Teaching Strategic Cost
Management
Ed Blocher
University of North Carolina, Chapel Hill
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Overview
1. The Strategic Approach: an Introduction
2. Tools for Integrating Strategy: Value Chain Analysis, The
Strategy Map, and the Balanced Scorecard (BSC)
3. Sample Course Outlines
4. Sample Course Topic: Activity-Based Costing (ABC), TimeDrive ABC (TDABC), and ABM
5. Sample Course Topic: Customer Profitability Analysis
6. Sample Course Topic: The Management and Control of
Quality and Accounting for Lean
7. Sample Course Topic: Performance Measurement
8. Using Software in the Cost Management Course
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Part 1: the Strategic
Approach to Teaching
Cost/Management
Accounting Topics—An
Introduction
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Teaching Strategic Cost
Management
What?
Why?
How?
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Three 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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Strategic Cost Management
Prior Perspective
•
•
•
The Strategic
Perspective
Focus on Financial
Reporting
# View cost
management as a
tool
for
developing
Common emphasis on
and
implementing
standardization and
business
strategy
standard costs
# The accountant as a
The accountant as
business partner
functional expert and
# Focus on cost
financial scorekeeper
management
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Consequences of Lack 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
…
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Definition of Management
Accounting: IMA
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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Introducing Strategy
Strategic
Positioning
Strengths
Weaknesses
Opportunities
Threats
Value
Chain
Strategy
Map
Teaching Strategic Cost Management: Ed Blocher
Balanced
Scorecard
(BSC)
AAA Annual Meeting, August 2010
Michael Porter: Strategic
Positioning
 Cost Leadership—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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Aspects of the
Two Competitive Strategies
Aspect
Basis of competitive
advantage
Cost Leadership
Lowest cost in the
industry
Often, a limited
Product line
selection
Lowest possible cost
with high quality and
Production emphasis
essential product
features
Differentiation
Unique product or
service
Wide variety,
differentiating
features
Innovation in
differentiating
products
Marketing emphasis
Premium price and
innovative,
differentiating
features
Low price
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Part 2: Tools for Integrating
Strategy into Cost
Accounting/Cost Management
Courses
-- The Value Chain
-- Strategy Maps & the Balanced
Scorecard (BSC)
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Value Chain Analysis:
A Detailed Look at Strategy…
The Value Chain is a linked set of valueadding activities used by an organization to
deliver its value proposition to its customers. It
consists of:
o “Upstream” Activities
o Manufacturing/Operations
o “Downstream” Activities
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Value-Chain Analysis
 Identify value-chain activities
 Develop competitive advantage by:
 Identifying opportunities for adding value for
the customer
 Identifying opportunities for eliminating nonvalue added activities and reducing cost
 Understand linkages among suppliers,
the entity, and customers
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Strategy Maps &
the 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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
vision &
mission
Exceed shareholder
expectations
Financial
Customer
Diversify income
stream
Diversify
customer base
Increase sales
volume
Improve profit
margins
Increase sales to
existing customers
Attract new
customers
Internal
Process
Target profitable
market segments
Develop new
products
Optimize internal
processes
Attract new
customers
Learning
& Growth
Develop
employee skills
Teaching Strategic Cost Management: Ed Blocher
Integrate
systems
AAA Annual Meeting, August 2010
The Balanced Scorecard (BSC):
Feedback to Strategy
Strategic
Positioning
Value
Chain
Strategy
Map
Teaching Strategic Cost Management: Ed Blocher
Balanced
Scorecard
(BSC)
AAA Annual Meeting, August 2010
Educational Resource: Tartan
Manufacturing Case
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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Part 3: Sample
Course Outlines
• Management Accounting
• Cost Accounting
• Advanced Management
Accounting
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Introduction to Management Accounting
 Strategic Positioning
 Ethics
Implementing
Strategy
Product
Costing
Cost Behavior
(Planning and
Operational
Control)
 The Value
Chain
 Volume
Based
(Job
Costing)
 Cost Estimation
 The
Balanced
Scorecard
 CVP Analysis
 Master Budget
 Activity based
Costing
 Management
Control
Teaching Strategic Cost Management: Ed Blocher
Product Life
Cycle
 Target
Costing
 Life
Cycle
Costing
 Decision
Making
 Flexible Budgets
AAA Annual Meeting, August 2010
Cost Accounting
 Strategic Positioning
 Ethics
Implementing
Strategy
 The Value
Chain
 The
Balanced
Scorecard
Product
Costing

Cost Behavior
(Planning and
Operational
Control)
Job Costing
Product Life
Cycle
 Cost Estimation
 Target
Costing
 CVP Analysis
(ABC)
 Life Cycle
Costing
 ABC Costing
 Process Cost
 Joint Costs
 Standard
Costing
Teaching Strategic Cost Management: Ed Blocher
 Master Budget
(ABC)
 Decision
Making (ABC)
 Managing
Constraints
AAA Annual Meeting, August 2010
Advanced Management Accounting
 Strategic Positioning
 Ethics
Implementing
Strategy
Cost Behavior
(ABC-based)
 The Value Chain
 Cost Estimation
(Regression)
 The Balanced
Scorecard (BSC)
 Management Control (TP)
 Executive Compensation
 Business Valuation
Teaching Strategic Cost Management: Ed Blocher
Product Life
Cycle
 Target
Costing
 CVP Analysis
 Master Budget
 Life
Cycle
Costing
 Decision
Making (LP)
AAA Annual Meeting, August 2010
Part 4: Sample Course Topic—
Activity-Based Costing (ABC),
RCA, and TDABC
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Evolution of Cost Accounting Systems
Traditional
Costing
Resources
Allocated
to
ABC
(simple &
minimal)
Resources
Consumed
by
Resources
Consumed
by
Activities
Activities
Consumed
by
Cost Objects
ABC
(multidimensional)
Consumed
by
outputs
Cost Objects
channels
Cost
Objects
Teaching Strategic Cost Management: Ed Blocher
Users
AAA Annual Meeting, August 2010
ABC/M Framework
Root
Causes
of Costs
What Things
Cost
Resource
Costs
Resource
Drivers
Work Activities
Performance
Measures
Activity Cost
Assignment
Cost Objects
Why Things
Cost
Activity
Drivers
•Cost Reduction
•Process
reengineering
•Cost of quality
•Continuous
improvement
•Waste elimination
•Benchmarking
•Design for manufacturing
Better Decision
•Make versus Buy
Teaching Strategic Cost Management: Ed Blocher
Making
AAA Annual Meeting, August 2010
Resource Consumption
Accounting (RCA)
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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Time-Driven ABC
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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
TDABC Example
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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Part 5: Sample Course
Topic—Customer Profitability
Analysis
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Overview of Customer Profitability
Analysis
• Activity Based Costing (ABC)
• Customer Relationship Management
(CRM):
• Customer Lifetime Value (CLV)
• Customer Equity
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Customer Profitability Analysis:
The Whale Curve
T h e W h ale C u rve: 80% fro m th e top 20 % (or m ore!)
C u m u la tiv e P ro fits
300 %
100 %
50 %
20%
M ost P ro fita b le
Teaching Strategic Cost Management: Ed Blocher
100 %
L ea st P ro fita b le
AAA Annual Meeting, August 2010
What Makes for a Profitable Customer?
Profitable and unprofitable customers are distinguished
by the demands they place on the organization
 Less profitable customers  More profitable customers







Small order quantities
Special products ordered
Heavy discounting
Unpredictable demands
Delivery times change
High technical support
Slow payment (imputed
interest)







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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Migrating Customers to Higher Profitability –
A Strategic Analysis
Very
Types of Customers
Profitable
High
(Creamy)
Product Mix
Margin
Low
(Low Fat)
Low
High
Cost-to-Serve
Teaching
Strategic Cost Management: Ed Blocher
32
Very
unprofitable
AAA Annual Meeting, August 2010
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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
You are a pharmaceutical supplier:
which customer is more important?
Dentist A
Dentist B
Sales = $750,000
Sales = $375,000
profits = $100,000
profits = $40,000
Age 61
Age 25
Which is more profitable?
Which is more valuable?
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Customer Lifetime Value (CLV)
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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Customer Equity
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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Part 6: Sample Course
Topic—The Management &
Control of Quality (including
Six-Sigma and Lean)
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Relationship between TQM & Financial Performance
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
A Strategic Model for Managing Quality
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Lean Manufacturing
•
•
•
•
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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Accounting for 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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Accounting for 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.
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Lean Accounting – Value
Streams
Rimmer Company
Value Stream Income Statement
Digital Cameras
Sales
Operating Costs
Materials
Labor
Equipment related costs
Occupancy costs
Total Operating Costs
Less Other Value Stream Costs
Manufacturing
Selling and Administration
$
$
25,200
168,000
92,400
11,200
585,000
$
$
-
120,000
10,000
130,000
240,000
10,000
158,200
(10,000)
$
148,200
Total
540,000
$
1,125,000
154,000
$
450,800
12,800
88,000
48,400
4,800
296,800
Value Stream Profit before inventory change
Less: Cost of decrease in inventory
Value Stream Profit
Video Cameras
$
250,000
380,000
136,000
(20,000)
294,200
(30,000)
116,000
$
Less Nontraceable Costs
Manufacturing
Selling and Administration
155,000
54,000
Total Nontraceable Fixed Costs
Operating Income
Teaching Strategic Cost Management: Ed Blocher
264,200
209,000
$
55,200
AAA Annual Meeting, August 2010
Part 7: Sample Course
Topic— Operational and
Management-level
Performance Measurement
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Operational Performance Measurement
with a Flexible Budget
S c h m id t M a c h in e ry C o m p a n y
A n a lys is o f O p e ra tio n s
F o r th e p e rio d e n d e d O c to b e r 3 1 , 2 0 X 6
2010
2010
S a le s
F le x ib le
D a ta Ite m f o r
A n a lys is
U n its S o ld
A c tu a l
V o lu m e
M a s te r
B udget
F le x ib le
(A c tivity)
(S ta tic )
V a r ia n c e
B udget
V a r ia n c e
B udget
780
0
780
220
U
1000
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F
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C o n trib u tio n M a rg in
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F ixe d E xp e n s e s
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S a le s
V a ria b le E xp e n s e s
Teaching Strategic Cost Management: Ed Blocher
$ 1 5 0 ,0 0 0
U
$ 2 0 0 ,0 0 0
AAA Annual Meeting, August 2010
Management Performance
Measurement
Cost Centers
• Engineered Cost (cost driver: volume based)
•Flexible Budget
• Discretionary Cost (cost driver?)
•Master Budget
• “Profit Center” – one step from outsourcing…
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Management 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
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Management –Level
Performance Measurement:
When to Use Profit or Cost Center
Customer
Plant
Warehouse
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Part 8: Using Software in
the Strategic Cost
Management Course
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Using Software in the
Strategic Cost Management
Course
1. Excel:
Goal Seek
Solver
2. ABC:
OROS (SAS), SAP, …
Excel
3. Simulation:
Crystal Ball, @Risk, Excel(Formulas/Functions)
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
ABC Software: OROS Quick
(from SAS)
• Comprehensive: resources through
objects
• Allow a couple of classes
• Short Tutorial, 13 pages, couple of
hours
• Blue Ridge Manufacturing Case
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010
Have a great Meeting and Visit
in San Francisco!
Teaching Strategic Cost Management: Ed Blocher
AAA Annual Meeting, August 2010