Strategic Cost
Management
11
11-1
Strategic Cost Management:
Basic Concepts
1
• Strategic planning and decision making requires a
broad set of information
• Information about customers, suppliers, different
product designs
• Information should
• Include information about the firm’s environment
and internal workings
• Must be prospective and should provide insight
about future periods and activities
11-2
Strategic Cost Management:
Basic Concepts
1
Strategic Decision Making: choosing among alternative
strategies with the goal of selecting a strategy for
long term growth and survival
Strategic Cost Management: use of cost data to
develop and identify superior strategies that will help
produce a sustainable competitive advantage
11-3
Strategic Cost
Management: Basic
Concepts
1
Competitive Advantage
• creating better customer value for the same or lower
cost than offered by competitors
OR
• Creating equivalent value for lower cost than offered
by competitors
Customer Value
• The difference between customer realization (what a
customer receives) and customer sacrifice (what the
customer gives up)
11-4
Strategic Cost
Management: Basic
Concepts
1
A cost leadership strategy happens when the same or
better value is provided to customers at a lower cost
than a company’s competitors.
Example: A company might redesign a product so that
fewer parts are needed, lowering production costs
and the costs of maintaining the product after
purchase.
11-5
Strategic Cost
Management: Basic
Concepts
1
A differentiation strategy strives to increase customer
value by increasing what the customer receives
(customer realization).
Example: A retailer of computers might offer an on-site
repair service, a feature not offered by other rivals in
the local market.
11-6
Strategic Cost
Management: Basic
Concepts
1
A focusing strategy happens when a firm selects or
emphasizes a market or customer segment in which
to compete.
Example: Paging Network, Inc., a paging services
provider, has targeted particular kinds of customers
and is in the process of weeding out the non-targeted
customers.
11-7
Strategic Cost Management:
Basic Concepts
1
There are two types of linkages that must be
analyzed and understood:
Internal and External linkages.
•Internal linkages are relationships among activities
that are performed within a firm’s portion of the value
chain.
•External linkages describe the relationship of a firm’s
value chain activities that are performed with its
suppliers and customers. There are two types:
supplier linkages and customer linkages.
11-8
Strategic Cost Management:
Basic Concepts
1
Organizational activities are of two types:
Structural and Executional.
•Structural activities are activities that determine the
underlying economic structure of the organization.
•Executional activities are activities that define the
processes and capabilities or an organization and thus are
directly related to the ability of an organization to execute
successfully.
11-9
Strategic Cost Management:
Basic Concepts
1
Operational activities are day to day activities performed as a result
of the structure and processes selected by the organization.
Operational cost drivers are those factors that drive the cost of
operational activities.
Operational activities and drivers are the
focus of activity based costing
11-10
Value Chain Analysis
2
Value Chain Analysis
•
Identifying and exploiting internal and external
linkages with the objective of strengthening a firm’s
strategic position
•
Activities before and after production must be
identified and their linkages identified and exploited
•
relationships assessed and used to reduce costs
and increase values
11-11
Life Cycle Cost Management
3
Product Life Cycle
the time a product exists - from conception to
abandonment
•
•
Revenue producing life: the time a product
generates revenue for a company
Consumable life: the length of time a product
serves the needs of a customer
11-12
Life Cycle Cost Management
3
Target Costing
• Useful tool for establishing cost reduction goals during
the design stage
• Target cost: difference between the sales price
needed to capture a predetermined market share and
the desired per unit profit
• The sales price must reflect product functionality – if
the target cost is less than what is currently achievable,
then the company must find cost reductions to move
the actual cost toward the target cost
• Reverse engineering
• Value analysis
• Process improvement
11-13
Just-in-Time (JIT) Manufacturing
and Purchasing
4
• JIT manufacturing is a demand-pull system
• Object is to eliminate waste by producing a product
only when it is needed and only in the quantities
demanded by the customers
• Demand pulls products through the manufacturing
process
• No production takes place until a signal from a
succeeding process indicates a need to produce
• Parts and materials arrive just in time to be used in
production
11-14
Just-in-Time (JIT) Manufacturing and
Purchasing
•
•
5
Accounting for the cost accounting cycle is simplified using
backflush costing.
Backflush costing uses trigger points to determine when
manufacturing costs are assigned to key inventory and
temporary accounts
•
Trigger points are simply events that prompt the
accounting recognition of certain manufacturing costs
•
The purchase of raw materials and the completion of
goods
•
The purchase of raw materials and the sale of goods
•
The completion of goods
•
The sale of goods
11-15