1-1

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 1
Cost Management
and Strategic
Decision Making
Evaluating
Opportunities and
Leading Change
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1-3

Learning Objective 1

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1-4

Characteristics of Cost Management

What
What is
is Cost
Cost Management?
Management?

••ItIt goes
goes beyond
beyond historical
historical
measurement
measurement and and reporting.
reporting.
••ItIt assesses

?
assesses the the impacts
impacts of of
current
current or or proposed
proposed decisions.
decisions.
••ItIt is
is aa philosophy,
philosophy, an an attitude,
attitude,
and
and aa set set of
of techniques
techniques to to
create
create more more customer
customer
value
value and and achieve
achieve lower
lower cost.
cost.
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1-5

Learning Objective 2

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1-6

Characteristics of
Cost-Management Analysts

Cost analysts use cost

accounting and other data
to:

Improve Improve Improve

products resource use services

Support Reduce
strategies costs
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1-7

Characteristics of
Cost-Management Analysts

Integrity

Broad knowledge
of the business

Ability to work
in cross-functional
teams

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1-8

Ethical Standards for Cost-

Management Analysts
Cost-management
Cost-management analysts
analysts must
must maintain
maintain high
high
standards
standards ofof ethical
ethical behavior
behavior because
because they
they can
can
control
control the
the information
information used
used for
for important
important
strategic
strategic management
management decisions.
decisions.

The
The IMA
IMA (Institute
(Institute of
of Management
Management Accountants)
Accountants) Statement
Statement
of
of Ethical
Ethical Professional
Professional Practice,
Practice, published
published for
for its
its
management
management accountant
accountant membership,
membership, offers
offers guidance
guidance for
for
ethical
ethical behavior
behavior applicable
applicable to
to cost-management
cost-management analysts.
analysts.

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1-9

IMA Overarching Ethical Principles

Honesty

Fairness PRINCIPLES Objectivity

Responsibility

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1-10

IMA Standards for Ethical Behavior

Follow
Follow applicable
applicable laws,
laws,
regulations
regulations and
and
standards.
standards.

Maintain
Maintain
professional
professional
Competence
expertise,
expertise, and
and
communicate
communicate any any
limitations
limitations or
or Provide
Provide decision
decision support
support
constraints.
constraints. information
information and
and
recommendations
recommendations that that are
are
accurate
accurate and
and timely.
timely.
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1-11

IMA Standards for Ethical Behavior

Do
Do not
not disclose
disclose confidential
confidential
information
information unless
unless legally
legally
obligated
obligated to
to do
do so.
so.

Do
Do not
not use
use
confidential
confidential
information
information for
for Confidentiality
personal
personal
advantage.
advantage.

Inform
Inform relevant
relevant parties
parties
about
about the
the proper
proper use
use of
of
confidential
confidential information.
information.
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1-12

IMA Standards for Ethical Behavior

Avoid
Avoid conflicts
conflicts of
of interest
interest
and
and advise
advise others
others of
of
potential
potential conflicts.
conflicts.

Refrain
Refrain from
from
conduct
conduct that
that could
could
compromise
compromise ethical
performance.
ethical Integrity
performance.

Abstain
Abstain from
from activities
activities that
that
might
might discredit
discredit the
the
profession.
profession.
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1-13

IMA Standards for Ethical Behavior

Communicate
Communicateinformation
information
fairly
fairlyand
andobjectively.
objectively.

Disclose
Disclose delays
delaysor or
deficiencies
deficiencies in
in
Credibility information
information and
and
its
itsprocessing.
processing.

Disclose
Discloseall
all information
information
that
thatshould
should influence
influenceanan
intended
intendeduser’s
user’s
understanding
understandingof ofreports
reports
and
andanalyses.
analyses.
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1-14

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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1-15

Internal Control System

(to assure that a company achieves…)

Effectiveness and Compliance with

efficiency in its laws and
operations regulations

Reliability in its
financial reporting

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1-16

Learning Objective 3

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1-17

Strategic Decision Making

Strategy

An organization’s
overall plan
or policy to achieve
its goals.
Key
questions

Where
Where dodo we
we How
How dodo we
we want
want
want
want to
to go?
go? to
to get
get there?
there?
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 Exh.
1-18 1.1

Where do We Want to Go? – Strategic

Missions • New market potential
• Be early entrant
• Achieve growth
• Capture market share Build
High
• Continuing market
• Maintain growth
• Be a major player
Hold
REWARDS

• Protect market share

• Continuing market
Medium • Maintain cash flow
• Maintain volume
Harvest • Cut costs
• Declining market
• Exit at lowest cost
• Minimize losses
Low Divest • Find a buyer quickly

Low Medium High

RISK
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1-19

How Do We Want to Get There?

Managers
Managers are are more
more successful
successful
in
in attaining
attaining objectives
objectives ifif they:
they:

Understand
Understand sources
sources Use
Use effective
effective
and
and threats
threats to
to decision
decision making
making
competitive
competitive advantages.
advantages. techniques.
techniques.

Competitive
Competitive advantages
advantages result
result from
from achieving
achieving aa value
value chain
chain
that
that enables
enables an
an organization
organization to to provide
provide more
more value
value
(perhaps
(perhaps at
at aa lower
lower cost)
cost) than
than its
its competitors.
competitors.

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 Exh.
1-20 1.2

The Value Chain

Where
Wheredodowe
wewant
wanttotogo?
go?
How
Howdo
dowewewant
wantto
toget
getthere?
there?

Physical
Physical Human
Human
resources
resources resources
resources
Support
Supportservices
services
••Accounting
Accounting
••Human
Humanresources
resources
••Legal
Legalservices
services
••Information
Informationsystems
systems
••Telecommunications
Telecommunications

Value
Valueofof
Distri- Customer products
products
R&D Design Supply Production Marketing
bution service and
and
services
services
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1-21

Outsourcing and the Value Chain

Focus
Focusresources
resources on
on Outsource
Outsourcethose
thosevalue
value
parts
partsofofthe
thevalue
valuechain
chain chain
chainprocesses
processesthat
that
that
that are
aremost
mostimportant
important can
canbebedone
done more
more
to
tocompany
companygoals.
goals. efficiently
efficientlyby
byothers.
others.

What
Whatis ismost
most likely
likely
to
to be
be outsourced?
outsourced? Potential problem
Information
Information services,
services, Loss of control
legal,
legal, logistics,
logistics, human
human and
resources,
resources, payroll,
payroll, internal expertise.
accounting,
accounting, tax.
tax.
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 Exh.
1-22 1.3

Competitive Advantages, Sources

and Threats
Co Exis
Product mp t i n w rs Business
eti g Ne etito
Strategy tor
s omp Unit Strategy
Source of C
Low Cost Capability Build
Production
Create New
Knowledge Hold

Product
Differentiation Harvest
Imitate
Others
Divest
Market Focus
rs

Su
Suppliers
me

bs
sto

titu
Cu

est
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1-23

Formulation of Strategic Action Plans

An 8-step process at Pursuit Data

1.
1. Identify
Identifyneed
needforforchange.
change.
2.
2. Create
Createteam
teamto tolead
leadandandmanage
managechange.
change.
3.
3. Create
Createvision
visionofofthe
thechange
changeand
andstrategy
strategyfor
forachieving
achievingvision.
vision.
4.
4. Communicate
Communicatevisionvisionandandstrategy
strategyfor
forchange
changeandandhave
havechange
changeteam
team
act
actas
asaarole
rolemodel.
model.
5.
5. Encourage
Encourageinnovation
innovationand andremove
removeobstacles
obstaclesto tochange.
change.
6.
6. Ensure
Ensurethat
thatshort-term
short-termachievements
achievementsarearefrequent
frequentand
andobvious.
obvious.
7.
7. Use
Usesuccesses
successesto tocreate
createopportunities
opportunitiesfor
forimproving
improvingentire
entire
organization.
organization.
8.
8. Reinforce
Reinforceculture
cultureof ofmore
moreimprovement,
improvement,better
betterleadership,
leadership,more
more
effective
effectivemanagement.
management.

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1-24

Learning Objective 4

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1-25

Evaluating Plans and Outcomes

Operational Strategic
performance performance
analysis analysis

Has short-run Has long-run

performance met performance met
expectations? expectations?

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1-26

Evaluating Plans and Outcomes

Quantitative information Variance
and qualitative information Analysis
about a proposed plan

Differences between
Cost the expected and
Benefit actual costs of
Analysi business operations
s

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1-27

End of Chapter 1

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