Introduction to Strategic Cost

Management
 OVERVIEW OF
COST
Chapter 1 MANAGEMENT
AND STRATEGY
Introduction to Strategy

Success comes from developing and implementing an effective

strategy aided by management accounting methods
 Clear mission statement
 Strategy is a roadmap to achieve a company’s mission
Strategy – a set of policies, procedures and approaches to business that
produce long term success
Cost Management Information

 Serves all management functions

 Information a manager needs to manage effectively

 Financial and nonfinancial
Financial information alone shows a short-term focus
 Developed under the direction of the controller for the Chief Financial
Officer (CFO) of the organization
 Types of Organizations

Service
Service Government
Governmentandand
Manufacturers
Manufacturers Merchandisers
Merchandisers firms
firms Not-for-profit
Not-for-profit

Wholesalers
Wholesalers Retailers
Retailers
Uses of Cost Management Information

Cost management information is assembled to aid management

in the following functions:
 Strategic management
 Planning and decision-making
 Management and operational control
 Reportorial and Compliance to Legal Requirements
1. Strategic Management

Strategic management – involves the development of a sustainable competitive

position in which the firm’s competitive advantage spells continued success.
 Involves identifying and implementing goals and action plans to maintain a
competitive advantage
 Management must make sound strategic decisions regarding the choice of
products, manufacturing methods, marketing techniques and channels and other
long-term issues
 Requires an integrative approach which combines skills from all business
function, namely, marketing, production, finance and accounting/controllership
2. Planning and Decision Making

 Information is needed to support recurring decisions such as replacing

and maintaining equipment, managing cash flows, budgeting raw
materials purchases, production and pricing, scheduling production,
pricing and managing distribution of products to customers and so
forth.
 Information is needed for short-run planning (budgeting) and profit
planning (Cost-Volume-Profit analysis)
 Management and Operational Control

 Information is needed to identify inefficient operations and reward effective

management practices
Operational Control takes place when mid-level managers (product managers,
regional managers) monitors the activities of operating level managers and employers
(production supervisors , department heads)
Management Control, on the other hand, is the evaluation of mid-level manager by
upper-level manager( Controller or the Chief Financial Officer (CFO))
Reportorial and Compliance to Legal
Requirements

 Requires 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
 Information is needed to guarantee compliance with regulatory
reporting requirements
 The Role of Management Accountants

Management accountants are the accounting professionals who develop and analyze cost management
information and other accounting information.
 They provide information to managers
 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)
 They participates in assuring that the organization operates as a unified whole in its long run
intermediate and short run best interests.
 The Role of Management Accountants

 Generally, management accountants do the following tasks:

a) Scorekeeping or data accumulation
Guidelines used:
i. Employ a cost benefit approached
ii. Recognize behavioral as well as technical considerations
iii. Use appropriate cost concepts for different purpose
a) Interpreting and reporting of information that helps manager to focus on operating problems, opportunities
as well as inefficiencies
b) Problem solving or quantification of the relative merits of possible courses of action as well as
recommendations as to the best procedures.
 Planning and Control Process

Resource Profit
Planning Planning
Planning – involves identifying alternatives Break – even
Cash budgets
and selecting a course of action and specifying analysis
how the action will be implemented to further
the organization’s objectives. The plan Projected
communicates a company’s goals to employees Capital budgets Income
statements
and specifies the resources needed to achieve
them. Plans are often expressed in budgets. Projected
Statement of
Financial
Position
 Planning and Control Process

 Control of organizations is achieved by evaluating the performance of managers and

the operations for which they are responsible.
Performance reports – reports used to evaluate the performance of managers and the
operations they control. These reports are use to “flag” areas that need closer attention.
Accounting Control Reports: Typically, managers follow the principle of
“management by exception” which means
 Cost variance analysis managers investigate departures from the
 Financial statement analysis plan that appear to be exceptional rather
than those that are minor only.
 Gross profit variance analysis
Planning and Control Process
PLAN

DECISIONS TO CHANGE ACTION TAKEN TO

OPERATIONS OR REVISE IMPLEMENT PLAN

RESULTS

DECISIONS TO REWARD OR
PUNISH MANAGERS COMPARISON OF PLANNED
AND ACTUAL RESULTS

EVALUATION