Professional Documents
Culture Documents
1
Study Objectives
1. Explain what strategic cost management is and how it
can be used to help a firm create a competitive
advantage.
2. Discuss value-chain analysis and the strategic role of
activity-based customer and supplier costing.
3. Tell what life-cycle cost management is and how it can
be used to maximize profits over a product’s life cycle.
4. Identify the basic features of JIT purchasing and
manufacturing.
5. Describe the effect JIT has on cost traceability and
product costing.
2
Strategic Cost Management
• Strategic cost management is the process
of reducing total costs while improving the
strategic position of a business. This goal
can be accomplished by having a
thorough understanding of which costs
support a company's strategic position and
which costs either weaken it or have no
impact
3
Strategic Cost Management
• Strategic Cost Analysis is a comparison
of one entity's cost position to another.
Cost analysis compares everything from
the price paid for raw materials right to the
price customers pay for the finished
product. The goal of the analysis is to
determine whether or not one company's
costs are competitive with another's.
4
Strategic Cost Management
• The main objective of cost management
is to reduce the costs expended by an
organization while strengthening the
strategic position of the firm. The
strategic position is concerned with the
impact on strategy of the external
environment, internal resources and
competences, and the expectations and
influence of stakeholders.
5
Strategic Cost Management
• Strategic cost management is a continuing
process, since the strategy of a firm may
change over time. Thus, certain costs may
be sacrosanct when one strategy is being
used, but can be readily eliminated when
the strategy shifts.
6
Strategic Cost Management:
Basic Concepts
• Three general strategies have been
identified:
– Cost leadership
– Product differentiation
– Focusing
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Strategic Cost Management:
Basic Concepts
Cost leadership strategy
To provide the same or better value to
customers at a lower cost than offered by
competitors.
8
Strategic Cost Management:
Basic Concepts
Differentiation strategy
Strives to increase customer value by
increasing what the customer receives
(customer realization).
9
Strategic Cost Management:
Basic Concepts
Focusing strategy
A firm selects or emphasizes a market or
customer segment in which to compete.
10
Strategic Cost Management:
Basic Concepts
The industrial value chain
• The linked set of value-creating activities from
basic raw materials to the disposal of the
finished product by end-use customers.
• Fundamental to a value-chain framework is the
recognition that there exist complex linkages
and interrelationships among activities both
within and external to the firm.
11
Strategic Cost Management:
Basic Concepts
Value-chain framework linkages
– Internal linkages: relationships among
activities that are performed within a firm’s
portion of the value chain
– External linkages: the firm’s value-chain
activities that are performed with its suppliers
and customers
• Supplier linkages
• Customer linkages
12
Strategic Cost Management:
Basic Concepts
13
Strategic Cost Management:
Basic Concepts
Organizational activities:
– Structural activities: activities that determine
the underlying economic structure of the
organization.
– Executional activities: activities that define
the processes and capabilities of an
organization and thus are directly related to
the ability of an organization to execute
successfully.
14
Strategic Cost Management:
Basic Concepts
15
Strategic Cost Management:
Basic Concepts
16
Strategic Cost Management:
Basic Concepts
17
Value-Chain Analysis
18
Value-Chain Analysis
Internal Linkage Analysis Example
Current Expected
Activity Activity Activity
Activities Activity Driver Capacity Demand Demand
Material usage Number of parts 200,000 200,000 80,000
Assembling parts Direct labor hours 10,000 10,000 5,000
Purchasing parts Number of orders 15,000 12,500 6,500
Warranty repair Number of defective products 1,000 800 500
19
Value-Chain Analysis
Internal Linkage Analysis Example
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Value-Chain Analysis
Internal Linkage Analysis Example
Units 10,000
Unit savings $ 48.70
21
Value-Chain Analysis
22
Value-Chain Analysis
23
Value-Chain Analysis
Internal Linkage Analysis Example
(800 + 190 + 5 + 5)
(30 + 20)
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Value-Chain Analysis
25
Value-Chain Analysis
One Large Ten Smaller
Customer Customers
Units purchased 500,000 500,000
Orders placed 2 200
Manufacturing cost $ 3,000,000 $ 3,000,000
Order-filling cost allocated* $ 303,000 $ 303,000
Order cost per unit $ 0.6060 $ 0.6060
26
Life-Cycle Cost Management
Basic views of the product life cycle:
Marketing viewpoint
Production viewpoint
Consumable life viewpoint
27
Life-Cycle Cost Management
28
Life-Cycle Cost Management
29
Life-Cycle Cost Management
Cost Reduction Example
Cost Behavior
Functional-based system:
Variable conversion activity rate: $40 per direct labor hour
Material usage rate: $8 per part
ABC system:
Labor usage $10 per direct labor hour
Material usage: $8 per part
Machining: $28 per machine hour
Purchasing activity: $60 per purchase order
Setup activity: $1,000 per setup hour
Warranty activity: $200 per returned unit
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Customer repair cost $10 per hour
Life-Cycle Cost Management
Cost Reduction Example
Activity and Resource Information (annual estimates)
Design A Design B
United produced 10,000 10,000
Direct material usages 100,000 parts 60,000 parts
Labor usage 50,000 hours 80,000 hours
Machine hours 25,000 20,000
Purchase orders 300 200
Setup hours 200 100
Returned units 400 75
Repair time (customer) 800 150
31
Life-Cycle Cost Management
32
Life-Cycle Cost Management
33
Life-Cycle Cost Management
Cost reduction methods:
– reverse engineering
– value analysis
– process improvement
34
Life-Cycle Cost Management
35
JIT and Its Effect on the Cost
Management System
JIT Traditional
• Pull-through system • Push-through system
• Insignificant inventories • Significant inventories
• Small supplier base • Large supplier base
• Long-term supplier contracts • Short-term supplier contracts
• Cellular structure • Departmental structure
• Multiskilled labor • Specialized labor
• Decentralized services • Centralized services
• High employee involvement • Low employee involvement
• Facilitating management • Supervisory management
style style
• Total quality control • Acceptable quality level
• Buyers’ market • Sellers’ market
• Value-chain focus • Value-added focus 36
Cost Flows:
Traditional Compared with JIT
Transaction 1: Purchase of raw materials.
37
Cost Flows:
Traditional Compared with JIT
Transaction 2: Materials issued to production.
38
Cost Flows:
Traditional Compared with JIT
Transaction 3: Direct labor cost incurred.
39
Cost Flows:
Traditional Compared with JIT
Transaction 4: Overhead cost incurred.
41
Cost Flows:
Traditional Compared with JIT
Transaction 6: Completion of goods.
43
Cost Flows:
Traditional Compared with JIT
Transaction 8: Variance is recognized.
44
COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan