Advanced Cost Management-Fall 2002 1

Advanced Cost Management

Professor William F. O’Brien, MBA, CPA

Fall 2002

Advanced Cost Management-Fall 2002 2

Introduction

• Cost Management• Financial•Non-Financial

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Financial Management Evolution

DATADATA

INFORMATIONINFORMATION

ANALYSISANALYSIS

IMPLEMENTATIONIMPLEMENTATION

Today’sCorporateFocus is on

Results!

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CompanyF/S

Users

EconomicDecisions

Financial Impact

(useful &relevant)

Financial Accounting Model

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Managerial Accounting Model

Plan

Implement

Monitor

Adjust AccountingInformation

Communication Environment

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Managerial vs. Financial Accounting

Managerial

• Internally oriented• Prospective• Operational and financial

focus• Timely• Not required • Non-GAAP• Relevant• Sub-unit orientation

Financial

• Externally oriented• Historical• Financial focus only • Accurate• Required • GAAP• Objective• Entire entity orientation

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Four Management Functions

…another Perspective• Strategic Management• Planning and Decision Making• Management and Operational

Control• F/S Preparation

• How is Cost Management Info Used?

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Strategic Cost Management

• Strategic cost management is the development of cost management information to facilitate the principal management function--strategic management.

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Factors Influencing Today’s Business

Environment• Global competition• Manufacturing and IT advances• Customer focus• Revised organizational

structures• Social, political and cultural

changes

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Contemporary Mgt. Techniques

• Benchmarking• Total Quality Management (TQM)• Continuous Improvement• Activity-Based Costing (ABC) and Mgt. (ABM)• Reengineering• Theory of Constraints (TOC)• Mass Customization• Target Costing• Life-cycle Costing• The Balanced Scorecard

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Professional Organizations

• Regulatory• IRS• FTC•SEC• FASB•CASB

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Professional Organizations

• Associations• IMA•SMA, Canada•AICPA• FEI• IIA

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Ethics

• Lack of ethics--everyone loses• South Florida Bermuda

Triangle of Ethics•Sensormatic•W.R. Grace•Bausch and Lomb•Sunbeam

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Ethics and You

• You will face an ethical challenge• It could impact

• Your job• Your family• Your relationships• Your financial stability• Your physical well-being

• You have only ONE reputation...

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Accounting Business Skills

“The What” • Business Perspective• Organizational Focus• Bias for Action• Communication Excellence• People Proficiency

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Financial Management Guidelines“The How”

• Cc• KTT• MBWA• R ƒ R3

• responsiveness• reliability• relevance

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Just Say “No” to...

A

B

C

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Scarlet Letter of Accounting

• Lacks Reality

• Distraction

• Lacks Cost Mgt.

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Ansari: SMA

• Strategic Triangle (QCT)•Competition based on quality, cost & Time

• Mgt. Acctg. Triangle (TBC)• Impacts technical, behavioral & cultural

aspects

• Mgt. Acctg. Links Strategy with Action• It is not an end unto itself• It is an integrating tool

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SMA, cont.

• The two triangles are dependent upon each other

• This process is a framework to ensure that our management accounting tools possess the attributes necessary to achieve our strategic goals

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SMA, cont.

• QCT Triangle•Self evident

• TBC Triangle•Provides Technical insight• Encourages Behavioral changes•Supports Cultural beliefs

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Strategic Analysis

• Cost…an economic sacrifice

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Competitive Strategy

• Strategic Planning: Mission Stmt.

• Cost Analysis•Shift from Stewardship to

Catalyst•Shift from Corp. Cop to Business

Partner

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Porter’s Value Processes

• Core Competency• Cost Advantage

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Types of Competitive Strategy

• Cost Leadership…cost advantage

• Differentiation…core competency

• Focus…pre-requisite to the first two

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Sustainable Competitive Strategy

Process• Complete a SWOT Analysis and

CSF Identification• CSF Measurement• CSF Reporting

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SWOT Analysis

• Internal Factors•Strengths•Weaknesses

• External Factors•Opportunities• Threats

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Critical Success Factors

• CSF’s can be defined in a variety of ways

• ie…something that must be done well right now!

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A Changed Perspective

• Results of Operations vs. operating information for results

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Balanced Scorecard

• A Vehicle for Reporting CSF’s• 4-Parts• More on Nov. 12, 2002

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Value Chain Analysis

• Multiple Approaches•Porter’s approach…see next slide•BCL approach

•Drivers• Cost• Core Competency

•MAG 41 approach

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Porter’s Value-Chain• Developed in 1985 by Michael

E. Porter in Competitive Advantage

• Highlights Cost Advantages and Distinctive

Capabilities• Value Chain Model• Value Chain Elements

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Value Chain Modelfrom Michael E. Porter’s Competitive

Advantage

Firm Infrastructure (General Management)

Human Resource Management

Technology Development

Procurement

Inbound Logistics

Ops. Outbound Logistics

Sales & Marketing

Service and Support

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

Custom

er Value

Cus

tom

er V

alue

Margin

Mar

gin

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Value Chain Elements• Customer Value

Added• Margin Orientation• Primary Activities

• Inbound Logistics• Operations• Outbound Logistics• Sales and Marketing• Service and Support

• Support Activities• Firm

Infrastructure• Human

Resources

• Tech. Development

• Procurement

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Strategic Cost Mgt. Implications

• Non-traditional reporting• Long-term focus• Cross-functional perspective

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Four Key Tools

• SWOT Analysis• CSF’s• Balanced Scorecard• Value Chain Analysis