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  • 1. Strategic Cost Management Professor William F. O’Brien, MBA, CPA Fall 2004
  • 2. Session 1A--Introduction & Cost Accounting Review <ul><li>Cost Management </li></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><li>Non-Financial </li></ul></ul>
  • 3. Financial Management Evolution DATA INFORMATION ANALYSIS IMPLEMENTATION Today’s Corporate Focus is on Results!
  • 4. Company F/S Users Economic Decisions Financial Impact (useful & relevant) Financial Accounting Model
  • 5. Managerial Accounting Model Plan Implement Monitor Adjust Accounting Information Communication Environment
  • 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 is Cost Management Info Used? </li></ul>
  • 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. Contemporary Mgt. Techniques <ul><li>Benchmarking </li></ul><ul><li>Total Quality Management (TQM) </li></ul><ul><li>Continuous Improvement </li></ul><ul><li>Activity-Based Costing (ABC) and Mgt. (ABM) </li></ul><ul><li>Reengineering </li></ul><ul><li>Theory of Constraints (TOC) </li></ul><ul><li>Mass Customization </li></ul><ul><li>Target Costing </li></ul><ul><li>Life-cycle Costing </li></ul><ul><li>The Balanced Scorecard </li></ul>
  • 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. 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. Cost Actg. Review <ul><li>Cost…an economic sacrifice </li></ul>
  • 12. 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>
  • 13. 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>
  • 14. 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
  • 15. 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>
  • 16. 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>
  • 17. 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>
  • 18. 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>
  • 19. 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>
  • 20. Multiple Product Line Format
  • 21. Behavioral Issues <ul><li>Risk aversion bias </li></ul><ul><li>Uncertainty </li></ul>
  • 22. 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>
  • 23. Scarlet Letter of Accounting <ul><li>Lacks Cost Mgt. </li></ul><ul><li>Error Prone </li></ul><ul><li>Distraction </li></ul>
  • 24. Session 1B--Strategic Cost Management & the Organizational Role of Management Accountants
  • 25. 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>
  • 26. Ansari: SMA <ul><li>Strategic Triangle (QCT) </li></ul><ul><ul><li>Competition based on quality, cost & Time </li></ul></ul><ul><li>Mgt. Acctg. 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>
  • 27. 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>
  • 28. 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>
  • 29. Accounting Business Skills “The What” <ul><li>Business Perspective </li></ul><ul><li>Organizational Focus </li></ul><ul><li>Bias for Action </li></ul><ul><li>Communication Excellence </li></ul><ul><li>People Proficiency </li></ul>
  • 30. Financial Management Guidelines “The How” <ul><li>C c: communication versus control </li></ul><ul><li>KTT: know the territory </li></ul><ul><li>MBWA: manage by wandering around </li></ul><ul><li>R ƒ R 3: respect is a function of... </li></ul><ul><ul><li>responsiveness </li></ul></ul><ul><ul><li>reliability </li></ul></ul><ul><ul><li>relevance </li></ul></ul>

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