Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

1Cost Management

and Strategic Decision Making

Evaluating Opportunities and

Leading Change

Learning Objective 11-2

??

What is 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.

•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.

Characteristics of Cost Management1-3

Learning Objective 21-4

Characteristics ofCost-Management Analysts

Cost analysts use costaccounting and other data to:

Supportstrategies

Improveproducts

Improveservices

Reducecosts

Improveresource use

1-5

Characteristics ofCost-Management Analysts

Integrity

Ability to workin cross-functional

teams

Broad knowledgeof the business

1-6

Ethical Standards for Cost-Management Analysts

Cost-management analysts must maintain highstandards of ethical behavior because they can

control the information used for importantstrategic management decisions.

Cost-management analysts must maintain highstandards of ethical behavior because they can

control the information used for importantstrategic 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.

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.

1-7

PRINCIPLES

IMA Overarching Ethical Principles

Honesty

Fairness Objectivity

Responsibility

1-8

Competence

Follow applicable laws, regulations and

standards.

Follow applicable laws, regulations and

standards.

Maintain professional

expertise, and communicate any

limitations or constraints.

Maintain professional

expertise, and communicate any

limitations or constraints. Provide decision support

information and recommendations that are

accurate and timely.

Provide decision support information and

recommendations that are accurate and timely.

IMA Standards for Ethical Behavior1-9

Confidentiality

Do not disclose confidential information unless legally

obligated to do so.

Do not disclose confidential information unless legally

obligated to do so.

Inform relevant parties about the proper use of

confidential information.

Inform relevant parties about the proper use of

confidential information.

Do not use confidential

information for personal

advantage.

Do not use confidential

information for personal

advantage.

IMA Standards for Ethical Behavior1-10

Avoid conflicts of interest and advise others of potential conflicts.

Avoid conflicts of interest and advise others of potential conflicts.

Abstain from activities that might discredit the

profession.

Abstain from activities that might discredit the

profession.

Refrain from conduct that could compromise ethical

performance.

Refrain from conduct that could compromise ethical

performance.Integrity

IMA Standards for Ethical Behavior1-11

Communicate information fairly and objectively.

Communicate information fairly and objectively.

Disclose all information that should influence an

intended user’s understanding of reports

and analyses.

Disclose all information that should influence an

intended user’s understanding of reports

and analyses.

Credibility

IMA Standards for Ethical Behavior

Disclose delays or deficiencies in

information and its processing.

Disclose delays or deficiencies in

information and its processing.

1-12

Sarbanes-Oxley Act (SOX)(Section 404)

The CEO and CFO are now personally

responsible for their company’s financial

statements. They must sign the

statements and take responsibility for their accuracy.

The CEO and CFO are responsible for

their company’s system of internal controls over its

financial reporting. Accurate cost measurement has

gained in importance.

1-13

Internal Control System(to assure that a company achieves…)

Effectiveness and efficiency in its

operations

Reliability in its financial reporting

Compliance withlaws and

regulations

1-14

Learning Objective 31-15

Strategic Decision Making

An organization’s overall planor policy to achieve its goals.

Strategy

Keyquestions

How do we want to get there?

How do we want to get there?

Where do we want to go?

Where do we want to go?

1-16

Where do We Want to Go? – Strategic Missions

Low

Low

Medium

Medium

High

High

RISK

RE

WA

RD

S

Divest

Harvest

Hold

Build

• Declining market• Exit at lowest cost• Minimize losses• Find a buyer quickly

• Continuing market• Maintain cash flow• Maintain volume• Cut costs

• Continuing market• Maintain growth• Be a major player• Protect market share

• New market potential• Be early entrant• Achieve growth• Capture market share

Exh.1.11-17

How Do We Want to Get There?

Managers are more successfulin attaining objectives if they:

Managers are more successfulin attaining objectives if they:

Understand sourcesand threats to

competitive advantages.

Understand sourcesand threats to

competitive advantages.

Use effective decision making

techniques.

Use effective decision making

techniques.

Competitive advantages result from achieving a value chainthat enables an organization to provide more value

(perhaps at a lower cost) than its competitors.

Competitive advantages result from achieving a value chainthat enables an organization to provide more value

(perhaps at a lower cost) than its competitors.

1-18

The Value ChainWhere do we want to go?

How do we want to get there?Where do we want to go?

How do we want to get there?

Physical resources

Physical resources

Humanresources

Humanresources

Support services•Accounting

•Human resources•Legal services

•Information systems•Telecommunications

Support services•Accounting

•Human resources•Legal services

•Information systems•Telecommunications

R & D Design Supply Production Marketing Distri- bution

Customer service

Value ofproducts

andservices

Value ofproducts

andservices

Primary processes

Exh.1.21-19

Outsourcing and the Value Chain

Focus resources on Focus resources on parts of the value chain parts of the value chain that are most important that are most important

to company goals.to company goals.

Focus resources on Focus resources on parts of the value chain parts of the value chain that are most important that are most important

to company goals.to company goals.

Outsource those value Outsource those value chain processes that chain processes that

can be done more can be done more efficiently by others.efficiently by others.

Outsource those value Outsource those value chain processes that chain processes that

can be done more can be done more efficiently by others.efficiently by others.

What is most likelyto be outsourced?

Information services, legal, logistics, human

resources, payroll, accounting, tax.

What is most likelyto be outsourced?

Information services, legal, logistics, human

resources, payroll, accounting, tax.

Potential problemLoss of control

andinternal expertise.

1-20

Competitive Advantages, Sources and Threats

Exh.1.3

Product Strategy

Business Unit Strategy

Low Cost Production

Product Differentiation

Market Focus

Build

Hold

Harvest

Divest

Source of Capability

Create New Knowledge

Imitate Others

SubstitutesNew

Competitors

ExistingCompetitors

Cus

tom

ers

Sup

plie

rs

1-21

Formulation of Strategic Action Plans

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 teamact 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, moreeffective management.

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 teamact 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, moreeffective management.

An 8-step process at Pursuit DataAn 8-step process at Pursuit Data

1-22

Learning Objective 41-23

Evaluating Plans and Outcomes

Operationalperformance

analysis

Strategicperformance

analysis

Has short-runperformance met

expectations?

Has long-runperformance met

expectations?

1-24

Evaluating Plans and Outcomes

CostBenefitAnalysi

s

VarianceAnalysis

Differences between the expected and

actual costs of business operations

Quantitative informationand qualitative information

about a proposed plan

1-25

End of Chapter 11-26