Strategic Cost Management

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Strategic Cost Management

• Professor William F. OBrien, MBA, CPA

Fall 2006
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Session 1--Introduction

• Strategic Cost Management
• Quantitative
• Strategic
• Tactical

This is the key point of todays classif not the
entire course!!!
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Strategic Cost Management

• Strategic cost management is the development of
  cost management information to facilitate the
  principal management function--strategic
  management.

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Financial Management Evolution
DATA
Todays Corporate Focus is on Results!
INFORMATION
ANALYSIS
IMPLEMENTATION
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Managerial Accounting Model
Communication Environment
Plan
Adjust
Accounting Information
Implement
Monitor
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Four Management Functionsanother Perspective

• Strategic Management
• Planning and Decision Making
• Management and Operational Control
• F/S Preparation
• How does SMA (Strategic Management Actg) impact
  each of these areas?

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Factors Influencing Todays Business Environment

• Global competition
• Manufacturing and IT advances
• Customer focus
• Revised organizational structures
• Social, political and cultural changes

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Ethics

• Lack of ethics--everyone loses
• Recent examples
• Enron
• WorldCom
• Adelphia
• Arthur Andersen

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Ethics and You

• You will face an ethical challenge
• It could impact
• Your job
• Your family
• Your relationships
• Your financial stability
• Your physical well-being
• You have only ONE reputation...

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Ansari SMA

• Strategic Triangle (QCT)
• Competitive advantage based on quality, cost
  time
• Attribute Triangle (TBC)
• Impacts technical, behavioral cultural aspects
• Mgt. Actg. Links Strategy with Action
• It is not an end unto itself
• It is an integrating tool

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SMA, cont.

• The two triangles are dependent upon each other
• This process is a framework to ensure that our
  management accounting tools possess the
  attributes necessary to achieve our strategic
  goals

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SMA, cont.

• QCT Triangle
• Self evident
• TBC Triangle
• Provides Technical insight
• Encourages Behavioral changes
• Supports Cultural beliefs

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Barbary Pirates Case

• Historical and analytical relevance
• Note the spin
• Where are the strategic and tactical
  considerations?

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Session 1SupplementCost Actg. Review

• Costan economic sacrifice
• Review these concepts on your own, we will
  discuss them, as necessary, on Jan. 11th
• Common cost terminology
• Manufacturing cost flows
• Direct costing and contribution margin analysis

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Cost Actg. Review

• Costan economic sacrifice
• Review these concepts on your own, we will
  discuss them, as necessary, on Jan. 11th
• Common cost terminology
• Manufacturing cost flows
• Direct costing and contribution margin analysis

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Critical Cost Terms

• Fixed vs. Variable
• Product vs. Period
• Manufacturing vs. Non-manufacturing
• Direct vs. Indirect
• Controllable vs. Uncontrollable
• Opportunity and Sunk Costs
• Differential Cost and Revenue
• Cost Drivers

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Cost Drivers and Final Cost Objectives

• Cost Drivers
• Anything that causes a cost to occur
• Final Cost Objective (FCO)
• Generally used in conjunction with Activity Based
  Costing

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Manufacturing Cost Flows
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Direct Costing

• Also known as Contribution Margin Format
• Direct costing ? direct costs
• PL format
• Sales xxx
• Variable costs -xxx
• Contribution margin xxx
• Fixed costs -xxx
• Net income xxx

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CVP Analysis

• Uses
• Revenue planning
• Cost classification
• Commission analysis
• Volume and mix determination
• ABC modifications

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Break-even Analysis

• Sales - variable costs fixed costs
• Contribution Margin Approach
• FC/contribution margin ratio ()
• FC/unit contribution margin (units)
• Equation Approach
• (Unit SP)x - (unit VC)x FC (units)
• X - (VC)x FC ()
• CM approach is the easier to apply

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Margin of Safety

• Actual sales - B/E sales
• Margin of safety percentage
• Margin of safety/actual sales

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Operating Leverage

• CM/NI
• Reflects the percentage increase in sales
  compared to the percentage increase in net income
• High OL reflects high opportunity and high risk

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Multiple Product Line Format
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CVP Limitations

• Relevant range assumption
• Difficulty in cost determination
• Allocations
• The Scarlet Letter of accounting

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Scarlet Letter of Accounting

• Lacks Cost Mgt.
• Error Prone
• Distraction