You are on page 1of 86
Wain Ry a uit ae MY \ a! ‘ A CO ‘i mr YAveN Nite aM aN KEP LyN0 EDITION MA. ELENITA BALATBAT CABRERA BBA MBA CPA CMA GILBERT ip PE CABRERA BB AWM en MANAGEMENT 2019-2029 Edition _ ELENITA BALATBAT = wBA, CPA, CMA CABRERA PRESENTLY: ‘Academic and Business Consultant President and CEO, CLA Consultancy and Training Center, nc FORMERLY: Vice Chairman, Professional Regulatory Board of Accountancy World Bank Consultant | Deau, College of Business Administration, Lyceum University ofthe Philippines | GPA Review Director & Reviewer, Professional Review and Training Center, nc. Professor of Accounting & Finance, University of the East, Far Eastem University, De La Salle University, Centro Escolar University, Si. Scholastica’s College Audit Staff, SGV and Co., CPAS GILBERT ANTHONY B. CABRERA BBA, MBA, CPA PRESENTLY: Vice President, Risk and Finance, FORMERLY: Chief Financial Officer, Food Retail Conglomerate, USA. Senior Auditor, SGV and Co., CPAS Accounting Instructor : University of Maryland, Robert Smit University of the East Global Insurance Brokerage, USA. ih School of | ‘Business Unit | ct ‘INTRODUCTION To STRATEGIC COST MANAGEMENT Chapter 1 Overview of Cost Management and Strategy 2 The Professional Environment of Cost Management 3 Contemporary Business Environment and Strategic Focus of Cost Management 4 Developing a Competitive Strategy and Contemporary Cost Management Techniques CHAPTER OVERVIEW OF COST MANAGEMENT AND STRATEGY ~ EXPECTED LEARNING OUT COMES. After studying this 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 oor CHAPTER 1 OVERVIEW oF COST MANAGEMENT AND STRATEGY INTRODUCTION The growing Pressures of global competition, tr i ving e trade wars a technological Mmnovation and chan; i see have: ads bok management much iges in business processes have made cost Business managers more important, critical and dynamic than ever before. ‘must think and act competitively and doing so requires a Strategy is a set of policies, Procedures and approaches to business that produce long-term success while siralegic management involves the development of a sustairiable, conipetitive Position. Strategic cost_management involves the development of cost management elopin f information to facilitate the principal managenient function which is strategic management. In today’s, business environment, the development and use of information especially .cost_management information is a critical factor in the effective management of a firm or organization. Cost_management information is the information that the manager needs to ‘effectively manage the firm, profit-oriented as well as not-for-profit organization. This inoludes both financial information about cost and revenues as well as . relevant nonfinancial information about productivity, quality and other key success factors.for the firm. thagement is the practice of accounting in which the accountant develops Se eaigeiene information. For competitive success, it is not enough “to emphasize only on financial information. This could lead manager to sess oot reduction (a financial measure) while ignoring or even lowering quality san i iS (a nonfinancial measure). This decision ae bea ue foal we i cat ; market share in the long-run. ea 18 oe eanoe should be given to nonfinancial and long-term pel ote oF is rating performance such as product and manufacturing advances, due ial and customer loyalty. Cost management information, is thus a : value added concept. It adds value by helping a firm be more competitive. 4 Chapter © managoment is very Important to the success of every fim, sive theme of this book. o" ENtetive stratogi nization and is thus the pe pating changes. Products and produc processes are designed to accommodate expected changes in customer demands, Flexibility is important. The ability to make fast changes is critical as a resuj the domand of the new management concepts of e-commerce, speed to Market, ang flexible manufacturing. Product life cycle — the time from the introduction ofa new product to its removal from the market ~ is expected to become shorter and shorter, Success in the recent past days or months is no longer a measure 7 liltimate success: the manager must be “driving” the firm by using the windshjeig not the rear-view mirror. Strategic thinking involves antici ‘The strategic emphasis also requires creative and integrative thinking, that i, te ability to identify and solve problems from a cross-functional view. The busines, functions are often identified as marketing, production, finance, and accounting» controllership. Instead of viewing a problem as «production problem, a marketing problem, or a finance and accounting problem, cross-functional teams view it fem an integrative approach that combines skills from all functions simultaneously, The integrative approach is necessary in a dynamic and competitive environment, The firm’s attentions is focused on satisfying the customers’ needs; all of the firm's resources, from all functions, are directed to that goal. USERS OF COST MANAGEMENT INFORMATION Cost management information is useful in all organizations: business firms, governmental units, and not-for-profit organizations. Business firms are usually categorized by industry, the main categories being merchandising, manufacturing, and service. Merchandising firms purchase goods for resale. Merchandisers that sell to other merghandisers are called wholesalers; those selling directly to consumers are re/ailers. Governmental and not-for-profit organization provide services, much like the firms in service industries. However, these organizations provide the services for which no direct relationship exists between the amount paid and the services provided. Instead, both the nature of these.services and the customers to receiv? them are determined by government or philanthropic organizations. The resoute® are provided by governmental units and/or charities. The services provided b) these organizations are often called public goods to indicate that no typical at exists for them. Public goods have a number of un ique characteristics; such ast impractically of limiting consumption to a single customer (clean water and police and fire protection are provided for all residents). ——-— Overview of Cost Management and Strategy _5 —____ Overview of Cost Management and Strategy 5 USES OF Cost MANAGEMENT INFORMATION Cost management inf a forms F functions, seh ation is needed for each of the following management : ind implementing these 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. The strategic emphasis requires an integrative approach which combines skills from all business function, namely, marketing, production, finance and accounting / controllership, is necessary in a dynamic and competitive environment. Due to increasing strategic issues, cost management has moved from a traditional role of product costing and operational control to a broader " strategic focus: strategic cost management. Strategic cost management is the development of cost “Management information to facilitate the principal management function, strategic management. SChepter) 2. Planning and Decision-making Cost management information is such as replacing and mainta budgeting raw materials purchase: managing distribution of products to custom Planning and decision-making involves budgeting and profit ptanajy cash flow management and other decision related to the firm’s operat such as deciding whether to lease or buy a facility, whether to replace just repair as equipment, when to change a marketing plan Or whten begin new product development. 3. Management and Operational Control Cost management information is needed to provide a fair and effecting basis for identifying inefficient operations and to reward and motivate the most effective manages. Qperational Control takes place when mid-level manages (e, managers, regional managers) monitors the activities of operating-teve] managers and employers (e.g., production supervisions, ‘departmen, heads). Management control on the other hand, is the evaluation of mid. level manager by upper-level manager (e.g., Controller or the Chief Financial Officer (CFO)). 4. Reportorial and Compliance to Legal Requirements ge Reportorial and compliance responsibilities require management to comply with the financial reporting requirements to regulatory agencies ities and Exchange Commission (SEC) Bureau of such as the Securi Internal revenue (BIR), and other relevant government authorities and needed to support recut 1g equipn s, scheduling production, pri ers, and so forth, 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. The financial statement information also. serves the other th management functions as this information is often an important pat! planning and decision making, control and strategic management. —_—. MANAGE! MANAGEMENS ACCOUNTANT'S ROLE IN STRATEGIC COST ——___Overview of Cost Management and Strategy 7. agement ji i ae pe is the practice of accounting in which the accountant develops mai i aged performed by Tet gore eat This area of accountancy practice is i i nt accountants, Manage) accounting professionals vine fanagement accountants are the ° ‘elop and ar i i and other accounting information, Pp mnalyze cost management information Cost Mani and uses Manage 2 Sonat poe Socounting involves the application of appropriate techniques and reasonable econsray en 89 85 © assist management in establishing plans for toward achieving tha ectives and in the making of rational decisions with a view desatenntation aes Se objectives. It is the process of identification, measurement, financial inf » analysis, preparation, interpretation, and communication of information, which is used by management to plan, evaluate and control ee within an organization. It also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. Management accountants (including cost accountants) are concerned with providing information to managers, that is, people inside an organization who direct and control the operations. They provide a variety of reports. Some reports focus on how well managers and business units have performed while other reports provide timely and frequent updates on key indicators, analysis of business situation or opportunity and analytical reports that are needed to investigate specific problems. Management accountants at appropriate levels are involved actively in the process of managing the entity. The process includes making strategic, tactical and operating decisions and helping to coordinate the efforts of the entire organization. The management accountant participates, as part of management, in sarang at the organization operates as a unified whole in its long-run intermediate and short- run best interests. ing i imarily wi iding information to i counting is concerned primarily with provid \ ee aaiaer who ae charged with planning and controlling the operations of ite Brat 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. 8 Chapter 1 _ (b) interpreting and reporting of information that hes manager 10 focus operating problems, opportunities as well as inefficiencies, 7p; : commonly associated with current planning and control and the analy and investigations of recurring routine internal accounting reports to, sign situations in which management action may: be required. ‘cation of the relative merits of possible dations as to the best procedure, urring decisions. (©) Problem-solving or quantifi of action as well as recommen commonly associated with non-reet course, This, Three important guidelines help management accountants provide the mo; when scorekeeping provide the most value when scorekeeping, problem, and attention directing (interpreting and reporting). These are St Vale Solving 1. Employ acost-benefit approach = a 2. Recognize behavioral as well as technical considerations and 3.° Use appropriate cost concepts for different purpose Management accountants continually face resource-allocation decisions, such gs whether to purchase a new software package or hire a new employee. The oie, benefit approach stiould be used in making these decisions: Resources should spent if they are expected to better attain company goals in relation to the expected costs of those resources. The expected benefits from spending should exceed the expected costs. The expected benefits and costs may not be easy to quantify Nevertheless, the cost-benefit approach is useful for making resource-alloctin decisions. Specifically, the management accountant provides a system which allows management to receive the necessary information used in performing its administrative functions of: z (a)' planning which involves setting of goals for the firm, evaluating the various ways to meet the goals and picking out what appears to be the best way to meet the goals; (b) controlling which involves the evaluation of whether actual performance conforms with planned goals; and (c) decision making which involves determination of predictive information (e.g. relevant costs) for making important business decisions. Overview of Cost Management and Strategy 9 Planning A key activity 2 for all alternatives and selecting a implemented to further th "panies 7 planning. Planning involves identifying of action and specifying how the action will ther the organization’s objectives. on eerie The plan communicates a com resources needed to achieve thei formally in budge; pany’s goals to employees and specifies the ee caer them. The plans of management are often expressed financial position are examples of coreioutese yan ee satements Of ierbiice alin We of Contributions which accounting can make in ev i ; i examples of useful tools inprofitsinen ysis projected income statements are Control Contr of organizations is achieved by evaluatirig the performance of managers je operations for which they are responsible, The distinction between evaluating managers and evaluating the operations they control is important. Managers are evaluated to determine how their performance should be rewarded or punished, which in turn motivates them to perform at a high level. Based on an evaluation indicating good performance, a manager might receive substantial bonus compensation. An evaluation indicating a manager performed poorly might lead to the manager being fired. In part because evaluations of managers are typically tied to compensation and promotion opportunities, managers work hard to ensure that they will receive favorable evaluations. financial statements analysis, gross profit variance analysis ntrol reports used to inform managers when ibility are deviating from the plan. The ions they control Cost variance analysis, are some of the accounting co! activities which are part of their responsi reports used evaluate the performance of managers and the operat are referred to as performance reports. i formance report, enerally accepted method of preparing a pe | tly revolve a comparison of current period performance with r period or with planned (budgeted) performance. Although there is no such reports frequent! performance in a prior (Chapter 1 Performance reports may not provide definitive answers, but they extromoly uxofil., Managers ean usie them to “flag” areas that need close, and to avoid areas that are under control. It would not seem nege oxample, to investigate Inbor, rent, depreciati are either equal 10 or relatively clos managers follow the principle of management by exception whe! performance reports. means that managers investigate departures fr plan that appear to be exceptional; they do not investigate minor departurey n "® the plan. * Fon Operations are evaluated to provide information as to whether or not they sh be changed (i.e., expanded, contracted, or modified in some way). An eva of an operation can be negative even when the: evaluation of the manag responsible for the operation is basically positive. seer Company plans often play an important role in the control process. Manager compare actual results with planned results and decide if corrective seine” necessary. If actual results differ from the plan, the plan may not have oe followed properly, the plan may have not been well thought out, or chang circumstances may have made the plan out of date. ‘ging Figure 1-1 presents the major steps in the planning and control process, Once a plan has been made, actions are taken to implement it. These actions lead to results, which are compared with the original plan. Based on this evaluation managers are rewarded (¢.g,, given substantial bonuses or promoted if performance is judged to be good) or punished (e.g., given only a small bonus, given no bonus, or even fired if performance is judged to be poor). Also, based on the evaluation process, operations may be changed. Changes may consist of expanding (eg, adding a second shift), contracting (¢.g., closing a production plant), or improving operations (e.g., training employees to do a better job answering customer product inquiries). Changes may also consist of revising an unrealistic plan. Fg ar at Meee an Sr + Planing and Control Process Decisions t Aation take jo change Ati ction take Operations or revise fader eregen Decisions to reward or Comparison of planned punish managers and actual results Thus, accounting serves management at all stages of the management process, from the formulation of objectives and so on up to the feedback of performance information which in turn helps in the reformulation of objectives. Decision Making As indicated in Figure 4-1, decision making is an integral part of the planning and contro] process — decisions are made to reward or punish managers, and decisions are made to change operations or revise plans, Should a firm add a new product? Should it drop an existing product? Should it manufacture a component used in assembling its major product or contract with another company to produce the component? What price should a firm charge for anew product? ‘These questions indicate just a few of the key decisions that confront companies. And how vel they make these decisions will determine future profitability and, possibly, e survival of the company. Recognizing the importance of making good decisions, we will devote all of Chapter 11 to the topic. —< $2 Chapter? elops cost management informatg ers and employee teains to use titive and successful. © as Summary, the management accountant dev for the Chief, Financial Officer, other manag manage the firm and make the firm more compel RELATIONSHIP BETWEEN COST ACCOUNTING AND COST MANAGEMENT et of procedures for recording: dnd reporin measurements of the cost of manufacturing goods and performing, Services in the aggregate and in detail. It includes methods for recognizing, classifyin allocating, aggregating and reporting such costs and comparing them with standag costs. Cost accounting is a systematics Cost Management needs the output of cost accounting. Its purpose is to provide managers with information which aids decision. There are no generally accepteg principles which specify how management accounting information is to be reported. While systems such as direct costing and standard costing exist in management accounting, each accounting report should be tailored to the needs of the decision and the decision maker. 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 the 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 AND THE COST MANAGEMENT ACCOUNTANT A company earns profit by attracting customers willing to pay for the goods and services it offers. Customers compare the goods and services offered by a company to the same goods and services offered by other companies. The key t# 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 8 implemented. The management accountant provides input that aids in developing strategy, building resources and capabilities, and implementing state)’ ie understand the management accountant’s role, we must first understand the manager’s tasks in more detail. OTR 116 PROFESSIONAL ENVIRONMENT OF COST MANAGEMENT EXPECTED LEARNING OUTCOMES After studying this chapter, you should be able to, Describe the position of the Managemen; accountant in the organization structure of the business firm Explain the role and the relationship between the Chief Financial and the Controller 3. Describe the functions and responsibilities of the Controller as the top management accountant 4, Explain the role and the relationship between the Chief Financial Officer and the Treasurer 5. Describé the functions and responsibilities of the Treasurer 6. Understand the ethical standards —_for management accountants Realize the need for a company code of conduct 8. Be familiar with typical ethical challenges tha! management accountants encounter 9. Describe the intemational certifications that ae available to management accountants t ory Oe CHAPTER 2 THE PROFESSIONAL ENVIRONMENT F COST MANAGEMENT ORGANIZATION ACCOUNTAN™ STRUCTURE AND THE MAN, AGEMENT Many of the activiti S ities constituti interrelated and this mu: eae te field of management accounting are management accountant ii rdinated, ranked and implemented by the organization as perceived by sich @ fashion as to meet the objectives of the accountant is that of tailori 'y him or her. A major function of the management that the craanization’s the application of the process to the organization so effectively. objectives, short-term and long-term, are achieved Management accounting is intended to include persons involved in such functions as controllership, treasury, financial analysis, planning, and budgeting, cost accounting, internal audit, systems, and general accounting. Management accountants thus may have titles as controller, treasurer, budget analyst, cost analyst, and accountant, among others. The accounting function is usually “staff”, with responsibility for providing line managers and also other staff managers, with specialized services. This includes advice and help in the areas of budgeting, controlling, pricing and special decisions. thority to command action or give orders to subordinates. ir il ini jecti f the business it directly responsible for attainin| the objectives of c iar aeeeiealy as possible. Sales and production managers typically have line cater Staff ‘authority is the authority to advise but not command others; it is al 5 ff managers give support, advice and service to i . Stal i exer tr ef staff authority are found in personnel, purchasing, ine is engineering and accounting. Line authority is the aut ing, lit ity over his department, the chief accounting Pica anneal fills the staff role in his company as Except for exerci: ; and production ‘executives. Theoretically, ler gen r usually the contro Spade with the line roles of sales 19 be followed by the HY communica’ uch sro 4 manuaj ig vomntcoter Wold delegated authority f,.7 the contrat jyow to apply these prcedung, the right to command em tion or specialty, ion, 22 Chapter 2 " sures sumtin, PIO? the controler teansinits the best 8 people 10 the President 0° instructions, In pract top tine management to di This is known as function? Iuterally or downvard,with et the in eH er aaioriy Wi ard t ra specific FUN FINANCIAL OFFICER AND THE CONTROLLER THE CHIE ‘The ehlef flnanclal countries ~ iy the & an organization. they usually includ ayo called the finance director in var ccHO),~ ais called t nce di 7 toe einsible ie Mrerseeing the Financial Operations he renponsibill vo vary ainong, Organizations, 44 fe the following area: ities of the C) © Contraltership ~ ine matic managers and reports [0 Sarcholders and overseeing the ova operations of the a © Treasury ~ includes ; investments, and manageme nt of cash. & Risk management — includes managing the financial risk of interestrae and exchange-rate changes and derivatives management. Taxation — includes income taxes, sales taxes, and international ta planning. Internal audit ~ includes reviewing and analyzing financial and othe records to attest to the integrity of the organization’s financial to adherence to its policies and procedures. repose sudes providing, financial information for repons ort ounting, system. banking and short- and long-term financing In some organizations, the CFO is also responsible for infc i ganiz yt formati -other organizations, an officer of equivalent rank to the CFO m called tr sa information officer — is responsible for information systems. ee T he anton (also called the chief accounting officer) is the financial executive pana yscaponnble for management accounting and financial accounting. This poets muses om i v conmoller as the chief management accounting executive Teeae Tee lo any controlling in terms of line authority except over Ha contalle: does contr et, the modern concept of controllership maintains that sclerait dah fobioret in i special sense, That is, by reporting and interpreting ig, and attention-directing roles), the controller exerts a force or influence c decisions, that impels management toward making better-infom fGce2a — The Professional Environment of Cost Management _23 R -1 is an illustrative orpanieath controller of an aprana Sve onenizaton chart of the CFO and the corporate Figure 2-1: Reporti ? Reporting Rel, Controle: tio™ships for the CFO and the Corporate _ Chairman Chief Executive Officer Board of Directors (CEO) | President Chief Operating Officer (Coo) Chief Financial Officer (CFO) Treasurer | Controller The Controller as the Top Management Accountant Controllership is the practice of the established science of control which is the process: by which management assures itself that the resources are procured and utilized according to plans in order to achieve the company’s objectives. In most organizations, the top managerial accounting position is held by the controller. ‘The controller provides reports for planning and evaluating company activities (e.g., budgets and performance reports) and provides the information needed to make management decisions (C85 decisions related to construction of a new factory or decisions related to adding or dropping a product). The controller also has responsibility for all financial accounting reports and tax filings with the Bureau of Internal Revenue and other taxing agencies, as well as coordinating the activities of the firm’s external auditors. YM Cnynon — 1 ohirt for the controller's off, porting 1 the controler jg, Mint ch 5 tion, A alimplitind iuatiation Hi the organization uf tie aren 16 : howe tn Higaiee 22 Mate that ane of Jornpa e footing, Mont mieiunn alt nel Ines massac COMPRNICD have jy opartinont, Cant aquinnatants eatinate costs (0 facilitate management dee, 1. of valuing, inventory. andl develop out inforination for purpones Of ningomont toam, Ione wants, The controller In NORE ae will -neod not cay ‘hig fT county need ‘ Level acct tn nna anquited of all high-tovel executives, These si Aowomnating akilla but also skills required le” eblfla. adil i sr avud onal connsnnication skills, solid interpersonal gyiy Anolide exeollont written ab ich the firm competes ls and w doop knowledge of tho industry in which a ‘Tho controtlor's authority Ii basically staff authority in that the controller's off tivo advice and orvice (o othor departments. However, in his own depary ho han line authority, In tho modorn Lop ¢ f'controllership, it is maintained tho controtlor doo control in a special wonse, ‘That is, by reporting and intenpret rolovant data, tho controller exerts a fores oF influence that impels Managemen, toward loglenl decinions consintont with objectives. . ‘Wigure 2.21 A ‘Typical Organization Chart Showing the Functions ofthe Controller Controller Budgating and Porformanco Renorting Financial Analysis and Spoctal Studios Cost Management Taxation Reporting Syotoma Development b The Professional Environment of Cost Management 25 ‘asic Functions of Controy ership The basie princi . E Pal functi Con be categorized as follows TeSPOmibiltes and activites of eontrolleship may 1. Planning. Estab ming. — Establ intai . consistent with lish and Maintain an integrated plan of operation term, analyrea ne company's Boals and objectives, both short and long management, with a evised, as required, communicated to all levels of \d procedures installed. Cantor PPropriate systems anc and revise standards against which to measure ion-making process, evaluate the data with reference to company and unit objectives: Prepare and file external repot 5 Prey rts as required to quired to satisfy goverment regulatory bodies, shareholders, financial institution, customers, and the general public. ~ Accounting. Design, establish, and maintain general and cost accounting systems at all company levels, including corporate, divisional, plant, and unit to properly record all financial transactions in the books of accounts and records in accordance with sound accounting principles with adequate internal control, Other Primary Responsibilities. Manage and’supervise such functions as taxes, including interface with the respective taxing authorities and agents, maintain appropriate relationships with intemal and external auditors; develop and maintain systems and Procedures: eyelon record eention ms; supervise assigned treasury functions; institute inv: Fnancial mublic relations programs; office management; and direct other assigned functions. wane iations from the basic functions is it, there may be many deviat n A eat should be pointed out that the controller's efor shoul note just deserter him less effective by assigning to him unrelated fanetions ofan slieie ant an The financial planning and control functions are too imp: operational 3 ss of nterpri len the c( ith activities that i ise to burden the controller wit cess of the business ¢! is to the suct others can perform. 26 Chaprer 2 Qualifications of the Controller “The qualifications of an effective controller would include: 1. An excellent technical foundation in accounting and finangg a Uunderstanding and thorough knowledge of accounting principe,“ 2. An understanding of the principles of planning, organizing, ang Cong 3. A general understanding of the industry in which the company oe and the social, economic, and political forces involved. Pt 4. A thorough understanding of the company, including its technolo, products, poli objectives, history, organization, and environment 5. The ability to communicate with all levels of management and a ¢, understanding of the other functional problems related to i Production, procurement, industrial relations, and marketing. 6. The ability to express ideas clearly in writing or in making informatiy, presentations. . ‘ 7. The ability to motivate others to achieve positive action and results, . ie Sngineerin, ‘The controller may have the technical capability and be able to. lay out the ass tasks as well as supervise and direct his personnel, but he must also have integriy and the ability to communicate if he is to succeed. He must be fair, Teasonable and sincere with all concemed if he is to be recognized for the importance of ty controllership function, As in any executive position, the controller must be able to work with People atall levels, have respect for the ideas and’ opinions of others, and have the resourcefulness, to meet all challenges. THE CHIEF FINANCIAL OFFICER AND THE TREASURER Although organizational structures vary from firm of firm, the role of finance assigned to the Chief of Financial Officer (CFO) or the Vice President-Finance who reports to the President. The financial vice-president’s key subordinates are the Treasurer and the Controller. This book has extensively dealt with the role of the Controller inthe previous section. The Profes Envir he Professional Environment of Cost Management _27 . Treasurership : Treasurership is concerned with the assets of a business concern to maxin scaquistion, financing and management of ze the wealth of the firms for its owners. In addition to the position of the con Ce te ntroller, many companies have a position calle cme oe i custody of cash and funds ‘ivested in ao weneeally reson a ition to money management duties, the treasurer is Se dia. ee saints relationships with investors, banks, and other credo Thus the weainr plays a major role in managing cash and eee reparing cash forecasts and obtaining financing from banks . Both the controller and the treasurer report to the chief financial officer (CFO) who is the seni i i Devil spemes ior executive responsible for both accounting and {n most firms the treasurer has the following responsibilities: 1. Funds Procurement This involves raising of funds in accordance withthe firms planned capital structure. This responsibility may require negotiating for loans, short-term or long-term, issuing equity of debt instruments at the best terms and conditions possible. . 2. Banking and Custody of'Funds This involves direct management of cash and cash equivalents and maintenance of good relations with banks and other non-bank institution. 3. Investment of Funds ‘This involves management ‘of the company’s placements and securities or | purchase of debt or equity instruments such as ordinary or preference shares in other corporate entities. This responsibility also includes analysis of decisions related to investment in property, plant and equipment. 4, Operating Responsibilities related to (a) Credit and Collection (b) Inventory Management . ‘ani (c) Corporate pension and retirement func (d) Investor Relations Insurance 2 Compliance with legal and regulatory pr procurement, use and distribution as well finance function with accounting function. ovisions relating to funds 1 as coordination of the sae 38 Chapter 2 _ mie r ACCOUNTANY, > ETHICAL STANDARDS FOR MANAGEM| An recent yours, many concerns have been business and in public life, Alloge been directed toward ans in virtu goverment, business, charitable org: : t allegations and scandals have received a lot of attention, represent a wholesale breakdown of the moral fiber of the Nation, fe hundreds of millions of transactions are conducted every day that emain ung; a Novertheloss, it is ised regarding ethi ( cal hg scandals of unethical important to have an appreciation of what jg and rnd acceptable behavior in business and why. ‘Fortunately, the Inny Mi Management Accountants (IMA) of the United States has developed a of ethical code called the Standards of Ethical Conduct for Practiga’ “i Management Accounting and Financial Management. Even though the «r®” % Were specifically developed for management accountants, they have much at application. ey Code of Conduct for Management Accountants The Institute of Management Accountants (IMA) issued the Standards of Ethicg Conduct for Practitioners of Management Accounting and Financial Managemen, These standards are presented in Figure 2-3. There are two parts to the The first part provides general guidelines for ethical behavior. In a null, ‘management accountant has ethical responsibilities in four broad areas name, 1, to-maintain a high level of professional competence, » 2. to treat sensitive matters with confidentiality, 3. to maintain personal integrity, and 4. to be objective in all disclosing. The second part of the standards gives specific guidance concerning what stu be done if an individual finds evidence of ethical misconduct within # organization. The ethical standards provide sound, practical advice for management account and managers. They require professional behavior, especially in avoiding confls of interest. They require management accountants to bring bad news t0 attention of their supervisors, and to work competently. 2 The Profe: nal Erevironment of Cc Most of the rules in the ety: - consideration ~ if these rulog sent are motivated by « very practical Manayement 29 economy could come to a halt. “T generally followed in business, then the of not abiding by the standeedg, (Plowing are examples of the consequences 1. Suppose 7, op magee Could not be trusted swith confidential information. information ihe a therefore be reluctant wo distribute confidential made based on incoy sampany. This could result to decisions being operations. mplete information and could lead to deterioration of 2. Suppose employees id you like to fly in an airplane whose wings were made by the subcontractor who was will ighest bri Movement was willing to pay the highest bribe 3. Suppose the CEOs or Presidents of companies routinely lied in their annual Teports to shareholders and grossly distorted financial statements. If the basic integrity of the company’s financial statement could not be relied on, investors and creditors would have little basis for making informed decisions. Rational investors would suspect the worst and would pay less for securities issued by companies. As a result, less funds would be available for productive investments and many firms might be unable to raise any funds at all. This ultimately, would lead to slower economic growth, fewer goods and services, and higher prices.” As these examples suggest, if ethical standards were not generally adhered to, there would be undesirable consequences for everyone. Following ethical rules such as those in the Standards of Ethical Conduct for Practitioners of Management Accounting and Financial Management is not just 2 matter of being “nice”; it is absolutely essential for the smooth functioning of an advanced market economy. et for Practitioners of Mug, " ethical Condw Rae ernment Financial Man ie, Standards 0 Figure 2-3: Accounting ant Fecountng and Fancial management have an hig to the public, their profe jon, the omer ie! ae ae w mn 5 of ethical conduc 7 sical the tree te Nats tas has promulgated the following standards of ethical at for practitioners ‘of management accounting and financial management. Adherene these standards, both domestically and internationally, 1S integral to achiev Objectives of Management Accounting. Practitioners of management account financial management shall not commit acts contrary to these standards nor shai condone the commiss 3 others within their organizations, bey jon of such acts by ractitioners of management en accounting and financial managemg nt Competence. P' have a responsibility to: Maintain an appropriate level of of their knowledge and skills. «Perform their professionel duties in accordance with relevant laws, regulations, technical standards. nd Prepare complete and clear reports and of relevant and reliable information professional competence by ongoing develope recommendations after appropriate analysis /. Practitioners of management accounting and financial managemes Confidential hae pat respary to: isirilli aogied kit ee ney - and monitor tel aioe t Oa + Refrain from using or appearing to us ial it i it i work for ‘noha se iepuee ae ely hom <— of management accounting and financial management have rt tor : — ros of interest and advise all appropriate partes of@" ca ie in any activity that would prejudice their ability to cary out . | ary ait favor, or hospitality that would influence or would ap pear to influen?* jonal Environment of Cost Mi + Refrain from ei , orpanbzahcry vata, Hea Passive subverting the attainment ofthe " hical objectivas + Recognize and i : orc te axed Professional limitations or other constraints that would + Communicate vntan aaa OF successful performance of an activity judgments or opinions. © @S well as favorable information and professional + Refrain from engaging in or ‘Supporting any Activity that would discredit the profession, Objectivity. Practitioners of manay jement a i financi C eemenn 9 iccounting and financial management have . Communicate information fairly and objectively, + Disclose fully all relevant information that could reas an intended users understanding of the reports, co presented. onably be expected to influence mments, and recommendations Resolution of Ethical Conflict. In applying the standards of ethical conduct, practitioners of management accounting and financial management may encounter problems in identifying unethical behavior or in resolving an ethical conflict. When faced with significant ethical issues, practitioners of management accounting and financial management should follow the established policies of the organization bearing on the resolution of such conflict. If these policies do not resolve the ethical conflict, such ractitioner should consider the following courses of action: | : Discuss such problems with the immediate superior except when it appears that the ior is i i Jblem should be presented initially to the superior is involved, in which case the problem shot Pp it st hi i isfactory resolution cannot be achieved when next higher managerial level. Ifa satisfactory e ead the problem is initially presented, submit the issues to the next higher manag level. i ive officer, or equivalent, the acceptable lite ey el ep as the audit committee, senile ad ai revi aut er, be wate re. Ct ame i i initiated only with the si : above the immediate Sipe Except where legally prescribed, ing the superior is not involved. | individuals not employed of assuming the such problems to authorities or individual communication o! SU>” jot considered appropriate, engaged by the organization s ial di i ive advisor at oi sn = cnet attomey as to legal obligations and rights concerning the ethical ae , ber a renourse on signi Js of intemal review, there may nflict still exists after exhausting all level ign from the organization and ificant matters than to resi + sterm find that it pays to treat all of their constituents honestly and loyal 32_Chapter 2 an copra Tepresentes. the nature of the ethical congo te Rt to submit an informative merorandam 2 organization. Kies resignaticn, CAA0E5 ain be appropiate to rettty oer . 7 inte of enagement bexourtarts, Samay Netorel RSS EEN o Reey Statements on Management Aacoutiog- es OF Management Ac, 8. Statement No. 1B, New York, NY, June 17, 1962 as revised 1807. oo COMPANY CODE OF CONDUCT portant practical function in an ady, adherence to ethical standards, materigy Tig, president of CMA emphasizes the impor" PT Ethical standards serve @ very in economy. Without widespread standards would fall. A former ethics in business: «Employees like to work for a company that they can trust. C like fo deal with an ethically reliable business. Suppliers like oan Fans with which they can have a real partnership. Communities are mer likely to cooperate with organizations that deal honestly and fey wig them. If the business community is to function effectively, all of players need to act ethically.” It is unfortunate though, that some companies place so much emphasis on gen term profits that may make it seem like the only way to get ahead is ig unethically. Those who engage in unethical behavior often justify their actions with exe more of the following reasons: (1) the organization expects unethical behavior, (2) everyone else is unethical, and/or (3) behaving unethically is the only way to get ahead. To counter the first justification for unethical behavior, many companies kat adopted formal ethical codes of conduct. These codes are generally broad-bae! statements of a company’s responsibilities to its employees, its customets suppliers and the community in which the company operates. Codes give br guidelines rather than that spell out specific do’s and don'ts or suggest poo behavior in a specific situation. Companies with a strong code of ethics can© strong, customer and employee loyalty. While liars and cheats may we occasion, their victories are often short-term. Companies in Laie — ly. 7 he Professional Environment of Cost Management 33 TYPICAL ETHICAL CHALLENGES Ethical issues can confroy nt mi: : examples: ‘anagement accountants in many ways. Here are two * Case A. Ro (evan softane ae anagement accountant, knows that reporting a has concerns eben S108 will result in yet another series of avo, ad cost are cuenta oes ott of sofware for wich R&D an expense fart being capitalized as an asset rather than being shown at that the new product : will be successful and i idence and profitable but presents little have beeg ite a argument. The last two products from this division the division and See The Management accountant has many friends in faniner 's to avoid a personal confrontation with the division Case B: A packagin ier, biddi @ supplier, bidding for a new contract, offers the management accountant of the purchasing company an all-expense paid weekend to the Boracay Resort. The supplier does not mention the new contract when gi 1 ing the invitation. The accountant is not a personal friend of the supplier. He knows cost issues are critical in approving the new contract and is concemed that the supplier will ask for details about bids by competing packaging companies. In both cases, the management accountant is faced with an ethical dilemma. Case A involves competence, objectivity, and integrity. The management accountant should request that the division manager provide credible evidence that the new product is commercially viable. If the manager does not provide such evidence, expensing R&D costs in the current period is appropriate. Case B involves confidentiality and integrity. Ethical issues are not always clear-cut. The supplier in Case B may have no intention of raising issues associated with the bid. However, the appearance of a conflict of interest in Case.B is sufficient for many companies to prohibit employees from accepting “ ‘favors’ from suppliers. bred 3.3 includes the IMA’s guidance on “Resolution of Ethical Conflict” The accountant in Case B should discuss the invitation with his immediate supervisor. trihe visit is approved, the supplier should be informed thatthe invitation has bes officially approved subject to his following corporate policy (which includes the confidentiality of information). Mo Chapter INTERNATIONAL LEVEL, CODES OF CONDUCT ON 'T { Accountants (FAC) jn yy In July 1990, the International Federation i hi Philippines through the PICPA iv member, issued the “Guidelines oy gil » activities OF all pra Professional Accountants" which gover accountants throughout the world; regard! independent CPAs, employed in government service or employed ay ;, In addition to outlining cthical requirements in matters dai.” stivity, independence, and confidentiality, the IFAC's ¢, hical responsibilities in matters relating to tay, ation, the handling of monieg a i re involved, the IFAC gi" these requirements are stricter than the hic the work is being performed, thea : of whether they are preg My , accountants competenc outlines th and comm border netivitie: requirements must be followed requirements of the country in which objec vg, and soli ional Regulation Commission a ‘The Board of Accountancy of the Profi a prov the implementation of the Revised Code of Fthies for Professional Accountants i the Philippines effective January 1, 2016. INTERNATIONAL CERTIFICATIONS The three certifications available to management accountants are as follows; Certificate of Management Accounting (CMA) © Certificate in Public Accounting (CPA) © Certificate in Internal Auditing (CIA) CMA.-A Certified Management Accountant is one who has passed the rigoros qualifying examination, has met an experience requirement, and participates in _ continuing educations. The CMA Certificate is granted by the Instive Management Accountants (IMA). CPA.'A Certified Public Accountant is one who has met the pre-qualificaica educational requirements, passed the CPA licensure examinations given by the Professional Regulatory Board of Accountancy and has satisfied all other leg and regulatory requirements of a public accountant. The CPAs main responsibiiy to provide assurance concerning the reliability of the information contain in firm’s financial statements. Th CA Te Profesonl Environment o Since one of the manape; em ast Management _35 accountant is to de: ‘agement cont ‘bili 2 My e rol res i inthe att to develop etecive Ponsibilites of the management systems to di c f records. ir: 'o detect and cI " oie Prevent errors and song a a tte Controlrionted mon ere Management aceoUAtinl fo ae granting Certificate tio” Such as the Institut status of Certified tification in Internal Auditi eae t tine (C ene tft Internal Auditor an individual must nee esr? tai the signed ee lual must pass a comprehensive Te techni number of years of work experiene ohical Competence and have the required more, time analyzin 2 ig @ company’s i recording and com iis oe puting costs of product Accountants (IMA), the princi eition c ); the principal organization of m: i United States, has instituted a program to provid resend fot sieepee le certil i accountants and financial managers. The Certified Mach ne (CMA) examination was first given in 1972. A listing of the required subject areas in the CMA examination indicates the breadth of knowledge expected of the professional management accountant. The examination consists of the following four parts:. Economics, Finance, and Management; Financial Accounting and Reporting; Management Reporting, Analysis and Behavioral Issues; and Decision Analysis and Information Systems. The Certified in Financial Management (CFM) examination was first given in 1996. The CFM examination is similar to the CMA examination with one major difference: the Financial Accounting and Reporting section is replaced with Corporate Financial Management. The IMA also promulgated a code of ethics for management accountants, with is discussed and less with the problems of The Institute of Management in the previous section. : i i Anization that The Institute of Management Accounting | (IMA) isa ereieesions organiza wn a publishes the monthly magazine Strategic Finanet- Sines 197 th TMA ive examination to test the i n eet aa ne be successful in a complex and fast-changing, meee rt Morne 3,000 he exam each year. Those who me : — More it ortiate in Management Aveouni an a proud ito in i 7 Sm on C business cards. For deta ee Oe on rs MA and for information on the CMA professional memberships 1 it ite. examination, visit the IMA Web si individuals take t velopment of standards of ethical hs hat members can call to discus 1 review these ethical stan a ea rds, A isthe de otline th A website t iF MANAGEMENT ACCOUNT): Nts One of contribu f i an and maintenance ol ahi tonflicts. one mY ‘also visit the IM PHILIPPINE ASS' (PAMA) tions of CIATION ©} P, vas established in 1972 as the National Association of Account ae clap, ne aiid with NAA in New York, It vans (NAay primarily provide it nbers with educational and professional acti itn Eipplement in the ets Mode of management accounting practices and me, Monthly technical meetings, seminars and workshops are held to present lethods ‘and current topics by leading speakers from the government, pri rele attjcational sectors: THte OPS forum provides the nerve for the aaa find experiences among the participants and the speakers. Publication Be of i amerals is also part of the Kssociation’s efforts to service its mmembow. technica ate and professionalize Management Accounting ii To propaguats the Certificate in Management rosa Aa through its continuing ‘education arm, the Philippine institute 7) Progra ‘Accounting (PIMA). Basic objectives of the program are: of Management nc. its mem To propag! 1. To establish management accountin, 4 sar ig as a re i . _entiyng the ole ofthe management eee ame wast) of knowledge, and by outlining a course of stu aE knowledge can be acquired. study by which suc 2. To foster higher- educational i To fat standards in the field of managene 3. To assist employees, educ yes, ators and students ishit To act pee els Inowledge and compeiane ine ld management accounting. ompetence in the field of TEMPORARY BUSINESS CON MENT AND STRATEGIC VIRONMEN FOCUS oF COST MANAGEMENT CHAPTER EXPECTED LEARNING OUTCOMES After studying this chapter, you should be able to... the more recent changes jp, 1. Describe n € contemporary business environment such as Environment 3 The Global Business ‘Advances in Manufacturing Techniques Advances in Information ... A greater focus on customers New forms of organization Changes in the Social, Political & Cultura Environment Explain the strategic focus of cost management crews 3. Describe the relationship between cost management and the accounting systems 4. Explain the concept of integrative framework on how the accounting system is used in the firm's organizational architecture ooo CHAPTER 3 CONTEMP9 RARY BUSI ST NESS ENVIR RATEGIC Focus or COST MANA MENT AND CONTEMPORARY BUSINESS ENVIRONMENT The business envii ‘ronment in recent iti Years has be inchade (aga teletloss drive forts M8 been character include (1) an j nu increase in ized by increasing technologies; (3 Sus improvement. These changes ns (2) advances in manufacturing technologies, the Internet, and & Blobal competitio, s in information Corporate executives are now using cost data to chart successful futures for their companies. Adapting Management accounting system to better meet management's needs for informatioh is crucial to an organization’s survival when competing in global markets. Global Conipetitors now have relatively free access to markets around the world. As a result, domestic markets on virtually every country face greater challenges from foreign competition, With increased reliance on global markets, companies need not only respond quickly to changing market conditions but also tailor products to different Consumer tastes and demands and this has to be done at a level that assures profit and gives satisfactory retums to shareholders. : i their management , yment management accountants use e aol coahes to cinport and reafree murfesuig od: ter cree Sateen this ight that one leans o appreciate terol of management Ses ae ee mot ofan influencing role rather than just an informing roe. accountant whi i in at least the last two decades where I i iness environment in at ee hae pe ee ‘h i potsforn themselves to bovoms ee nee i i E i lent act 5 eS ne i tice of managem« nt , I Sal profound effect in i ewe gusiness, especially the increase in not ee ti ges in management techniques, that have cree eed iti id the chai competition an ic approach to management and'to cost management. apt for anew, strategic 7, Chapter 3 ‘The Global Business Environment nal markets and trade ave the key developmen y. the contemporary business changes in the Go! ty The growth of the extensive changes it fe business environment. Profit-oriented business. and not-for-profit qin iva Consumers and regulators are all affected significantly by the rapiq Economic independence and increased competition from other conf Browing number of alliance among large multinational, the increae; ‘A Agreements among countries indicate clearly that the Opportunities for grog @% Profitability lie in global markets. As low-cost, high quality goods ae ty worldwide, most consumers are benefited. Manager, business bo] investors benefit likewise when sales and production activities are puny i foreign countries. Global business environment is very competitive and firms need cost Manager, information to sustain competitiveness. They also need financial] and nonfi information about doing business and competing effectively. aig - Advances in Manufacturing Technologies Firms around the world adopt new manufacturing technologies to Temais competitive in the face of the increased global competition. Many firms methods applied in some Japanese manufacturing firms that produced significa cost and quality improvements using quality teams, and statistical quality contr, Some firms include just-in-time inventory method in order to reduce the cos ad waste of maintaining large levels of raw materials and unfinished Product. A key competitive edge that forms have is the ability to deliver the product, or servi. faster than the competition. This is known as speed-t. ‘market, Advances in Information Technologies, The Internet and E-Commerce The increasing use of information technology, the internet and e-commerce is perhaps the most fundamental of all business changes in recent years. This ne economy is manifested in the rapid growth of Internet-based firms (the dotcom's such as Amazon, eBay, and E-trade) and the increased use of the Intemet ft business data processing, communication, and sales. These technologies Mit resulted in the growing focus in cost management by reducing the time requ! 0 Process transactions, thereby expanding the individual's access to informalt within the firm, the industry and the business environment around the world Contemporary Business Envi contemporary Business Environment and Siratege Focus Y Cort Management 54 A Greater Focus on Customers _ S as qu Possible, shorter overall intensity of com, satisfaction. product on A life ‘ ; petition. The new buer ife cycle thereby increasing the Ness process focuses on customer Producing value for the customer has changed the orientation of mana; fr low-cost production of large quantities to quality, service, faster delivery andthe ability to respond to the customer's desire for spesific feature, "Today many ofthe critical success factors are customer oriented, Cost management practices are also changing, cost management reports now include specific measures of customer preference and customer satisfaction. The value of a product or service to the customer is affected by such diverse attributes as product price, quality, functionality, user-friendliness, customer service, warranty and maintenance costs. By managing activities that will increase customer value, the firms can establish a competitive advantage by creating better customer value for the same or lower cost than that of competitors. Cost information plays an important part in the process called strategic cost management. Generally, firms chose a strategic position corresponding to one of two general strategies: (a) cost leadership, and (b) superior product through differentiation. A focus on customer value means that the management accounting system ee produce information about both realization and sacrifice. The system shoul able to measure various attributes of customer value. ccess rsuit of cost leadership and/or differentiation strategies requires an Successful pt t ip and/or di a understanding of a firm’s value chain (internal) and supply chain (external). : 58 Chapter 3 — bees ae New Forms of Management Organization ~ Management organization has changed in response to the changes in Mate and manufacturing. Because of the focus on customer satisfaction and yaje ity emphasis has shifted from financial and profit-based measures of pers, ate Customer-related, nonfinancial performance measures such as quality, ‘ee delivery and service. Similarly, the hierarchical command-and-contre} ek Organization is being replaced by a more flexible organizational fro encourages teamwork and coordination among business functions, Ins = these changes, cost management practices are also changing to include reyp 6 are useful to cross-functional teams. of managers; the FepOrtS reflen: Multinational roles of these teams and include a variety of operating and fine information: product quality, unit cost, customer satisfaction, and pr bottlenecks. The changes in management organizati gemet tion and marketing in . environment of business are summarized in Figure 3-1. Figure 3-1: Comparison of Prior and Contemporary Business Environmeny Prior Business Contemporary Business Environment Environment Management Organization | ‘Type of information Almost exclusively financial | Financial and oper recorded and reported | data data, the firm's strategic success factors Management Hierarchical, command and Network-based organizational structure | control organization forms; teamwork focus - employee has more responsibility and conto, ‘coaching rather than command and control Management focus Emphasis on the short ‘term, | Emphasis on the long short-term performance term, focus on critical Measures and compensation, | success factors, concem for sustaining the ‘commitment to the long- current stock price, short term success of the fi, tenure and high mobility of top | including adding managers shareholder value Contemporary Busines: SE Environ Basis of compensation | Sig Hment and Si re nent and Strategic Focus of Cost Management 59 {| ‘| Quality, functional Manufact act luring process | High volanio, onesie ___| customer satisfaction runs, ignite m0 | oducfon Low volume, short process and fn in- | production runs, focus of inventory finished redung inventory evel , and other non-value-added a ‘Assembly-line automation re ee isolated technology | Mangia applications nufacturing systems, integrated technology applications connected by ; : networks Required labor skills Machin- paced, low-level | Individually and team- 7 - paced, high-t Emphasis on quality Acceptance of a normal or Goal of oo oe usual amount of waste Marketing Products Relatively few variations, long | Large number of ‘ product life cycles variations, short product life cycles Markets. Largely domestic Global Changes in the Social, Political, And Cultural Environment of Business Significant changes have taken place in the social, pol itical, and cultural environments that affect business. Although the nature and extent of these changes vary a great deal from country to country, they include amore ethically and realy diverse workforce, a renewed sense of ethical responsibility among managers - employees, and an increased deregulation of business by the national government. i il ible and to i it uires firms to be flexible and adaptal alo reat eon aa ‘he hands of a more highly skilled see asi "the changes tend to focus the firm factors outside the pods tine ee provision of its service to the ultimate consumer an gl its product society in which the costumer lives. 60 Chapter 3 EMENT ee G STRATEGIC FOCUS OF cost MANA’ and expected change jy _ - ‘. ies the .emergin . . . ‘A competitive firm incorporasiness jnto its business planning and pray, y environment © taanufacturing technologies 2 vs advanced tec set of changes in regulatory policies and cys," cial, political and cultural environment, contempora ‘This firm is custom appropriate, anti tastes, and recogn er-driven, tes the effect nizes its complex So the management accountant focuse, the 1 inking, er ha ist focusing on cost control and oh Guided by strategic or lon , Se Sper .ssful rather than ju make the company succe’ financial measure. scien por = Cost management should focus not on the ae ent pe but on ty wn of those measures that are critical to the firm’s success, Phases of the development of cost management systems should consider ths following: Stage 1: Cost management systems are basic transaction reporting systems, d stage, cost management systems Stage 2: . As they develop into the second sta nage focus on external financial reporting. The objective is reliable financial reports; accordingly, the usefulness for cost management is limited. Stage 3: Cost management systems track key operating data and develop more accurate and relevant cost information for decision making; cost management information is developed. Stage 4: .Strategically relevant cost management information is an integral part of the system. Stages 1 and 2 of cost system development focus on the management accountant’: measurement and reporting role. Stage 3 shifts to operational control. Stage 4, the management accountant becomes an integral part of management, not just reporter but a full business partner, with the skills of identifying, summarzinged reporting critical factors necessary for the firm’s success. Critical Success Factors (CSFs) are measures of those aspects of the fim's performance essential to its competitive advantage and, therefore, to its succtss. Ma ny ° these critical success factors are financial, but many are nonfinancial. TH for any given firm depend on the nature of the competition it faces. ntemporary Busi i b ary Business Environment and Swavegte Focus of Ce of Cost Managerient ~ 61 cosT MANAGEMENT AND ACCOUNTING SYSTEMS ‘The term cost management is widel js no uniform definition. We use c ‘Ost management I to d y used in busi in businesses today. Unfortunately, there lescribe the approaches and being used, changes of plant formation from a i ae hehe ns changes i ineron fom cunt yy e et Sa counting systems themselves are not at maoone : st management. Cost management has a broad foci g us. For example, it i eee 2 ple, it includes — ‘© thes na wes reduction of costs. The planning and contre of east inextricably linked with revenue and profit planning, For inmaenstel iene, ce, to enhance revenues and profits, managers oft il pavertising and product nodes deliberately incur additional costs for but it not confined Cost management is not practiced in isolati s ticed in isolation. It’s an integral of management strategies and their implementation. Examples lide moist a enhance customer satisfaction and quality, as well as programs that pro “blockbuster” new product development. mee WHEN SHOULD THE INTERNAL ACCOUNTING SYST! CHANGED? EMRE The succeeding sections will analyze organizational innovations. These innovations illustrate that internal accounting systems are an integral part of the organization’s architecture. When managers change the architecture of their organization by decentralizing decision rights and empowering employees via TQM programs because the firm’s business strategy changes, accounting systems are likewise modified. Similarly, when JIT production systems are installed, accouriting system changes follow. However, there were no organization changes urement systems and these accounting systems associated with productivity meast were not widely implemented. deal management accounting system. Each organization has different circumstances that lead to wae aie "i isi i tinually deal with trade-ofls accou lecisions. Also, accounting must contin ote ion describing firm performance and it ti among external users wanting information i a internal users wanting in! decision making and control. Surviving formation for organizations must meet th i nologies and markets by There is no such thing as the i he demands of changing tecl structures and organizational architectures, 4. tures are in a constant state of change, the account Ming ng. their busi organizational archit em must regularly adapt. There are certain signs that indicate that the internal accounting system is working well. One sign is dysfunctional behavior on the part of managers yee," of poorly chosen performance measures. Managers. will. make decisign positively influence performance measures. Ifthose performance measures are, consistent with the goals of the organization, management will make decisions ya do not coincide withthe organization's goals. Another sign of problems witht accounting system is poor operating decisions. If product mix and pri” decisions based on management accounting are not adding to the organization value, then the accounting system is either providing inaccurate estimates a opportunity costs and/or creating dysfunctional incentives. Often changes in customers’ organizational architectures cause suppliers to change their architecture (and accounting systems). If your major customers arg modifying their organizational architectures, they are likely responding ig technological and market conditions. The way in which knowledge is generate and disseminated has probably changed. These changes are likely affecting your firm’s organizational architecture. Organizations should not necessarily look to the latest management accountng fads to give them direction in changing their management accounting systems Activity-based costing (ABC), for example, is only appropriate for certain types of organizations. Each organization must continually evaluate and improve its management accounting system to meet the challenges of a changing environment and a changing organization. This text will emphasize the dual role of internal accounting systems for decision making and control. Because the internal accounting system is performing two separate roles (it is also being used for taxes and financial reporting), trade-offs between these roles must be made. In its decision-making role, the accounting system is the first place managers turn to help them estimate opportunity costs. However, accounting numbers are not forward-looking opportunity cos. Accounting systems record historical costs, which are backward looking. Therefore, accounting numbers are useful for decision making only under very strong assumptions, primarily that the future will look like the past. ‘ontemporary Busi i Contemporary Business Environment and rategic F ‘cus INTEGRATIVE FRAMEWORK OfCost Management 63 > Use, and design futu Figure 3-2 shows the integrati . 3 v grative frame ir system is used in the firm's omnia for understanding how the accounting fernal aoa ial architectur Sin extemal factors (technological innovation and market condoned ene affect the firm’s business strategy. The business j organizational architecture to Ttovide inetives Re nat with the firm’s These incentives affect the actions taken, which in turn Motte va oe ‘Thus, Figure 3-2 emphasizes that external factors like technology a a mn a conditions affect investments, organizational architecture, inenives Stine, tal ultimately the value of the firm. P es, actions, and Figure 3-2 provides two important observations: 1. Changes in the accounting system rarely occur ina vacuum. Accounting system changes generally occur at the same time as changes in the firm’s business strategy and other organizational changes, particularly with regard to the partitioning ‘of decision rights and the performance evaluation and reward systems. .2. Alterations in the firm’s organizational architecture, including changes in the accounting system, are likely to occur in response to changes in the firm’s business strategy caused by external shocks from technology and shifting market conditions. | ee 4 Chuptor determinant oh tusineas Miradegy, rena Hriguro 3-25 THe nrehitecture, and firm value Casstenree Wie Nature A Merletige 2A Contemporary Business Environment and. Strategic Focus of Cost Management 65 ‘Three significant managerial implications are derived from these two observations, First, before implementing an “ccounting or other organizational change, it is important to understand what is driving the change. Second, an accounting system should not be adopted merely because other firms are doing so; they may be reacting to a different set of extemal shocks, Third, an accounting system should not be changed without Concurrent, consistent changes in the way decision rights are partitioned as well as in the performance reward systems. All three parts of the organization’s architecture ‘must be internally consistent and coordinated, CHAPTER DEVELOPIN TRATEGY A COST MAN IG A COMPETITIVE ND CONTEMPORARY AGEMENT TECHNIQUES EXPECTED LEARNING ourcoMES After studying this Chapter, you should be able to... 1. Understand the basi ! an 2 basic approach of ' competitive siraegy is developed a roe gins 2. Explain the strategi gic Measures of success, financial Nonfinancial factors ine one Describe the critical success factors in a business firm and how they can be measured 4. Explain the consequences of lack of strategic information Describe the two basic competitive strategies, namely, a. Cost Leadership b. Product Differentiation 6. Understand and describe the contemporary cost management techniques such as Total Quality Management Just-in-Time Production System Process Reengineering Benchmarking _ Mass Customization | lanced Scorecarc natiity-based Costing and Management Theory of Constraints Life Cycle Costing. Target Costing nufacturing Computer-Aided Design and Ma Automation . Ecommerce The Value Chain eoee PRBaTRTTsyarganoT|a CHAPTER 4 DEVELOPING A COMPETITIVE STRATEGy, CONTEMPORARY COST MANAGEMENT ‘TECHNIQUES N DEVELOPING A COMPETITIVE STRATEGY , procedures and approaches to business that Prod luce A strategy is a set of pol long-term success. Finding a strategy begins with determining the purpose and long.range dire ron in other words, the mission of the company. The mission is developed ign specific performance objectives which are then implemented by specific comorag or company’s strategies, that is, specific actions to achieve the objectives that will fulfill the mission. A firm succeeds by implementing a strategy. Strategy specifies how an organization matches its own capabilities with the opportunities in the market place to accomplish its objectives. In other words, strategy describes how a compete will compete and the opportunities its employee should seek and pursue. Companies follow one of two broad strategies. Some companies such as Jollibee, Pure Gold and Cebu Pacific Airline compete on the basis of providing a quality product or service at low prices. This is also knowns “Cost Leadership” strategy. Other companies such as Rustan’s Department Store and BGC Shangri-La Hotel compete on their ability to offer unique products or services that are often priced higher than the products or services of competitors. This is known as “Product Differentiation” strategy. Deciding between these strategies is a big part of what managers do. Management accountants work closely with managers in formulating strategy by providing information about the sources of competitive advantage ~ for example, the cos, productivity, or efficiency advantage of their company relative to competitors oF the premium prices a company can charge relative to the costs of adding features that make its products or services distinctive. The management accountant helps formulate a strategy by answering questions such as: . _ developing a Comperiti Strategy: C 80 Conte st Management Tec! Who are our most important custory — stomers? How sensitive are thei: ie ¢ their pure} Who are our most i Purchases to price, qualit ; st important suppliers? and service? What substitute products exists j fom oir pode fy ferme ofa in the marketplace, and how do they diff : rice and quality’ ue @ Isthe industry demand growing or sh ating e Is there overcapacity? aia Strategic cost management i: fically foc gement is often used to describe C specifically focuses on strategic issues such as these ‘ost Management that STRATEGIC MEASURES OF SUCCESS Firms use cost management to su i pport their strategic goals. Th i ere . The strategic management system develops strategic information, including both fi A a non-financial information. nancial and Financial performance measures include among others a. growth in sales and earnings b. cash flows c. stock price They show the impact of the firm’s policies and procedures in the firm’s current financial position and therefore, its current return to the shareholders. Non-financial measures of operution include among others a, market share b. product quality c. customer satisfaction d. growth opportunities i ’ 4 potential competitive nancial factors show the firm’s current an ee three additional perspectives namely: position as measured from 1. the customer 2. internal business process and 3. innovation and learning Strat ic financial and nonfinancial measures of success are also commonly called: fegic ‘inal Critical Success Factors (CSFs) T2_ Chapter 4 _ Figure 4-1 shows the Financial and Nonfinancial Mest fe ticy Success Factors) Figure 41; Financial and Nonfinancial Measures of Success Success Factors and How to Measure CSF or Chit Critical Success Factors How to Measure CSF Financial Measures of Success Sales Level of sales in critical product groups, ea tr percent of sales from new products, saleg foes 4 accuracy . ay Timeliness of delivery Quality : Profitabilit Earnings from operations, earings tre, rofitability growth 198 trend, Cider iquidit Cash flow, trend in cash flow, int Liquidity asset tumover, inventory tumor, aoe ae tumover, credit ratings Market value Share price Non-Financial Measures of Success Customer Factors Customer satisfaction Customer retums and complaints, Customer survey Dealer and distributor Coverage and strength of deeler and distibuty, channel relationships; ¢.g., number of dealers per state or region ‘Marketing and selling Trends in sales performance, training, market tesearch activities; measured in On-time delivery Performance, customer receipt Customer complaints, warranty expense hours or peso time from order to Internal Business Process Quality Productivity Flexibility Equipment readiness Safety Number of defects, number of retums, customer Survey, amount of scrap, amount of rework, fe service reports, warranty claims, vendor quality defects Cycle time (from raw materials to finished prod) labor efficiency; machine efficiency; amount of waste, rework, and scrap Setup time, cycle time Downtime, operator experience, machine capaci, Maintenance activities Number of accidents, effects and accidents

You might also like