CHAPTER 1
OVERVIEW OF COST MANAGEMENT AND STRATEGY
INTRODUCTION (cb sss c)
Cost Management
important, critical and dynamic because of growing pressures of global competition, trade
wars among countries, technological innovation and changes in business processes
Business managers
must think and act competitively; they need STRATEGY
Strategy
set of policies, procedures and approaches to business that produce long-term success
Strategic Management
involves development of sustainable competitive position
Strategic Cost Management
involves development of cost management information to facilitate the principal
management function which is strategic management
Cost Management Information

critical factor in effective management of firm

information that manager needs to effectively manage the firm, profit-oriented as well as
not-for-profit organization

include both financial info about cost and revenues as well as relevant nonfinancial
information about productivity, quality and other key success factors for firm
( cs fp )
Cost Management

practice of accounting in which accountant develops and uses cost management
information

for competitive success, it is not enough to emphasize only on financial information

this could lead manager to stress cost reduction (a financial measure) while ignoring or
even lowering quality standards (a nonfinancial measure)

critical mistake could lead to lost of customers and market share in the long run

importance should be given to nonfinancial and long-term measures of operating
performace such as product and manufacturing advances, product quality and customer
loyalty
………………………
Strategic thinking
anticipating changes
Flexibility
make fast changes as a result of demand of new management concept of e-commerce,
speed to market, and flexible manufacturing
Product life cycle
time from introduction of new product to its removal from the market is expected to become
shorter and shorter
speed to market – faster
USERS OF COST MANAGEMENT INFORMATION
Cost Management information
useful in all organizations: business firms, governmental units, and non-for profit organizations
Business firms
categorized by industry and has 3 main categories (merchandising, manufacturing and service)
Merchandising – purchase goods for resale
Wholesaler – merchandiser who sells to merchandiser
Retailers – seeling directly to consumers
Governmental and not-for-profit organization

provide services for which no direct relationship exists between amount paid and the
services provided

resources are called public goods to indicate that no typical market exist for them

public goods are impractical of limiting consumption to a single customer (clean water and
police and fire protection are provided for all residents)
USES OR FUNCTIONS OF COST MANAGEMENT INFORMATION
SPMR
1. Strategic Management

involves development of a sustainable competitive position in which the firm’s competitive
advantage spells continued success.

strategy – set of goals and specific action plans that is achieved, provide the desired
competitive advantage

involves identifying and implementing goals and action plans

management – must make sound strategic decisions regarding choice of products,
manufacturing methods, marketing techniques and channels and other long term issues
………..

strategic emphasis requires an integrative approach which combines skills from all
business function, namely, marketing, production, finance and accounting. Controllership
is necessary in a dynamic and competitive environment.
Strategic cost management

new focus of cost management

development of cost management information to facilitate principal management function,
strategic management
2. Planning and Decision-making
Cost management information
needed to support recurring decision such as replacing and maintaining equipment,
managing cash flows, budgeting raw materials purchases, scheduling production, pricing,
and managing distribution of products to customers, and so forth
Planning and decision - making
involves budgeting and profit planning, cash flow management and other decision related
to the firm’s operation such as deciding whether to lease or buy a facility, whether to
replace or just repair as equipment, when to change a marketing plan or when to begin
new product development
3. Management and Operational Control
Cost management information
needed to provide a fair and effective basis for identifying inefficient operations and to reward and
motivate the most effective managers
Operational control
takes place when mid-level manages (product managers and employers (production
supervisions, department heads)
Management control
evaluation of mid-level manager by upper-level manager (controller or the Chief Financial Officer
CFO)
4. Reportorial and Compliance to Legal Requirements
Reportorial and compliance responsibilities
require management to comply with financial reporting requirments to regulatory agencies such
as Securities and Exchange Commission (SEC) Bureau of Internal Revenue (BIR) and other
relevant government authorities and agencies.
Financial statement preparation roles
received a renewed new focus and interest as accounting scandals have shown how crucial and
importance accurate financial information is for investors
Financial statement information
serves other three management functions as this information is often an important part of planning
and decision making, control and strategic management
MANAGEMENT ACCOUNTANT’S ROLE IN STRATEGIC COST MANAGEMENT
Cost Management

practice of accounting in which the accountant develop and use cost management
information

performed by management accountant
Management accountant

accounting professionals who develop and analyze cost management information and
other accounting information
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Management Accounting

involves application of appropriate techniques and concepts to economic data so as to
assist management in establishing plans for reasonable economic objectives and in the
making of rational decisions with a view toward achieving these objectives and in the
making of rational decisions with a view toward achieving these objectives

process of identification, measurement, accumulation, analysis, preparation, interpretation
and communication of financial information, which is used by management to plan,
evaluate and control activities within org

comprise the preparation of financial reports for non-management groups such as
shareholders, creditors, regulatory agencies and tax authorities
Management accountants

concerned with providing information to managers that is inside an org who direct and
control the operation

make strategic, tactical and operating decision and helping to coordinate the efforts of the
entire org
Management accounting
concerned primarily with providing information to internal managers who are charged with
planning and controlling operations of firm and making variety of management decisions
Management accountants do the ff: ( SIP )
1. Scorekeeping or data accumulation

enable both internal and external parties to evaluate organizational performance and
position
2. Interpreting and Reporting of information

help manager to focus on operating problems, opportunities as well as inefficiencies

commonly associated with current planning and control and analysis and investigation of
the of recurring routine internal accounting to signal situations in which management
action maybe required
3. Problem-solving or quantification of the relative merits of possible courses of action

as well as recommendations as to best procedure

commonly associated with non-recurring decisions
3 Important Guidelines helps management accountants provide the most value when
scorekeeping, problem-solving and attention directing (interpreting and reporting)
(ERU)
1. employ a cost-benefit approach
2. recognize behavioral and technical consideration
3. use appropriate cost concepts for different purpose
Cost-Benefit Approach – useful for making resource-allocation decisions
Administrative Functions ( PCD )
1. Planning
setting of goals for the firm , evaluating the various ways to meet goals and picking out
what appears to be the best way to meet the goals;
2. Controlling
evaluation of whether actual performance conforms with planned goals
3. Decision making
determination of predictive information (relevant cost) for making important business
decisions
Planning

key activity for all companies

identifying alternatives and selecting a course of action and specifying how action will be
implemented to further org’s objectives

plans of management are often expressed in budgets

cash budgets, capital budgets, and projected statements of financial position are
examples of contributions which accounting can make in resource planning while breakeven analysis, projected income statement are exampes of useful tools in profit planning.

Control
achieved by evaluating performance of managers and operations for which they are
responsible
Managers

evaluated to determine how their performance should be rewarded or
punished, which in turn motivates them to perform high level

rewards can be given through bonus compensation and promotion
opportunities
Accounting control reports

cost variance analysis, financial statement analysis, gross profit variance analysis

used to inform managers when activities which are part of their resposibility are
deviating from plan
Performance reports

the reports evaluate the performance of managers and operations they
control
Management by Exception

followed my managers

they investigate departures from plan that appear to be exceptional; they
do not imvestigate minor departures
Operations

can be negative even when evaluation is positive
STEPS IN PLANNING AND CONTROL
Decision Making


decision are made to reward or punish managers, change operations or revise
plans
how well decisions are made to determine future profitability and survival
Management accountant

develop cost management information for the Chief Financial Officer, other managers and
employee teams to use in managing the firm and make it more competitive and
successful.
RELATIONSHIP BETWEEN COST ACCOUNTING AND COST MANAGEMENT
Cost Accounting


systematic set of procedures for recording and reporting measurements of the cost
manufacturing goods and performing services in the aggregate and in detail
includes method of recognizing, classifying, allocating, aggregating and reporting such
costs and comparing them with standard cost
Cost management needs the output of cost accounting.

its purpose is to provide managers with information which aids decision
Managers

use cost management information to choose strategy, to communicate it and to determine
how best to implement it

they use it to coordinate their decision about designing, producing and marketing a product
or service
……………………………………………………………………………………………………………….
STRATEGIC DECISION MAKING AND THE COST MANAGEMENT
ACCOUNTANT
( SEC PLE )
Basic Cost Management Perspectives
1. Strategic Management Perspective
2. Enterprise Risk Management Perspective
3. Corporate Social Responsibilty Perspective
4. Process Management Perspective
5. Leadership Perspective
6. Ethical Perspective
A. Strategic Management Perspective


enterprise generates profit by attracting customers willing to pay for the goods and
services if offers
key to a company’s success is creating value for the customers while differentiating itself
from its competitors
Strategy
“game plan” that enables company to attract customers by dstinguishing itself from
competitors
Customers
focal point of company’s strategy
3 Categories of Customer Value Premises ( COP )
1. Customer Intimacy Strategy
“You should choose us because we can customize our products and services to
meet your individual needs better than our competitors. “
2. Operational Excellence
“You should choose us because we can customize our products and services to
meet your individual needs better than our competitors”.
3. Product Leadership
“”You should choose us because we offer higher quality products than our
competitors.”
B. Enterprise Risk Management
Perspective
C.
Corporate Social Responsibilty Perspective
Corporate Social Responsibilty (CSR)

concept where business org consider needs of all stakeholders when making decisons

responsible not only for creating strategies that produce financial results that satisfy
shareholders but also to serve other stakeholders such as customers, suppliers,
communities and environmental and human rights advocate – whose interest are tied to
company’s performance
Examples of Corporate Social Responsibilities
1. Provide its customers with:
a. Safe, high quality products that are fairly priced
b. Easy to use information systmens for shopping and tracking orders
c. Competent, courteous and rapid delivery of products and services
d. Easy to use information systems for shopping and tracking orders
2. Provide suppliers with;
a. Hassle-free acceptance of timely and complete deliveries
b. Fair contract terms and prompt payments
c. Reasonable time to prepare orders
d. Cooperative rather than unilateral actions
3. Provide stockholders with:
a. Competent management
b. Full disclosure of enterprise risks
c. Easy access to complete and accurate fiancial informations
d. Honest answers to knowledgeable questions
4. Provide its employees with:
a. Fair compensation
b. Safe and humane working concitions
c. Non-discriminatory treatment and the right to orgnaize and file gievances
d. Opportunities fir training, promotion and personal development
5. Provide the communities with:
a. Payment of fair taxes
b. Resources that support charities, schools and civic activities
c. Honest information aboutplans such as plant closings
d. Reasonable access to media sources
6. Provide environmental and human rights advocate with:
a. Recycling and resources conversation data
b. Full disclosure of suppliers located in developing countries
c. Greenhouse gas emission data
D. Process Management Perspective

companies organize themselves by functional departments

these departments have chain of command that specifies superior and subordinate
relationships.
Business process
series of steps that are followed In orer to carry out some tasks
Value Chain
describe how an org’s functional department interact with one another to form business
processes
Lean Thinking or Lean Production
management approach that organizes resources such as people and
machines arounf flow of business processes and only produce units in
response to customer orders
E. Leadership Perspective

leaders must unite behaviors of employee who have diverse needs, beliefs and goals to
workplace
1. Internal motivation

comes from within one’s self

perceived by employees as credible and respectful of their value to company can
increase extent to which employees are instrinsically motivated to pursue strategic
goals
Attributes to have:
a. Technical competence
spanning the value chain
b. Personal integrity
in terms of work ethic and honesty
c. Strong communication skills
including oral presentation and writing skills
d. Strong mentoring skills
help others realize their potential
e. Strong listening skills
learn from his co-workers and be responsive to their needs
f. Personal humanity
in terms of giving recognition to all employees who contribute to org’s success
2. External Incentives

bonus compensation ae given to motivate employees
3. Cognitive Bias


leaders should be aware that are all people (including themselves) should
possess cognitive biasses or distorted thought processes
such as promoting false assertion that can adversely affect planning,
controlling and decision making
How to reduce negative impact of cognitive biases:
1. Acknowledge own susceptability to cognitive bias
2. Acknoledge presence of cognitive bias in others and introduce techniques to
minimize their adverse consequences
F. Ethics Perspective

Ethical behaviour

lubricant that keep the economy to run smoothly

Business must be conducted within ethical framework that builds and
sustain trust

otherwise, it would operate musc less efficiently
CHAPTER 2