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The scope of strategic cost management

Robin Cooper; Regine Slagmulder
Management Accounting; Feb 1998; 79, 8; ABI/INFORM Global
pg. 16

trategic Cost
Management
Robin Cooper and Regine Slagmulder, Editors

THE 5COPE OF 5TRATEGIC
(OST MANAGEMENT
lhe objective of strategic cost management is to reduce costs while simultaneously strengthening the strategic position of the firm (see last month's
column). Given this objective, strategic
cost management cannot, like traditional management accounting, limit
itself to either the four walls of the factory or the boundaries of the firm.
The dominance of financial over
managerial accounting for the majority
of the 20th Century led to an atrophy
of cost management practices. l ln particular, traditional cost systems are
limited to the walls of the factory and
are used to determine the cost of products only. Other potential cost objects
such as suppliers and customers are
treated either as general overhead and
arbitrarily allocated to products or as
period costs and assigned directly to
the income statement (Figure 1). The
problem with this approach
is that these nonmanufacturing costs cannot be managed
Figure
effectively because the underlying reasons for their occurrence are masked by the
way they are treated by the
firm's cost system.

ers and customers as well as products.ê
Armed with the insights provided by
this extension of cost management, a
firm can begin to manage these costs
strategically.
To enable these costs to be managed
strategically, they must be allocated
causally (Figure 2). One of the primary
techniques for meaningfully assigning
nonmanufacturing costs is activitybased cost management. The advantage of this technique over traditional
costing methods lies in its ability to assign costs in a causal manner to a
broad range of cost objects including
products, suppliers, and customers.f

Managing procurement costs. In traditional cost systems, procurement costs
are allocated to products arbitrarily.
Without pro per assignment of procurement costs, purchasing managers typically select suppliers based on the purchase price of their products. This
pattern leads to a number of suboptimal buying behaviors that weaken a

1. Traditional Management

COST MANAGEMENT
BEYOND THE
FACTORY WALLS
The implications of extending cost management beyond
the factory walls means that
costs are assigned to suppli16

MANAGEMENT ACCOUNTING

Product Costs

Accounting

firm's strategic position, for example,
purchasing components from suppliers
whose quality, reliability, and delivery
performance are below acceptable
levels.
These purchasing decisions hinder
the firm's ability to satisfy its customers and earn adequate profits. How
can a product be high quality and delivered on time if its components are
low quality and delivered late? The answer, of course, is that they cannot! Yet
any attempt to improve the purchasing
process appears to increase purchasing
costs as the so-called low-cost suppliers
no longer are deemed satisfactory. If
purchasing managers are rewarded
solely on the purchase prices they negotiate with their suppliers, it will be
almost impossible to change their approach to supplier selection.
Strategic cost management resolves
the conflict in two ways-first, by taking a broader view of component costs
and, second, by assigning procurement
costs to products causally. lnstead of
just looking at the purchase
price, strategic cost management includes the costs assoView
ciated with low quality, reliability, and delivery
performance. Purchasing
managers now are expected
to evaluate suppliers on total
cost, not just purchase price.
The resulting buying behavior leads to a strengthening
of the firm's strategic position because suppliers are
chosen on the basis of their
ability to help the firm produce high-quality products
timed to customer demand.

FEBRUARY 1998

Reproduced with permission of the copyright owner. Further reproduction prohibited without permission.

Either customers even at the risk oflosing low-profNetherlands) and visiting professor at the University ofGhent (Belgium). they can product costs are more accuSupplier Costs and should identify Product Costs Customer Costs rate. they can is reflected in its selling price.. Drucker Graduate Management this rule of thumb spreads the SG&A customer profitability. "SG&A costs Consequently. we need to make customer costs and hence profitability 35% profit margin (on product cost) to is generated." Essentially Robin Cooper is professor of management. Second. and costs evenly over products based on tatives can strengthen the strategic pohonorary visiting professor of strategic cost their sales dollars. This extension enables a firm to take itability and provides better insights Strategic cost management provides advantage of cost management synerinto the design of new products. satisfaction is high. Harvard Business School representatives are forced to select cusFor profitable customers there are Press. ln costs to the customers that cause them actively seek to find ways to reduce traditional cost systems. 1987. For excosts across the value chain while sipenses are treated as period costs and ample. make an adequate return. Now products Procurement Manufacturing SG&A whose profits are high are assigned their specific Expensas Expensas Expenses and where there is a procurement costs. If the specialty compotreating them as period costs creates increase prices to reflect the cost of the nents add value to the product and it few problems. Strategic Cost Management View vice levels. more accurate view of product profvirtually no demands on them. the way they are rewarded. SG&A exusing activity-based principles. sales represenCenter. assignment of customers' costs. or they itability ones. First.. Third. Boston. The outcome often management at Manchester Business School. lt achieves these objecUnder this treatment. Harvard Business School Press. strategic weakening of the firm becustomers. Third. therefore. There are two major all appear to cost the sarne percentage classes of actions they can take. they can identify clusters of 1997. they can new products. Without strategic cost representatives are unable to manage However. ment accounting. But ifthey are signifiresources consumed. Cost and Effect. sufficiently. Further reproduction prohibited without permission. For example. 18 MANAGEMENT ACCOUNTING FEBRUARY 1998 Reproduced with permission of the copyright owner. essentially they considerable post-sales support will be tives by coordinating its cost disappear from view. customers who order in small. reported tors. unpredictable quantities and require gic position. Boston. assigned causally to prodthey can lower selling ucts using activity-based prices for customers principles. Without proper first relates to profitable customers 1 See H. appear to cost nothing to serve. . are preferable. then the market is telling customer profitability can be deterThe overall aim is to increase the ratio the designers that simpler products mined accurately. sition of the firm by attracting and reRegine Slagmulder is professor ofmanageis a totally distorted view of the cost of taining high-profitability customers. supplier costs are Figure 2. Mass. Kaplan and Robin Cooper. en. this means reBut if the selling price is not increased cause there is no way that individual fusing to serve unprofitable customers. This coorthumb about how profitable products ties and require little or no support. Therefore. • are 20%. ing them to competiConsequently. Using this enhanced knowledge of Peter F. Second. Claremont Graduate University. but often they are seen to be more costly than customers management programs with those of taken into account through rules of who order in high. they can try to deliver better make the trade-off between profitability). then the cant.ln the next step of the through higher serprocess. Kaplan. Product designers can (if they are evaluated on product be taken. dination is the focus of our next should be. a more accurate view of column. predictable quantiits suppliers and customers. For example. this means either on the volume sold 31naddition to supplier and customer costs. Relevance Lost: The Rise and Fal/ of Management Accounting. there are high-profitability customers and set corporate costs that can be treated in the sarne (if the representa tives are evaluated on out to increase their satisfaction manner. Thus assigning the firm's SG&A resources can look process is to extend the process beyond supplier costs to products generates a just as attractive as one that places the firm's organizational boundaries. extending beyond the walls management to help them make this customer mix effectively. the firm can Managing customer service costs. Mass. First. there products that contain only standard products and reported product costs are also three types of action that can components. the services that these customers refunctionality and costas they design If SG&A costs are insígnificant. the treatment can lead to a reduce selling efforts to unprofitable use of such components is justified. be seen to be more expensive than ship between the selling price of the For unprofitable customers. multaneously strengthening its strateare expensed to the income statement. Tilberg University (the serving customers. ln particular. products new ways to serve that contain large numbers customers so that of unique components that while costs to serve rely upon specialty suppliers now will revenue generated) or on the relationare low. A customer of the factory is not sufficient. quire more efficiently. ln the limit. the sales of profitable to unprofitable customers. The next trade-off. the designers are forced to that places considerable demand on step in the strategic cost management rely on their intuition. sales and the second to unprofitable ones. The of their sales revenue. a more balanced view of customer profgies between it and its suppliers and itability by assigning customer-related customers. Typically. not the perceived risk of losaverage for all products. Thomas Johnson and Robert S. tomers almost exclusively based upon three types of actions that can be tak2See Robert S.