© The McGraw-Hill Companies, Inc., 2002
Transcript of © The McGraw-Hill Companies, Inc., 2002
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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1 Cost Management
A Strategic Emphasis2nd edition
by
Edward J. BlocherKung H. ChenThomas W. Lin
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
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1 Cost ManagementAn Overview
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1 The Uses of CostManagement Information
Information managers need toeffectively manage an organization.
Information managers need toeffectively manage an organization.
Financialinformationabout costs
and revenues.
Nonfinancialinformation
about productivityand quality.
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A Typical Organization Chart
Chief FinancialChief Financial OfficerOfficer
Chief Executive OfficerChief Executive Officer
Vice PresidentVice Presidentfor Marketingfor Marketing
Vice PresidentVice Presidentfor Operationsfor Operations
ControllerController TreasurerTreasurer Chief InformationChief InformationOfficerOfficer
Cost ManagementCost Management
Financial SystemsFinancial ReportingOther Reporting Obligations
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1 Four Functions of Management
Strategicmanagement
Strategicmanagement
Planning anddecision making
Planning anddecision making
Management and operational controlManagement and
operational controlPreparation of
financial statementsPreparation of
financial statements
STRATEGIC STRATEGIC MANAGEMENTMANAGEMENT
IS THE MOSTIS THE MOSTIMPORTANT.IMPORTANT.
STRATEGIC STRATEGIC MANAGEMENTMANAGEMENT
IS THE MOSTIS THE MOSTIMPORTANT.IMPORTANT.
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1 Four Functions of Management
Strategicmanagement
Strategicmanagement
Planning anddecision making
Planning anddecision making
Management and operational controlManagement and
operational controlPreparation of
financial statementsPreparation of
financial statements
Identification and implementationof specific goals and objectives thatprovide a competitive advantage.
Identification and implementationof specific goals and objectives thatprovide a competitive advantage.
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1 Four Functions of Management
Strategicmanagement
Strategicmanagement
Planning anddecision making
Planning anddecision making
Management and operational controlManagement and
operational controlPreparation of
financial statementsPreparation of
financial statements
Budgeting and profit planning, cashflow management, lease or buy
decisions, repair or replace decisions,product development decisions,
and marketing decisions
Budgeting and profit planning, cashflow management, lease or buy
decisions, repair or replace decisions,product development decisions,
and marketing decisions
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1 Four Functions of Management
Strategicmanagement
Strategicmanagement
Planning anddecision making
Planning anddecision making
Management and operational controlManagement and
operational controlPreparation of
financial statementsPreparation of
financial statements
Monitoring the activitiesat all levels to insure that
goals and objectives are achieved.
Monitoring the activitiesat all levels to insure that
goals and objectives are achieved.
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1 Four Functions of Management
Strategicmanagement
Strategicmanagement
Planning anddecision making
Planning anddecision making
Management and operational controlManagement and
operational controlPreparation of
financial statementsPreparation of
financial statements
Compliance with reporting requirements
of groups such as theFASB, IRS, SEC.
Compliance with reporting requirements
of groups such as theFASB, IRS, SEC.
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1 Strategic Management and Strategic Cost Management
Strategic managementStrategic management requires:Anticipating changes.Understanding the business and competitive environment.Ability to make changes quickly.Ability to identify and solve problems from a cross-functional view.
Strategic managementStrategic management requires:Anticipating changes.Understanding the business and competitive environment.Ability to make changes quickly.Ability to identify and solve problems from a cross-functional view.
Strategic cost managementStrategic cost management is the development of costmanagement information to facilitate strategic management.
Strategic cost managementStrategic cost management is the development of costmanagement information to facilitate strategic management.
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1 Types of Organizations
MerchandisersMerchandisersManufacturersManufacturers Servicefirms
Servicefirms
Government and Not-for-profit
Government and Not-for-profit
WholesalersWholesalers RetailersRetailers
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Increasedglobal
competition
Advances inmanufacturingtechnologies
New forms ofmanagementorganization
Social,political, and
cultural changes
Focuson the
customer
Advances ininformationtechnologies
Contemporary Business Environment
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Increasedglobal
competition
Advances inmanufacturingtechnologies
New forms ofmanagementorganization
Social,political, and
cultural changes
Focuson the
customer
Advances ininformationtechnologies
Contemporary Business Environment
Better cost managementinformation is neededto remain competitive.
Better cost managementinformation is neededto remain competitive.
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Increasedglobal
competition
Advances inmanufacturingtechnologies
New forms ofmanagementorganization
Social,political, and
cultural changes
Focuson the
customer
Advances ininformationtechnologies
Contemporary Business Environment
Just-in-time inventoryQuality improvementsFlexible manufacturingIncreased facilities costs relative to costs of labor and material
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Increasedglobal
competition
Advances inmanufacturingtechnologies
New forms ofmanagementorganization
Social,political, and
cultural changes
Focuson the
customer
Advances ininformationtechnologies
Contemporary Business Environment
ComputerizationSpecialized softwareInternetE-commerceTelecommunications
ComputerizationSpecialized softwareInternetE-commerceTelecommunications
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Increasedglobal
competition
Advances inmanufacturingtechnologies
New forms ofmanagementorganization
Social,political, and
cultural changes
Focuson the
customer
Advances ininformationtechnologies
Contemporary Business Environment
Changing emphasis from low-costproduction of large quantities
to quality, service, timely delivery, response to customer
requests for specific features.
Changing emphasis from low-costproduction of large quantities
to quality, service, timely delivery, response to customer
requests for specific features.
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Increasedglobal
competition
Advances inmanufacturingtechnologies
New forms ofmanagementorganization
Social,political, and
cultural changes
Focuson the
customer
Advances ininformationtechnologies
Contemporary Business Environment
Change fromcommand-and-control
organization to aflexible form that
encourages teamworkand coordinationacross functions.
Change fromcommand-and-control
organization to aflexible form that
encourages teamworkand coordinationacross functions.
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Increasedglobal
competition
Advances inmanufacturingtechnologies
New forms ofmanagementorganization
Social,political, and
cultural changes
Focuson the
customer
Advances ininformationtechnologies
Contemporary Business Environment
Ethnically and racially diverse workforceRenewed sense of ethical responsibilityGovernment deregulation of business
Ethnically and racially diverse workforceRenewed sense of ethical responsibilityGovernment deregulation of business
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Manufacturing
Business Environment Comparison
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Basis of Economies of scale, Quality,Competition standardization functionality,
customer satisfaction
Manufacturing High value, long Low volume, shortProcess production runs, production run, focus
significant levels of on reducing inventory in-process and levels and other non- finished inventory value added activities
and costs
Prior Business Contemporary Environment Business Environment
Business Environment Comparison
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Manufacturing Assembly-line Robotics, flexibleTechnology automation, isolated manufacturing
technology systems, integrated applications technology applications
connected by network
Required Machine paced, Individual and teamLabor Skills low-level skills paced, high-level
skills
Prior Business Contemporary Environment Business Environment
Business Environment Comparison
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Emphasis on Acceptance of a Strive for zero Quality normal or usual defects
amount of waste
Prior Business Contemporary Environment Business Environment
Business Environment Comparison
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Marketing
Business Environment Comparison
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Products Relatively few Large number of variations, long variations, short product life cycles product life cycles
Markets Largely domestic Global
Prior Business Contemporary Environment Business Environment
Business Environment Comparison
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Management Organization
Business Environment Comparison
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Type of Almost exclusively Financial andInformation financial data operating data, theRecorded and firm’s strategicReported success factors
Management Hierarchical, Network-based Organizational command and organization, teamworkStructure control focus – employee has more
responsibility and control, coaching rather than command and control
Prior Business Contemporary Environment Business Environment
Business Environment Comparison
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Management Emphasis on the Emphasis on the long Focus short term, short- term, focus on critical
term performance success factors, measures and commitment compensation, to the long-term concern for success of the sustaining the firm, including adding current stock price, shareholder value short tenure and high mobility of top managers
Business Environment Comparison
Prior Business Contemporary Environment Business Environment
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1 Four Stages in the Developmentof Cost Management Systems
Basic transaction recording systems.Basic transaction recording systems.
Focus on external reporting. Focus on external reporting.
Track key operating data and develop Track key operating data and develop more accurate and relevant cost more accurate and relevant cost information for decision making.information for decision making.
Strategically relevant cost management Strategically relevant cost management information is an integral part of the information is an integral part of the system.system.
Basic transaction recording systems.Basic transaction recording systems.
Focus on external reporting. Focus on external reporting.
Track key operating data and develop Track key operating data and develop more accurate and relevant cost more accurate and relevant cost information for decision making.information for decision making.
Strategically relevant cost management Strategically relevant cost management information is an integral part of the information is an integral part of the system.system.
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1 Benchmarking
Identify an activity that needs to be improved.
Find an organization that is the most efficient at this activity.
Study its process, and utilize that process.
Identify an activity that needs to be improved.
Find an organization that is the most efficient at this activity.
Study its process, and utilize that process.
aaBenchm rking
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Do we need to change the plan?
Where are we?
Where do we want to go?
How do we start?
How are we doing?
Do
Check
Plan
Act is
Total Quality Management
Benchmarking
ContinuousImprovement
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1 Activity-Based Costingand Management
A product costing method that is useful in industries where overhead is high overhead is high relative
to other costs.
Activity-based costing assigns costs to products based on several different several different activities activities whereas traditional costing
methods only assign costs to products on one one or twotwo different departments
or allocation bases. ABC
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1 Activity-Based Costingand Management
A product costing method that is useful in industries where overhead is high overhead is high relative
to other costs.
ABC Traditionalmethod
Products Products
Allocation BasesAllocation Bases““cost drivers”cost drivers”
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1 Reengineering
The process isredesigned to include
only those steps that makeour product more valuable.
Every step inthe businessprocess mustbe justified.
A business processis diagrammed
in detail.
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Anticipated results: Process is simplified. Process is completed in less time. Costs are reduced. Opportunities for errors are reduced.
The process isredesigned to include
only those steps that makeour product more valuable.
Every step inthe businessprocess mustbe justified.
A business processis diagrammed
in detail.
Reengineering
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1 Theory of Constraints
A sequential process of identifying and removing constraints in a system.
Restrictions or barriers that impedeprogress toward an objective
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1 Mass Customization
Marketing and production processes are
designed to meet each customer’s specific needs.
Marketing and production processes are
designed to meet each customer’s specific needs.
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1Target Costing
Identify product opportunity.
Determine price that wouldmake product competitive.
Determine if product can be made at cost sufficiently low to provide a
desired profit.
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1 Life-Cycle Costing
Identify and monitor costs throughout a product’s life cycle
Research and Development costs
Product design and testing costs
Manufacturing, inspecting, packaging and warehousing costs
Marketing, promotion, and distribution costs
Sales and service costs
Identify and monitor costs throughout a product’s life cycle
Research and Development costs
Product design and testing costs
Manufacturing, inspecting, packaging and warehousing costs
Marketing, promotion, and distribution costs
Sales and service costs
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1 The Balanced Scorecard
Management translates its strategy into performance measures that employees
understand and accept.
Management translates its strategy into performance measures that employees
understand and accept.
Performancemeasures
FinancialCustomer
satisfaction
Innovationand learning
Internalbusiness
processes
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1 The Balanced Scorecard
How do we lookto the owners?
How can wecontinually innovate
and learn?
In which internalbusiness processes
must we excel?
How do we lookto customers?
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1 The Balanced Scorecard
Learning improvesbusiness processes.
Improved businessprocesses improve
customer satisfaction.
Improving customersatisfaction improves
financial results.
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1 IMA Code of Ethics for Management Accountants
Competence
Confidentiality
Integrity
Objectivity
Competence
Confidentiality
Integrity
Objectivity
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1 IMA Code of Ethics for Management Accountants
Follow applicable laws, regulations and
standards.
Prepare complete and clear reports after appropriate
analysis.
Maintain professional competence.
Competence
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1 IMA Code of Ethics for Management Accountants
Do not disclose confidential information unless legally
obligated to do so.
Ensure that subordinates do not disclose confidential
information.
Do not use confidential
information for personal
advantage.
Confidentiality
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1 IMA Code of Ethics for Management Accountants
Avoid conflicts of interest and advise others of potential conflicts.
Recognize and communicate personal and
professional limitations.
Do not subvert organization’s
legitimate objectives.
Integrity
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1 IMA Code of Ethics for Management Accountants
Integrity
Avoid activities that could affect your ability to
perform duties.
Communicate unfavorable as well as favorable information.
Refrain from activities that could
discredit the profession.
Refuse gifts or favors
that might influence behavior.
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1 IMA Code of Ethics for Management Accountants
Objectivity
Communicate information fairly and objectively.
Disclose all information that might be useful to
management.
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1 End of Chapter 1