STRACO – STRATEGIC COST MANAGEMENT

Second Semester, AY 2022-2023

Bachelor of Science in Management Accounting III

CHAPTER 1

OVERVIEW OF COST MANAGEMENT AND STRATEGY

EXPECTED LEARNING OUTCOMES

After studying the chapter, you should be able to:

1. Explain what strategy is
2. Relate strategic cost management to strategic management
3. Describe the nature of cost management information and how they are developed
4. Explain the objective, scope and benefits derived from proper cost management
5. Enumerate and describe the various users of cost management information
6. Explain how cost management information is used for the following management functions:
• Strategic Management
• Planning and Decision-Making
• Management and Operational Control
• Reportorial and compliance to legal and various regulatory requirements
7. Understand the cost management accountant’s role in strategic cost management
8. Describe the role of the cost management accountant in the development and implementation of strategic decision for the business firm
9. Enumerate and explain the basic cost management perspective

• Business managers must think and act competitively and doing so requires a strategy.
• Strategy is a set of policies, procedures and approaches to business that produce long-term success. It is a set of goals and specific action
plans that if achieved, provide the desired competitive advantage.
• Strategic management involves the development of a sustainable competitive position.
• Strategic cost management involves the development of cost management information to facilitate the principal management function
which is strategic management.
• Cost management information is the information that manager needs to effectively management the firm, profit-oriented as well as not-
for-profit organization. This includes both financial information about cost and revenues as well as relevant nonfinancial information about
productivity, quality and other key success factor for the firm.
 Cost management is the practice of accounting in which the accountant develops and uses cost management information.
 For competitive success, it is not enough to emphasize only on financial information. This could lead manager to stress cost reduction (a
financial measure) while ignoring or even lowering quality standards (a nonfinancial measure).
 If a firm is to compete successfully, importance should be given to nonfinancial and longterm measures of operating performances such as
product and manufacturing advances, product quality and customer loyalty.
 Cost management information, is thus a value-added concept – adds value by helping a firm to be more competitive.
• Strategic thinking involves anticipating changes. Products and production process are designed to accommodate expected changes in
customer demands.

USERS OF COST MANAGEMENT INFORMATION

• Cost management information is useful in all organizations: business firms, government units, and not-for-profit organizations.

USES OF COST MANAGEMENT INFORMATION

• Cost management information is needed for each of the following management functions, namely:

1. Strategic Management
• It involves the development of a sustainable competitive position in which the firm’s competitive advantage spells
continued success.
• It involves identifying and implementing the goals and action plans.
• Management must make sound strategic decisions regarding the choice of products, manufacturing methods, marketing
techniques and channels and other long-term issues.

2. Planning and Decision-Making

• Cost management information is needed to support recurring decision such as replacing and maintaining equipment, managing
cash flows, budgeting raw materials purchases, scheduling production, pricing and managing distribution of products to
customers, and so forth.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 1
 3. Management and Operation Control
• Cost management information is needed to provide a fair and effective basis for identifying inefficient operations and to
reward and motivate the most effective managers.
• Operation Control takes place when mid-level manager monitors the activities of operating-level managers and
employees.
• Management Control is the evaluation of mid-level manager by upper-level manager.

4. Reportorial and Compliance to Legal Requirements

• Reportorial and compliance responsibilities require management to comply with the financial reporting requirements to
regulatory agencies such as the Securities and Exchange Commission (SEC), Bureau of Internal Revenue (BIR), and other
relevant government authorities and agencies.
• The financial statement preparation role has recently received a renewed new focus and interest as accounting scandals have
shown how crucial and important accurate financial information is for investors.

MANAGEMENT ACCOUNTANT’S ROLE IN STRATEGIC COST MANAGEMENT

• Cost Management is an area of accountancy practice as performed by management accountants.

• Management accountants are the accounting professionals who develop and analyze cost management information and other accounting
information. They are concerned with providing information to managers, that is, people inside an organization who direct and control the
operations.
• Management Accounting involves the application of appropriate techniques and concepts to economic data so as to assist management in
establishing plans for reasonable economic objectives and in the making of rational decision with a view toward achieving these
objectives. It also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory
agencies and tax authorities. It is concerned primarily with providing information to internal managers who are charged with planning and
controlling the operations of the firm and making a variety of management decisions.
• Generally, management accountants do the following tasks:
(a) Scorekeeping or data accumulation which enables both internal and external parties to evaluate organizational performance
and position.
(b) Interpreting and reporting of information that helps manager to focus on operating problems, opportunities as well as
inefficiencies.
(c) Problem-solving or quantification of the relative merits of possible courses of action as well as recommendations as to the best
procedure. This is commonly associated with non-recurring decisions.
• Specifically, the management accountant provides a system which allows management to receive the necessary information used in
performing its administrative functions of: (a) Planning
(b) Controlling
(c) Decision making

Planning
• It involves identifying alternatives and selecting a course of action and specifying how the action will be implemented to further the
organization’s objectives.
• The plan communicates a company’s goals to employees and specifies the resources needed to achieve them.
• The plans of management are often expressed formally in budgets.
Control
• Control of organizations is achieved by evaluating the performance of managers and the operations for which they are responsible.
• Managers are evaluated to determine how their performance should be rewarded or punished, which in turn motivates them to perform at a
high level.
• The reports used to evaluate the performance of managers and the operations they control are referred to as performance reports.
• Performance reports can be used by managers to “flag” areas that need closer attention and to avoid areas that are under control.
• Typically, managers follow the principle of management by exception when using performance reports. This means that managers
investigate departures from the plan that appear to be exceptional; they do not investigate minor departures from the plan.
• Operations are evaluated to provide information as to whether or not they should be changed (i.e., expanded, contracted, or modified in
some way).
• Managers can compare actual results with planned results and decide if corrective action is necessary. If actual results differ from the plan,
the plan may not have been followed properly, the plan may have not been well thought out, or changing circumstances may have made the
plan out of date.

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 2
 Fig~re 1-1: Planning and Control Process

Plan

Decisions to change
l
Action taken to
operations or revise implement plan

·Results

Decisions to reward or Comparison of planned

· · punish managers and actual results

Decision Making
• Decisions are made to reward or punish managers, and decisions are made to change operations or revise plans.
• How well the managers make decisions will determine future profitability and, possibly, the survival of the company.

RELATIONSHIP BETWEEN COST ACCOUNTING AND COST MANAGEMENT

• Cost accounting is a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and
performing services in the aggregate and in detail.
• Cost management needs the output of cost accounting. Its purpose is to provide managers with information which aids decision.
• There is no generally accepted principles which specify how management accounting information is to be reported. The most effective
systems result when the manager-decision maker and the accountant work together until the accountant understands the decision to be
made and the manager understands the source of information that accountant will report.
• Managers use cost management information to choose strategy, to communicate it and to determine how best to implement it. They use
this information to coordinate their decisions about designing, producing and marketing a product or service.

STRATEGIC DECISION MAKING AND THE COST MANAGEMENT ACCOUNTANT

Basic Cost Management Perspectives

• For cost management process to succeed, it is necessary that managers must complement their measurement skills with basic management
perspectives that “go beyond numbers.” This will enable them to make intelligent planning, control, and decision making for the
enterprise. These are:
a. A Strategic Management Perspective
b. An Enterprise Risk Management Perspective
c. A Corporate Social Responsibility Perspective
d. A Process Management Perspective
e. A Leadership Perspective
f. An Ethical Perspective

A. A Strategic Management Perspective

• The key to a company’s success is creating value for customers while differentiating itself from its competitors. Identifying how a
company will do this is what strategy is all about. However, a chosen strategy is only as good as how effectively it is implemented.
• The management accountant provides input that aids in developing strategy, building resources and capabilities, and implementing
strategy.
• The focal point of a company’s strategy should be its target customers. A company can only succeed if it creates a reason (formally
called customer value propositions) for its target customers to choose it over a competitor.

• Customer value premises tend to fall into three broad categories, namely:
(a) Customer Intimacy Strategy
“You should choose us because we can customize our products and services to meet your individual needs better
than our competitors.”
(b) Operational Excellence
“You should choose us because we deliver products and services faster, more conveniently, and at a lower price
than our competitors.”
(c) Product Leadership
“You should choose us because we offer higher quality products than our competitors.”

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 3
B. An Enterprise Risk Management Perspective

• Every business manager should recognize the fact that every strategy, plan and decision involve risks.
• Enterprise risk management is a process by an entity to identify those risks and develop responses to them that enable it to be
assured of meeting its goals.

C. A Corporate Social Responsibility Perspective

• Corporate social responsibility (CSR) is a concept where business organizations consider the needs of all stakeholders (customers,
suppliers, communities and environmental and human rights advocate) when making decisions.

D. A Process Management Perspective

• Effective managers understand that business processes, more so than functional departments (Marketing Department, the Research
and Development Department, and the Accounting Department), serve the needs of company’s most important stakeholders – its
customers.
• A business process is a series of steps that are followed in order to carry out some tasks in a business. These steps often span
departmental boundaries, thereby requiring managers to cooperate across functional departments. The term value chain is often used
to describe how an organization’s functional departments interact with one another to form business processes.
• A value chain consists of the major business functions (Research and Development, Product Design, Manufacturing, Distribution,
and Customer Service) that add value to a company’s products and services.
• Managers need to understand the value chain to be effective in terms of planning, control, and decision making. For example, if a
company’s engineers plan to design a new product, they must communicate with the Manufacturing Department to ensure that the
product can actually be produced, the Marketing Department to ensure that customers will buy the product, the Distribution
Department to ensure that large volumes of the product can be cost-effectively transported to customers, and the Accounting
Department to ensure that the product will increase profits.

E. A Leadership Perspective

• To achieve success, organizational leaders must be able to unite the behaviors of the fellow employee who have diverse needs,
beliefs and goals to the workplace.
• Leaders need to understand how (a) internal motivation, (b) external incentives, and (c) cognitive bias influence human behavior.
(a) Internal motivation refers to motivation that comes from within one’s self. A leader who is perceived by
employees as credible and respectful of their value to the company can increase the extent to which those
employees are intrinsically motivated to pursue strategic goals.
(b) External incentives such as bonus compensation, are given by many organizations to highlight important goals
and to motivate employees to achieve them.
(c) Cognitive bias. Leaders should be aware that are all people (including themselves) should possess cognitive
biases or distorted thought processes such as promoting false assertion that can adversely affect planning,
controlling and decision making. To reduce, if not totally eliminate cognitive biases, a leader may routinely
appoint independent team of employees to assess the credibility of recommendations set forth by other individuals
and groups.

F. An Ethics Perspective

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 4
 • Without fundamental trust in the integrity of the business, the economy would operate much less effectively.
• Therefore, for the benefit of everyone, it is vitally important that businesses be conducted within an ethical framework that builds
and sustains trust.

End

Source: Chapter 1: Strategic Cost Management 2021 Edition, Ma. Elenita Balatbat Cabrera et al. 5