1
Cost Management
and Strategic
Decision Making
Evaluating
Opportunities and
Leading Change
McGraw-Hill/Irwin
Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objective 1
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Characteristics of Cost Management
What is Cost Management?
•It goes beyond historical
measurement and reporting.
•It assesses the impacts of
current or proposed decisions.
•It is a philosophy, an attitude,
and a set of techniques to
create more customer
value and achieve lower cost.
?
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Learning Objective 2
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Characteristics of
Cost-Management Analysts
Cost analysts use cost
accounting and other data to:
Improve
products
Improve
resource use
Support
strategies
Improve
services
Reduce
costs
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Characteristics of
Cost-Management Analysts
Integrity
Broad knowledge
of the business
Ability to work
in cross-functional
teams
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Ethical Standards for CostManagement Analysts
Cost-management analysts must maintain high
standards of ethical behavior because they can
control the information used for important
strategic management decisions.
The IMA (Institute of Management Accountants) Statement of
Ethical Professional Practice, published for its management
accountant membership, offers guidance for ethical
behavior applicable to cost-management analysts.
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IMA Overarching Ethical Principles
Honesty
Fairness
PRINCIPLES
Responsibility
Objectivity
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IMA Standards for Ethical Behavior
Follow applicable laws,
regulations and
standards.
Maintain
professional
expertise, and
communicate any
limitations or
constraints.
Competence
Provide decision support
information and
recommendations that are
accurate and timely.
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IMA Standards for Ethical Behavior
Do not disclose confidential
information unless legally
obligated to do so.
Do not use
confidential
information for
personal
advantage.
Confidentiality
Inform relevant parties
about the proper use of
confidential information.
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IMA Standards for Ethical Behavior
Avoid conflicts of interest
and advise others of
potential conflicts.
Refrain from
conduct that could
compromise ethical
performance.
Integrity
Abstain from activities that
might discredit the
profession.
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IMA Standards for Ethical Behavior
Communicate information
fairly and objectively.
Credibility
Disclose all information
that should influence an
intended user’s
understanding of reports
and analyses.
Disclose delays or
deficiencies in
information and
its processing.
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Sarbanes-Oxley Act (SOX)
(Section 404)


The CEO and CFO
are now personally
responsible for their
company’s financial
statements.
They must sign the
statements and take
responsibility for
their accuracy.

The CEO and CFO
are responsible for
their company’s
system of internal
controls over its
financial reporting.
 Accurate cost
measurement has
gained in
importance.
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Internal Control System
(to assure that a company achieves…)
Effectiveness and
efficiency in its
operations
Compliance with
laws and
regulations
Reliability in its
financial reporting
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Learning Objective 3
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Strategic Decision Making
Strategy
An organization’s overall plan
or policy to achieve its goals.
Key
questions
Where do we
want to go?
How do we want
to get there?
Exh.
1.1
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Where do We Want to Go? – Strategic
Missions
• New market potential
• Be early entrant
• Achieve growth
• Capture market share
REWARDS
High
Hold
Medium
Harvest
Low
Divest
Low
Build
• Continuing market
• Maintain growth
• Be a major player
• Protect market share
• Continuing market
• Maintain cash flow
• Maintain volume
• Cut costs
• Declining market
• Exit at lowest cost
• Minimize losses
• Find a buyer quickly
Medium
RISK
High
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How Do We Want to Get There?
Managers are more successful
in attaining objectives if they:
Understand sources
and threats to
competitive advantages.
Use effective
decision making
techniques.
Competitive advantages result from achieving a value chain
that enables an organization to provide more value
(perhaps at a lower cost) than its competitors.
Exh.
1.2
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The Value Chain
Where do we want to go?
How do we want to get there?
Physical
resources
Human
resources
Support services
•Accounting
•Human resources
•Legal services
•Information systems
•Telecommunications
R&
D
Desig
n
Supply
Production Marketing
Primary processes
Distribution
Customer
service
Value of
products
and
services
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Outsourcing and the Value Chain
Focus resources on
parts of the value chain
that are most important
to company goals.
What is most likely
to be outsourced?
Information services,
legal, logistics, human
resources, payroll,
accounting, tax.
Outsource those value
chain processes that
can be done more
efficiently by others.
Potential problem
Loss of control
and
internal expertise.
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Competitive Advantages, Sources
and Threats
Product
Strategy
Low Cost
Production
Source of
Capability
Create New
Knowledge
Product
Differentiation
Imitate
Others
Business
Unit Strategy
Build
Hold
Harvest
Divest
Suppliers
Market Focus
Exh.
1.3
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Formulation of Strategic Action Plans
An 8-step process at Pursuit Data
1.
2.
3.
4.
5.
6.
7.
8.
Identify need for change.
Create team to lead and manage change.
Create vision of the change and strategy for achieving vision.
Communicate vision and strategy for change and have change team
act as a role model.
Encourage innovation and remove obstacles to change.
Ensure that short-term achievements are frequent and obvious.
Use successes to create opportunities for improving entire
organization.
Reinforce culture of more improvement, better leadership, more
effective management.
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Learning Objective 4
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Evaluating Plans and Outcomes
Operational
Strategic
performance
analysis
performance
analysis
Has short-run
performance met
expectations?
Has long-run
performance met
expectations?
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Evaluating Plans and Outcomes
Quantitative information
and qualitative information
about a proposed plan
Cost
Benefit
Analysi
s
Variance
Analysis
Differences between
the expected and
actual costs of
business operations
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End of Chapter 1