1

Cost Management
and Strategic
Decision Making
Evaluating
Opportunities and
Leading Change
McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objective 1
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Characteristics of Cost Management

What is Cost Management?

•It goes beyond historical

measurement and reporting.

?
•It assesses the impacts of
current or proposed decisions.
•It is a philosophy, an attitude,
and a set of techniques to
create more customer
value and achieve lower cost.
 Learning Objective 2
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Characteristics of
Cost-Management Analysts

Cost analysts use cost

accounting and other data to:

Improve Improve Improve

products resource use services

Support Reduce
strategies costs
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Characteristics of
Cost-Management Analysts

Integrity

Broad knowledge
of the business

Ability to work
in cross-functional
teams
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Ethical Standards for Cost-

Management Analysts
Cost-management analysts must maintain high
standards of ethical behavior because they can
control the information used for important
strategic management decisions.

The IMA (Institute of Management Accountants) Statement

of Ethical Professional Practice, published for its
management accountant membership, offers guidance for
ethical behavior applicable to cost-management analysts.
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IMA Overarching Ethical Principles

Honesty

Fairness PRINCIPLES Objectivity

Responsibility
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IMA Standards for Ethical Behavior

Follow applicable laws,
regulations and
standards.

Maintain
professional Competence
expertise, and
communicate any
limitations or
constraints. Provide decision support
information and
recommendations that are
accurate and timely.
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IMA Standards for Ethical Behavior

Do not disclose confidential
information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
personal
advantage.

Inform relevant parties

about the proper use of
confidential information.
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IMA Standards for Ethical Behavior

Avoid conflicts of interest
and advise others of
potential conflicts.

Refrain from
conduct that could
compromise ethical
performance.
Integrity

Abstain from activities that

might discredit the
profession.
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IMA Standards for Ethical Behavior

Communicate information
fairly and objectively.

Disclose delays or
deficiencies in
Credibility information and
its processing.

Disclose all information

that should influence an
intended user’s
understanding of reports
and analyses.
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Sarbanes-Oxley Act (SOX)

(Section 404)
 The CEO and CFO  The CEO and CFO
are now personally are responsible for
responsible for their their company’s
company’s financial system of internal
statements. controls over its
 They must sign the financial reporting.
statements and take  Accurate cost
responsibility for measurement has
their accuracy. gained in
importance.
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Internal Control System

(to assure that a company achieves…)

Effectiveness and Compliance with

efficiency in its laws and
operations regulations

Reliability in its
financial reporting
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Learning Objective 3
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Strategic Decision Making

Strategy

An organization’s overall plan

or policy to achieve its goals.

Key
questions

Where do we How do we want

want to go? to get there?
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Where do We Want to Go? – Strategic

1.1

Missions • New market potential

• Be early entrant
• Achieve growth
• Capture market share Build
High
• Continuing market
• Maintain growth
• Be a major player
Hold
REWARDS

• Protect market share

• Continuing market
Medium • Maintain cash flow
• Maintain volume
Harvest • Cut costs
• Declining market
• Exit at lowest cost
• Minimize losses
Low Divest • Find a buyer quickly

Low Medium High

RISK
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How Do We Want to Get There?

Managers are more successful

in attaining objectives if they:

Understand sources Use effective

and threats to decision making
competitive advantages. techniques.

Competitive advantages result from achieving a value chain

that enables an organization to provide more value
(perhaps at a lower cost) than its competitors.
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The Value Chain

1.2

Where do we want to go?

How do we want to get there?

Physical Human
resources resources

Support services
•Accounting
•Human resources
•Legal services
•Information systems
•Telecommunications

Value of
Distri- Customer products
R&D Design Supply Production Marketing
bution service and
services
Primary processes
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Outsourcing and the Value Chain

Focus resources on Outsource those value

parts of the value chain chain processes that
that are most important can be done more
to company goals. efficiently by others.

What is most likely

to be outsourced? Potential problem
Information services, Loss of control
legal, logistics, human and
resources, payroll, internal expertise.
accounting, tax.
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Competitive Advantages, Sources

1.3

and Threats
Co Exis
Product mp tin w rs Business
eti g Ne etito
Strategy tor
s Source of o mp Unit Strategy
C
Low Cost Capability Build
Production
Create New
Knowledge Hold

Product
Differentiation Harvest
Imitate
Others
Divest
Market Focus
rs

Su
Suppliers
me

bs
sto

ti
tut
Cu

es
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Formulation of Strategic Action Plans

An 8-step process at Pursuit Data

1. Identify need for change.
2. Create team to lead and manage change.
3. Create vision of the change and strategy for achieving vision.
4. Communicate vision and strategy for change and have change team
act as a role model.
5. Encourage innovation and remove obstacles to change.
6. Ensure that short-term achievements are frequent and obvious.
7. Use successes to create opportunities for improving entire
organization.
8. Reinforce culture of more improvement, better leadership, more
effective management.
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Learning Objective 4
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Evaluating Plans and Outcomes

Operational Strategic
performance performance
analysis analysis

Has short-run Has long-run

performance met performance met
expectations? expectations?
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Evaluating Plans and Outcomes

Quantitative information Variance
and qualitative information Analysis
about a proposed plan

Differences between
Cost the expected and
Benefit actual costs of
Analysi business operations
s
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End of Chapter 1