

Accounting for value streams significantly reduces the need for cost allocations (since the products are aggregated into value streams) which can help the firm to better understand the profitability of its process improvements and product groups.


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Lean Accounting – Value Streams Quality (including Six-Sigma and Lean)


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Part 7: Sample Course Topic— Operational and Management-level Performance Measurement


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Performance Measurement Management-level Performance Measurement

  • Motivation and Evaluation

    • Incentives: right decisions

      • Align performance measurement with strategy

    • Incentives: working hard

      • Compensation and bonus plans

    • Equity/fairness

      • Controllability

      • Cost allocations

  • Operational-level and Management-level


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Operational Performance Measurement Management-level Performance Measurementwith a Flexible Budget

2010

2010


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Management Performance Measurement Management-level Performance Measurement

  • Cost Centers

    • Engineered Cost (cost driver: volume based)

      • Flexible Budget

    • Discretionary Cost (cost driver?)

      • Master Budget

    • “Profit Center” – one step from outsourcing…


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Management Performance Measurement Management-level Performance Measurement

  • Profit Centers:

    • Variable costing income statements

    • Issue of transfer pricing

    • Role and importance of nonfinancial performance indicators

  • Investment Centers:

    • ROI vs. RI vs. EVA®

      • Measurement issues

    • Issue of transfer pricing

    • Role and importance of non-financial performance indicators


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Management –Level Management-level Performance Measurement

Performance Measurement: When to Use Profit or Cost Center

Customer

Plant

Warehouse



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Using Software in the CourseStrategic Cost Management Course

  • Excel:

    Goal Seek

    Solver

  • ABC:

    OROS (SAS), SAP, …

    Excel

  • Simulation:

    Crystal Ball, @Risk, Excel(Formulas/Functions)


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ABC Software: OROS Quick (from SAS) Course

  • Comprehensive: resources through objects

  • Allow a couple of classes

  • Short Tutorial, 13 pages, couple of hours

  • Blue Ridge Manufacturing Case


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Have a great Meeting and Visit Course in San Francisco!


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