CHAPTER 1

COST MANAGEMENT AND STRATEGY

Cost management information is developed and used to implement the organization’s
strategy. It consists of financial information about costs and revenues and nonfinancial
information about customer retention, productivity, quality, and other key success factors for the
organization. Cost management is the development and use of cost management information.
MANAGEMENT ACCOUNTING AND THE ROLE OF COST MANAGEMENT

Definition of Management Accounting by Institute of Management Accountants (IMA):

“Management accounting is a profession that involves partnering in management decision
making, devising planning and performance management systems, and providing expertise in
financial reporting and control to assist management in the formulation and implementation of an
organization’s strategy.”
The Four Functions of Management
1. Strategic Management
The development and implementation of a sustainable competitive position.
2. Planning and Decision Making
Involve budgeting and profit planning, cash flow management, and other decisions
related to operations.
3. Management and Operational Control
a. Operational Control
Takes place when mid-level managers monitor the activities of operating-level
managers and employees.
b. Management Control
The evaluation of mid-level managers by upper-level managers.
4. Preparation of Financial Statements
Requires management to comply with the financial reporting requirements of regulatory
agencies.
Strategic Management and the Strategic Emphasis in Cost Management
 Strategic thinking : Anticipating changes products, services, and operating processes
 Strategic Emphasis : Creative and Integrative thinking.
Types of Organizations
Cost management information is useful in all organizations:
1. Business Firms
a. Merchandising Firms
: Purchase goods for resale.
Examples: The large retailers such as Wal-Mart, Target, and Amazon.com.
b. Manufacturing Firms
: Use raw materials, labor, and manufacturing facilities and equipment to produce
products.
Examples: Ford, General Electric, and Cisco Systems.
c. Service Firms
: Provide a service to customers that offers convenience, freedom, safety, or comfort.
Examples: Common services include transportation, health care, financial services,
personal services, and legal services.
2. Governmental Units and Not-For-Profit Organizations
: The firms in service industries.
Examples: The services provided are often called public goods.

THE CONTEMPORARY BUSINESS ENVIRONTMENT

Many changes in the business environment in recent years have caused significant modifications
in cost management practices. The primary changes are:
1. The Global Business Environment
2. Lean Manufacturing
3. Use of Information Technology, the Internet, and Enterprise Resource Management
4. Focus on the Customer
5. Management Organization
6. Social, Political, and Cultural Considerations

THE STRATEGIC FOCUS OF COST MANAGEMENT

Robert Kaplan’s classification of the stages of the development of cost management systems
describes this shift in focus:
1. Cost management systems are basic transaction reporting systems.
 2. As they develop into the second stage, cost management systems focus on external
financial reporting. The objective is reliable financial reports; accordingly, the usefulness
for cost management is limited.
3. Cost management systems track key operating data and develop more accurate and
relevant cost information for decision making; cost management information is
developed.
4. Strategically relevant cost management information is an integral part of the system.

CONTEMPORARY MANAGEMENT TECHNIQUES: THE MANAGEMENT

ACCOUNTANT’S RESPONSE TO THE CONTEMPORARY BUSINESS ENVIRONMENT

Management accountants, guided by a strategic focus, have responded to the six changes in the
contemporary business environment with 13 methods that are useful in implementing strategy in
these dynamic times.
The six methods focus directly on strategy implementation, that is:
1. The Balanced Scorecard (BSC) and Strategy Map
2. The Value Chain
3. Activity-Based Costing and Management
a. Activity analysis
b. Activity-based costing (ABC)
c. Activity-based management (ABM)
4. Business Intelligence
5. Target Costing
6. Life-Cycle Costing
The seven methods help to achieve strategy implementation, that is:
1. Benchmarking
2. Business Process Improvement
3. Total Quality Management
4. Lean Accounting
5. The Theory of Constraints (TOC)
6. Enterprise Sustainability
7. Enterprise Risk Management

HOW A FIRM SUCCEEDS: THE COMPETITIVE STRATEGY

Strategy is a plan for using resources to achieve sustainable goals within a competitive
environment. A firm succeeds by implementing a strategy, that is, a plan for using resources to
achieve sustainable goals within a competitive environment.
DEVELOPING A COMPETITIVE STRATEGY

In developing a sustainable competitive position, each firm purposefully or as a result of market

forces arrives at one of the two competitive strategies:
 a. Cost Leadership
b. Differentiation
c. Other Strategic Issues
The Five Steps for Strategic Decision Making:
1. Determine the strategic issues surrounding the problem.
2. Identify the alternative actions.
3. Obtain information and conduct analyses of the alternatives.
4. Based on strategy and analysis, choose and implement the desired alternative.
5. Provide an ongoing evaluation of the effectiveness of implementation in step 4.

THE PROFESSIONAL ENVIRONTMENT OF COST MANAGEMENT

Professional Organizations
The professional environment of the management accountant is influenced by two types of
organizations: one that sets guidelines and regulations regarding management accounting
practices and one that promotes the professionalism and competence of management
accountants.
Professional Certifications
The role of professional certification programs is to provide a distinct measure of experience,
training, and performance capability for the management accountant. Certification is one way in
which the management accountant shows professional achievement and stature. Two types of
certification are relevant for management accountants, that is:
a. Certified Management Accountant (CMA)
b. Certified Public Accountant (CPA)
Professional Ethics
Ethics is an important aspect of the management accountant’s work and profession. Professional
ethics can be summed up as the commitment of the management accountant to provide a useful
service for management. This commitment means that the management accountant has the
competence, integrity, confidentiality, and credibility to serve management effectively.