Strategic Cost Management

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Strategic Cost Management
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CHAPTER

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Strategic Cost Management Basic Concepts
OBJECTIVE
1

• Strategic planning and decision making requires a
  broad set of information
• Information about customers, suppliers, different
  product designs
• Information should
• Include information about the firms environment
  and internal workings
• Must be prospective and should provide insight
  about future periods and activities

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Strategic Cost Management Basic Concepts
OBJECTIVE
1

• Strategic Decision Making choosing among
  alternative strategies with the goal of selecting
  a strategy for long term growth and survival
• Strategic Cost Management use of cost data to
  develop and identify superior strategies that
  will help produce a sustainable competitive
  advantage

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Strategic Cost Management Basic Concepts
OBJECTIVE
1

• Competitive Advantage
• creating better customer value for the same or
  lower cost than offered by competitors
• OR
• Creating equivalent value for lower cost than
  offered by competitors
• Customer Value
• The difference between customer realization (what
  a customer receives) and customer sacrifice (what
  the customer gives up)

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Strategic Cost Management Basic Concepts
OBJECTIVE
1

• A cost leadership strategy happens when the same
  or better value is provided to customers at a
  lower cost than a companys competitors.
• Example A company might redesign a product so
  that fewer parts are needed, lowering production
  costs and the costs of maintaining the product
  after purchase.

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Strategic Cost Management Basic Concepts
OBJECTIVE
1

• A differentiation strategy strives to increase
  customer value by increasing what the customer
  receives (customer realization).
• Example A retailer of computers might offer an
  on-site repair service, a feature not offered by
  other rivals in the local market.

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Strategic Cost Management Basic Concepts
OBJECTIVE
1

• A focusing strategy happens when a firm selects
  or emphasizes a market or customer segment in
  which to compete.
• Example Paging Network, Inc., a paging services
  provider, has targeted particular kinds of
  customers and is in the process of weeding out
  the non-targeted customers.

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Strategic Cost Management Basic Concepts
OBJECTIVE
1
There are two types of linkages that must be
analyzed and understood Internal and External
linkages.

• Internal linkages are relationships among
  activities that are performed within a firms
  portion of the value chain.
• External linkages describe the relationship of a
  firms value chain activities that are performed
  with its suppliers and customers. There are two
  types supplier linkages and customer linkages.

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Strategic Cost Management Basic Concepts
OBJECTIVE
1
Organizational activities are of two types
Structural and Executional.

• Structural activities are activities that
  determine the underlying economic structure of
  the organization.
• Executional activities are activities that define
  the processes and capabilities or an organization
  and thus are directly related to the ability of
  an organization to execute successfully.

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Strategic Cost Management Basic Concepts
OBJECTIVE
1
Operational activities are day to day activities
performed as a result of the structure and
processes selected by the organization. Operationa
l cost drivers are those factors that drive the
cost of operational activities.
Operational activities and drivers are the focus
of activity based costing
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Value Chain Analysis
OBJECTIVE
2

• Value Chain Analysis
• Identifying and exploiting internal and external
  linkages with the objective of strengthening a
  firms strategic position
• Activities before and after production must be
  identified and their linkages identified and
  exploited
• relationships assessed and used to reduce costs
  and increase values

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Life Cycle Cost Management
OBJECTIVE
3

• Product Life Cycle
• the time a product exists - from conception to
  abandonment
• Revenue producing life the time a product
  generates revenue for a company
• Consumable life the length of time a product
  serves the needs of a customer

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Life Cycle Cost Management
OBJECTIVE
3

• Target Costing
• Useful tool for establishing cost reduction goals
  during the design stage
• Target cost difference between the sales price
  needed to capture a predetermined market share
  and the desired per unit profit
• The sales price must reflect product
  functionality if the target cost is less than
  what is currently achievable, then the company
  must find cost reductions to move the actual cost
  toward the target cost
• Reverse engineering
• Value analysis
• Process improvement

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Just-in-Time (JIT) Manufacturing and Purchasing
OBJECTIVE
4

• JIT manufacturing is a demand-pull system
• Object is to eliminate waste by producing a
  product only when it is needed and only in the
  quantities demanded by the customers
• Demand pulls products through the manufacturing
  process
• No production takes place until a signal from a
  succeeding process indicates a need to produce
• Parts and materials arrive just in time to be
  used in production

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Just-in-Time (JIT) Manufacturing and Purchasing
OBJECTIVE
5

• Accounting for the cost accounting cycle is
  simplified using backflush costing.
• Backflush costing uses trigger points to
  determine when manufacturing costs are assigned
  to key inventory and temporary accounts
• Trigger points are simply events that prompt the
  accounting recognition of certain manufacturing
  costs
• The purchase of raw materials and the completion
  of goods
• The purchase of raw materials and the sale of
  goods
• The completion of goods
• The sale of goods

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