Strategic

Cost
Management
April 25, 2022
REFERENCE Books
Textbook

STUDENT RESOURCES
https://www.swlearning.com/accounting/hansen/cost_4e/student_resources.html
 Date Day Time Module Topics

1. April 25 Mon 9-11am 1 • Introduction to Cost

Zoom Meetings •
Management
Basic Cost Management
Concepts
2. April 27 Wed 9-11am 2 • Cost Behavior
• Activity-Based Costing
3. May 2 Mon 9-11am 3 • Job Order Costing
• Process Costing
4. May 4 Wed 9-11am 4 • Allocating Cost
• Budgeting
5. May 9 Mon 9-11am 5 • Standard Costing

6. May 11 Wed 9-11am 6 • Transfer Pricing

• Strategic Cost Management
• Balanced Score Card

7. May 16 Mon 9-11am 7 • Cost-Volume Profit Analysis

8. May 18 Wed 9-11am 8 • Relevant Costing

4
 Date Day Coverage

1. Quiz 1 Apr 30 Sat Modules 1-2

2. Midterm May 7 Sat Modules 1-4

3. Quiz 2 May 14 Sat Modules 5-6

4. Finals May 21 Sat All Modules

 Grading System
45% - Exams
45% - Assign./Quizzes/CP
10% - Attendance/Decorum
100%
 Introduction to
Cost Management
 Financial Accounting Versus
Cost Management
Financial accounting is devoted to providing
information for external users; these users
include investors, government agencies, and
banks.
Cost management identifies, collects,
measures, classifies, and reports information
that is useful to managers in costing
(determining what something costs), planning,
controlling, and decision making.
 Financial Accounting Versus
Cost Management
 Cost accounting attempts to satisfy costing
objectives for both financial and management
accounting.
 Management accounting is concerned
specifically with how cost information and
other financial and nonfinancial information
should be used for planning, controlling, and
decision making.
 RELATIONSHIP

COST
FINANCIAL ACCOUNTING MANAGEMENT
ACCOUNTING ACOUNTING
Current Factors Affecting Cost
Management
Global Competition
• The new competitive
environment has increased the
demand not only for more cost
information but also for more
accurate information.
• Vastly imported transportation
and communication has led to a
global market for many
manufacturing and service firms.
 Current Factors Affecting Cost
Management
Growth of the Service Industry
 As the traditional industries has
declined in importance, the
service sector of the economy
has increased in importance.
 Deregulation of many services
has increased competition in the
service industry.
 Current Factors Affecting Cost
Management
Advances in Information Technology
 Computers are used to monitor and
control operations, which allows for a
considerable amount of useful
information to be collected and
provided to management
instantaneously.
 The emergence of electronic
commerce which allows buyers and
sellers to come together electronically.
 Current Factors Affecting Cost
Management
Advances in Management Environment
The theory of constraints is a method used to continuously
improve manufacturing activities and nonmanufacturing
activities.
Just-in-time manufacturing is a demand-pull system that
strives to produce a product only when it is needed and
only in the quantities demanded by customers.
Computer-integrated manufacturing is the automation of the
manufacturing environment.
Current Factors Affecting Cost
Management
Customer Orientation
 Firms are concentrating on the
delivery of value to the customer
with the objective of establishing a
competitive advantage.
 Companies must compete not only
in technological and manufacturing
terms but also in terms of the speed
of delivery and response.
 Current Factors Affecting Cost
Management
New Product Development
 Management recognizes that a high
proportion of production costs are
committed during the development
and design stage of a new product.
 The requirement to control cost
encourages the use of target costing
and activity-based management.
 Current Factors Affecting Cost
Management
Total Quality Management
 Continual improvement and elimination of waste are
the two foundation principles that govern a state of
manufacturing excellence.
 A philosophy of total quality management, in which
managers strive to create an environment that will
enable organizations to manufacture perfect products,
has replaced the acceptable quality attitudes of the
past.
 Current Factors Affecting Cost
Management
Time as a Competitive Element
 Time is the crucial
element in all phases of
the value chain.
 Decreasing non-value-
added time appears to go
hand-in-hand with
increasing quality.
 Current Factors Affecting Cost
Management
Efficiency

While quality and time are

important, improving these
dimensions without
corresponding improvements
in financial performance may
be futile, if not fatal.

.
 Line and Staff Positions
Line positions are positions
that have direct responsibility
for the basic objectives of an
organization.
Staff positions are positions
that are supportive in nature
and have only indirect
responsibility for an
organization’s basic objectives.
 Partial Organization Chart,
Manufacturing Company
President
Line Function Staff Function

Production Vice- Financial Vice-

President President

Production
Supervisor Controller Treasurer

Machining Assembly Interna

Cost Financial Systems Tax
Foreman Foreman l Audit
 Role of Controller and Treasurer
Controller
1. Financial reports
2. SEC reporting
3. Tax planning and reporting
4. Performance reporting
5. Internal auditing
6. Budgeting
7. Accounting systems and
internal controls
 Role of Controller and Treasurer
Treasurer
1. Collection of cash
2. Monitoring of cash
payments
3. Monitors cash availability
4. Short-term investments
5. Short and long-term
borrowing
6. Issuing of capital stock
 The Management Process

Planning is the detailed

formulation of future
actions to achieve a
particular end.
Planning requires
setting objectives and
identifying methods to
achieve those
objectives.
 The Management Process

Controlling is the
managerial activity of
monitoring a plan’s
implementation and
taking corrective
action as needed.

Feedback
Control is is
usually
information
achieved
that
with
canthe
be use
usedoftofeedback.
evaluate
or correct the steps being taken to implement a plan.
The Management Process

Continuous
improvement is
required in a dynamic
environment if a firm is
to remain competitive
or to establish a
competitive advantage.
 The Management Process

Decision making is
the process of
choosing among
competing
alternatives.
 Standards of Ethical Conduct
for Management Accountants
Competence: Management accountants have a
responsibility to--
1. Maintain an appropriate level of professional competence
by ongoing development of their knowledge and skills.
2. Perform their professional duties in accordance with
relevant laws, regulations, and technical standards.
3. Prepare complete and clear reports and recommendations
after appropriate analysis of relevant and reliable
information.
 Standards of Ethical Conduct
for Management Accountants
Confidentiality: Management accountants have a responsibility
to--
1. Refrain from disclosing confidential information acquired in the
course of their work except when authorized, unless legally
obligated to do so.
2. Inform subordinates as appropriate regarding the confidentiality
of information acquired in the course of their work and monitor
their activities to ensure the maintenance of that confidentiality.
3. Refrain from using or appearing to use confidential information
acquired in the course of their work for unethical or illegal
advantage either personally or through a third party.
 Standards of Ethical Conduct
for Management Accountants
Integrity: Management accountants have a
responsibility to--
 Avoid actual or apparent conflicts of interest and advise all
appropriate parties of any potential conflict.
 Refrain from engaging in any activity that would prejudice
their ability to carry out their duties ethically.
 Refuse any gift, favor, or hospitality that would influence
their actions.
 Refrain from either actively or passively subverting the
attainment of the organization’s legitimate and ethical
objectives. Continued
 Standards of Ethical Conduct
for Management Accountants
Integrity: Management accountants have a
responsibility to--
 Recognize and communicate professional limitations or
other constraints that would preclude responsible
judgment or successful performance of an activity.
 Communicate unfavorable as well as favorable
information and professional judgments or opinions.
 Refrain from engaging in or supporting any activity that
would discredit the profession.
 Standards of Ethical Conduct
for Management Accountants
Objectivity: Management accountants have a
responsibility to--
1) Communicate information fairly and objectively.
2) Disclose fully all relevant information that could
reasonably be expected to influence an intended user’s
understanding of the reports, comments, and
recommendations presented.
 Professional Certifications
 CMA: One of the main purposes of the CMA was to
establish management accounting as a recognized,
professional discipline, separate from the profession
of public accounting.
 CPA: The responsibility of a CPA is to provide
assurance concerning the reliability of financial
statements.
 CIA: The focus of the CIA is to recognize
competency in internal auditing rather than external
auditing as with the CPA.
 The CMA

Four areas emphasized on the exam:

1) Economics, finance, and management
2) Financial accounting and reporting
3) Management report, analysis, and behavioral
issues
4) Decision analysis and information systems
 Basic Cost
Management
Concepts
 Basic Cost Concepts
A cost object is any item, such as products, customers,
departments, projects, activities, and so on, for which
costs are measured and assigned.
Example: A bicycle is a cost object when you are
determining the cost to produce a bicycle.
An activity is a basic unit of work performed within an
organization.
Example: Setting up equipment, moving materials,
maintaining equipment, designing products, etc.
 Basic Cost Concepts
Traceability is the ability to assign a cost to a
cost object in an economically feasible way by
means of a causal relationship.
Direct costs are those costs that can be easily
and accurately traced to a cost object.
Example: The salary of a supervisor of a department, where
the department is defined as the cost object.
 Basic Cost Concepts
Indirect costs are those costs that cannot be traced
easily and accurately to a cost object.
Example: The cost of heating and cooling a plant that
manufactures five products.
 Manufacturing Costs

Direct materials are those materials that are directly traceable to the
goods or services being produced.
Example: The cost of wood in furniture.
Direct labor is the labor that is directly traceable to the goods or
services being produced.
Example: Wages of assembly-line workers.
Overhead are all other manufacturing costs.
Example: Plant depreciation, utilities, property taxes, indirect materials,
indirect labor, etc.
 Nonproduction Costs
Marketing (selling) costs are the costs necessary to
market, distribute, and service a product or service.
Example: Advertising, storage costs, and freight out.
Administrative costs are the costs associated with
research, development, and general administration of
the organization that cannot reasonably be assigned to
either marketing or production.
Example: Legal fees, salary of the chief executive officer.
Nonproduction Costs
For external financial
reporting, marketing and
administrative costs are not
inventoried. They are
referred to as period costs.
 Production and Non Production Costs

Production or Non Production or

Manufacturing Cost Operating Cost

Direct
Materials R and D Expense

Prime Cost
Direct Labor Marketing (Selling)
Expense
Conversion
Cost Administrative
Overhead
Expense
 Manufacturing Organization
Income Statement
For the Year Ended December 31, 2004
Sales $2,800,000
Less: Cost of goods sold 1,300,000
Gross margin $ 700,000
Less operating expenses:
Selling expenses $300,000
From the Cost
Administrative expenses 150,000of Goods
450,000
Sold
Operating income $Schedule
250,000
 Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2004
Direct materials:
Beginning inventory $200,000
Add: Purchases 450,000
Materials available $650,000
Less: Ending inventory 50,000
Direct materials used in production $ 600,000
Direct labor 350,000
Manufacturing overhead:
Indirect labor $122,500
Depreciation 177,500
Rent 50,000
Utilities 37,500
Property taxes 12,500
Maintenance 50,000 450,000
Total manufacturing costs continued
added $1,400,000
Total manufacturing costs added $1,400,000
Add: Beginning work in process 200,000
Less: Ending work in process 400,000
Cost of goods manufactured $1,200,000

Work in process consists of all

partially completed units found in
production at a given point in time.
 Cost of Goods Sold Schedule
For the Year Ended December 31, 2004

Cost of goods manufactured $1,200,000

Add: Beginning inventory finished goods 250,000
Cost of goods available for sale $1,450,000
Less: Ending inventory finished goods 150,000
Cost of goods sold $1,300,000

From the
Statement of
Cost of Goods
Manufactured
Activity Cost
Behavior
VARIABLE COSTS
Variable costs are defined as costs that in total vary in direct
proportion to changes in an activity driver.
FIXED COSTS
Fixed costs are cost that in total are constant within the relevant range as
the level of the activity driver varies.

MIXED COSTS
Mixed costs are cost that have both fixed and a variable component. For
example, sales representative are often paid a salary plus a commission
on sales.
Illustration
NUMBER OF MUFFLER
400 500 800
TOTAL COST
FIXED COST ? P 50,000 ?

VARIABLE COST ? 60,000 ?

TOTAL COST ? P110,000 ?

COST PER MUFFLER

FIXED COST ? ? ?

VARIABLE COST ? ? ?

TOTAL COST ? ? ?
 NUMBER 500
OF MUFFLER800
400
TOTAL COST
FIXED COST P 50,000

VARIABLE COST P50,000 60,000

P50,000
TOTAL COST 48,000 P 110,000 96,000
COST PER MUFFLER P98,000 P146,000
FIXED COST
P125.00 P100.00 P 62.50
VARIABLE COST
120.00 120.00 120.00
TOTAL COST
P 245.00 P 220.00 P 182.50
 Fixed Costs

Two production lines can process 10,000 computers per

year each. The workers on each line are supervised by a
production-line manager who is paid $24,000 per year.
For production up to 10,000 units, only one supervisor is
needed. When production is between 10,001 and 20,000
computers being produced, two supervisors are required.
 Total Fixed Cost Graph
$60,000

Total Costs
$50,000
$40,000 Fixed Costs
$30,000 F = $24000
$20,000
$10,000
0 4 8 10 12 16
Units Produced (000)

Computers
Supervision Processed Unit Cost
$24,000 4,000 $6.00
24,000 8,000 3.00
24,000 10,000 2.40
48,000 12,000 4.00
48,000 16,000 3.00
48,000 20,000 2.40
 Total Fixed Cost Graph
$60,000

Total Costs
$50,000
$40,000 Fixed Costs
$30,000 F = $24000
$20,000
$10,000
0 4 8 10 12 16
Units Produced (000)

Computers
Supervision Processed Unit Cost
$24,000 4,000 $6.00
24,000 8,000 3.00
24,000 10,000 2.40
48,000 12,000 4.00
48,000 16,000 3.00
48,000 20,000 2.40
 Total Fixed Cost Graph
$60,000

Total Costs
F = $48,000
$50,000
$40,000 Fixed Costs
$30,000
$20,000
$10,000
0 4 8 10 12 16
Units Produced (000)

Computers
Supervision Processed Unit Cost
$24,000 4,000 $6.00
24,000 8,000 3.00
24,000 10,000 2.40
48,000 12,000 4.00
48,000 16,000 3.00
48,000 20,000 2.40
 Total Fixed Cost Graph
$60,000

Total Costs
F = $48,000
$50,000
$40,000 Fixed Costs
$30,000
$20,000
$10,000
0 4 8 10 12 16
Units Produced (000)

Computers
Supervision Processed Unit Cost
$24,000 4,000 $6.00
24,000 8,000 3.00
24,000 10,000 2.40
48,000 12,000 4.00
48,000 16,000 3.00
48,000 20,000 2.40
 RELEVANT RANGE
Production
Production
125%
Production 100%
Production
Production 75%
50%
0%

Fixed Cost
Fixed Cost=P100,000
P100K+
Methods for Separating Mixed Costs

Variable
Component
Fixed
Component
 Hi-Low Point Method
Month Vol. in Machine Hrs. Electricity Cost

July 6,000 P 60,000

Aug 5,000 53,000
Sept 4,500 49,500
Oct 4,000 46,000
Nov 3,500 42,500
Dec 3,000 39,000
6-Month Total 26,000 P 290,000

Using the hi-low method compute:

1. Variable cost per machine hours
2. Monthly fixed electricity cost
3. Total electricity cost if 4,800 machine hours are projected to be used next
month
1. Variable cost/machine hour = P60,000-P39,000/6,000-3000
= P21,000/3,000 = P7.00 machine hour

2. High Low
Total Monthly Cost P 60,000 P 39,000

Less: Variable Cost

P7.00 x 6,000 42,000

P7.00 x 3,000 21,000
Fixed Cost P 18,000 P 18,000

3. Total Electricity Cost = Fixed Cost + Variable Cost

= P18,000 + P7.00(4,800)
= P51,600
Variable costs are
costs that in total
vary in direct Variable
proportion to Cost
changes in an
activity driver.
Mixed costs are
costs that has
both a fixed and Mixed
a variable Costs
component.
Activity-
Based
Costing
Video Presentation
Traditional vs. Activity-Based Costing

Traditional Costing Systems

o Allocates overhead using a predetermined rate.
o Job order costing: direct labor cost may be the relevant activity base.
o Process costing: machine hours may be the relevant activity base.
Illustration of a Traditional Costing System
Atlas Company produces two abdominal fitness products—the Ab Bench and
the Ab Coaster. Direct materials cost per unit is $40 for the Ab Bench and
$30 for the Ab Coaster. Direct labor cost is $12 per unit for each product.
Both products require one direct labor hour per unit, are allocated overhead
cost of $30 per unit.

ILLUSTRATION 4.3
Total unit costs—traditional
costing
The Need for a New Approach
• Tremendous change in manufacturing and service industries.
• Decrease in amount of direct labor usage.
• Significant increase in total overhead costs.
• Inappropriate to use plantwide predetermined overhead rates when a lack
of correlation exists.
• Complex manufacturing processes may require multiple allocation bases
(Activity-Based Costing).
Activity-Based Costing
• An approach for allocating overhead costs.
o Allocates overhead to multiple activity cost pools.
o Assigns the activity cost pools to products or services
by means of cost drivers.
Key Concepts
Activity. Any event, action, transaction, or work sequence that incurs
costs when producing a product or performing a service.
Activity cost pool. Overhead cost attributed to a distinct activity (e.g.,
ordering materials or setting up machines).
Cost driver. Any factor or activity that has a direct cause-effect
relationship with the resources consumed.
Design Steps for an Activity-
Based Costing System
1. Identify, define, and classify activities and key
attributes.
2. Assign the cost of resources to activities.
3. Assign the cost of secondary activities to primary
activities.
4. Identify cost objects and specify the amount of each
activity consumed by specific cost objects.
5. Calculate primary activity rates.
6. Assign activity costs to cost objects.
Illustration:
Activities
Units Total DL DM No. of Times No. of
Produced DL Hrs. Cost Cost Setups Handled Parts
C 20 30 P 300 P 600 2 2 1
D 100 150 1,500 3,000 4 2 2
E 100 70 700 3,000 2 2 2
Total 250 8 6 5
Overhead application rate: (DL Hours)
= P12,500/250 DL Hours
Budgeted cost of each driver: = P50 per DLH

Setups P6,200
Times Handled 3,300
No. of parts 3,000
P12,500
 Units Total DL DM No. of Times No. of
Produced DL Hrs. Cost Cost Setups Handled Parts
C 20 30 P 300 P 600 2 2 1
Traditional Costing: D 100 150 1,500 3,000 4 2 2
E 100 70 700 3,000 2 2 2

C D E Total 250 8 6 5

DM P 600 P 3,000 P3,000

DL 300 1,500 700
OH 1,500 7,500 3,500
Total Cost P2,400 P12,000 P7,200
Unit Cost P120/unit P120/unit P72/unit
Total OH Applied Units Produced
C P50 x 30h = P1,500 20
D P50 x 150h= 7,500 100
E P50 x 70h = 3,500 100
 Units Total DL DM No. of Times No. of
Produced DL Hrs. Cost Cost Setups Handled Parts

Activity-Based Costing C
D
20
100
30
150
P 300
1,500
P 600
3,000
2
4
2
2
1
2
E 100 70 700 3,000 2 2 2
C D E Total 250 8 6 5

DM P 600 P3,000 P3,000

DL 300 1,500 700
OH 3,250 5,400 3,850
Total Cost P4,150 P9,900 P7,550 Budgeted cost of each driver:
Unit Cost P207.60/unit P99/unit P75.50/unit Setups P6,200/8 = P775/set up
Times Handled 3,300/6 = P550/handling
No. of parts 3,000/5 = P600/No.of Parts
C D E P12,500
Setups P775 x 2 P1,550 P775 x 4 P3,100 P775 x 2 P1,550
Handling P550 x 2 1,100 P550 x 2 1,100 P550 x 2 1,100
No. of Parts P600 x 1 600 P600 x 2 1,200 P600 x 2 1,200
Total P3,250 P5,400 P3,850
Comparison:
C D E
Traditional Costing P120.00 P120.00 P72.00
Activity-Based Costing 207.60 99.00 75.50
Difference (P 87.60) P 21.00 (P3.50)