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Ses. 1

  1. 1. Strategic Cost Management Professor William F. O’Brien, MBA, CPA Fall 2005
  2. 2. Session 1--Introduction <ul><li>Strategic Cost Management </li></ul><ul><ul><li>Quantitative </li></ul></ul><ul><ul><li>Strategic </li></ul></ul><ul><ul><li>Tactical </li></ul></ul>This is the key point of today’s class…if not the entire course!!!
  3. 3. Strategic Cost Management <ul><li>Strategic cost management is the development of cost management information to facilitate the principal management function--strategic management. </li></ul>
  4. 4. Financial Management Evolution DATA INFORMATION ANALYSIS IMPLEMENTATION Today’s Corporate Focus is on Results!
  5. 5. Managerial Accounting Model Plan Implement Monitor Adjust Accounting Information Communication Environment
  6. 6. Four Management Functions …another Perspective <ul><li>Strategic Management </li></ul><ul><li>Planning and Decision Making </li></ul><ul><li>Management and Operational Control </li></ul><ul><li>F/S Preparation </li></ul><ul><li>How does SMA (Strategic Management Actg) impact each of these areas? </li></ul>
  7. 7. Factors Influencing Today’s Business Environment <ul><li>Global competition </li></ul><ul><li>Manufacturing and IT advances </li></ul><ul><li>Customer focus </li></ul><ul><li>Revised organizational structures </li></ul><ul><li>Social, political and cultural changes </li></ul>
  8. 8. Contemporary Mgt. Techniques <ul><li>Business partnering </li></ul><ul><li>Activity based costing and activity based management </li></ul><ul><li>Value chain analysis </li></ul><ul><li>Target costing </li></ul><ul><li>Lean production management accounting </li></ul><ul><li>EVA ® </li></ul><ul><li>Theory of constraints </li></ul><ul><li>Cost of quality analysis </li></ul><ul><li>Environmental costing </li></ul>
  9. 9. Ethics <ul><li>Lack of ethics--everyone loses </li></ul><ul><li>Recent examples </li></ul><ul><ul><li>Enron </li></ul></ul><ul><ul><li>WorldCom </li></ul></ul><ul><ul><li>Adelphia </li></ul></ul><ul><ul><li>Arthur Andersen </li></ul></ul>
  10. 10. Ethics and You <ul><li>You will face an ethical challenge </li></ul><ul><li>It could impact </li></ul><ul><ul><li>Your job </li></ul></ul><ul><ul><li>Your family </li></ul></ul><ul><ul><li>Your relationships </li></ul></ul><ul><ul><li>Your financial stability </li></ul></ul><ul><ul><li>Your physical well-being </li></ul></ul><ul><li>You have only ONE reputation... </li></ul>
  11. 11. Ansari: SMA <ul><li>Strategic Triangle (QCT) </li></ul><ul><ul><li>Competition based on quality, cost & Time </li></ul></ul><ul><li>Attribute Triangle (TBC) </li></ul><ul><ul><li>Impacts technical, behavioral & cultural aspects </li></ul></ul><ul><li>Mgt. Acctg. Links Strategy with Action </li></ul><ul><ul><li>It is not an end unto itself </li></ul></ul><ul><ul><li>It is an integrating tool </li></ul></ul>
  12. 12. SMA, cont. <ul><li>The two triangles are dependent upon each other </li></ul><ul><li>This process is a framework to ensure that our management accounting tools possess the attributes necessary to achieve our strategic goals </li></ul>
  13. 13. SMA, cont. <ul><li>QCT Triangle </li></ul><ul><ul><li>Self evident </li></ul></ul><ul><li>TBC Triangle </li></ul><ul><ul><li>Provides Technical insight </li></ul></ul><ul><ul><li>Encourages Behavioral changes </li></ul></ul><ul><ul><li>Supports Cultural beliefs </li></ul></ul>
  14. 14. Cost Actg. Review <ul><li>Cost…an economic sacrifice </li></ul><ul><li>Review these concepts on your own, we will discuss them on Sep. 28th </li></ul><ul><ul><li>Common cost terminology </li></ul></ul><ul><ul><li>Manufacturing cost flows </li></ul></ul><ul><ul><li>Direct costing and contribution margin analysis </li></ul></ul>
  15. 15. Critical Cost Terms <ul><li>Fixed vs. Variable </li></ul><ul><li>Product vs. Period </li></ul><ul><li>Manufacturing vs. Non-manufacturing </li></ul><ul><li>Direct vs. Indirect </li></ul><ul><li>Controllable vs. Uncontrollable </li></ul><ul><li>Opportunity and Sunk Costs </li></ul><ul><li>Differential Cost and Revenue </li></ul><ul><li>Cost Drivers </li></ul>
  16. 16. Cost Drivers and Final Cost Objectives <ul><li>Cost Drivers </li></ul><ul><ul><li>Anything that causes a cost to occur </li></ul></ul><ul><li>Final Cost Objective (FCO) </li></ul><ul><li>Generally used in conjunction with Activity Based Costing </li></ul>
  17. 17. Manufacturing Cost Flows BOH I O EOH RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS B O/H R/M B O/H WIP B O/H F/G R/M PURCHASES TRANSFERS TO WIP E O/H R/M R/M TRANSFERS DIR. LABOR MFG OVERHEAD MANUFACTURING COSTS COST OF GOODS MANUFACTURED (COGM) E O/H WIP COGM COST OF GOODS SOLD (COGS) E O/H F/G P&L
  18. 18. Direct Costing <ul><li>Also known as “Contribution Margin Format” </li></ul><ul><li>Direct costing  direct costs </li></ul><ul><li>P&L format: </li></ul><ul><ul><li>Sales xxx </li></ul></ul><ul><ul><li>Variable costs - xxx </li></ul></ul><ul><ul><li>Contribution margin xxx </li></ul></ul><ul><ul><li>Fixed costs - xxx </li></ul></ul><ul><ul><li>Net income xxx </li></ul></ul>
  19. 19. CVP Analysis <ul><li>Uses </li></ul><ul><ul><li>Revenue planning </li></ul></ul><ul><ul><li>Cost classification </li></ul></ul><ul><ul><li>Commission analysis </li></ul></ul><ul><ul><li>Volume and mix determination </li></ul></ul><ul><ul><li>ABC modifications </li></ul></ul>
  20. 20. Break-even Analysis <ul><li>Sales - variable costs = fixed costs </li></ul><ul><li>Contribution Margin Approach </li></ul><ul><ul><li>FC/contribution margin ratio ($) </li></ul></ul><ul><ul><li>FC/unit contribution margin (units) </li></ul></ul><ul><li>Equation Approach </li></ul><ul><ul><li>(Unit SP)x - (unit VC)x = FC (units) </li></ul></ul><ul><ul><li>X - (VC%)x = FC ($) </li></ul></ul><ul><li>CM approach is the easier to apply </li></ul>
  21. 21. Margin of Safety <ul><li>Actual sales - B/E sales </li></ul><ul><li>Margin of safety percentage </li></ul><ul><ul><li>Margin of safety/actual sales </li></ul></ul>
  22. 22. Operating Leverage <ul><li>CM/NI </li></ul><ul><li>Reflects the percentage increase in sales compared to the percentage increase in net income </li></ul><ul><li>High OL reflects high opportunity and high risk </li></ul>
  23. 23. Multiple Product Line Format
  24. 24. CVP Limitations <ul><li>Relevant range assumption </li></ul><ul><li>Difficulty in cost determination </li></ul><ul><li>Allocations </li></ul><ul><ul><li>The “Scarlet Letter” of accounting </li></ul></ul>
  25. 25. Scarlet Letter of Accounting <ul><li>Lacks Cost Mgt. </li></ul><ul><li>Error Prone </li></ul><ul><li>Distraction </li></ul>
  26. 26. Barbary Pirates Case <ul><li>Historical and analytical relevance </li></ul><ul><li>Note the “spin” </li></ul><ul><li>Where are the strategic and tactical considerations? </li></ul>

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