StrategicCostManagementProfessorWilliamF.O’Brien,MBA,CPAFall20041STRATEGICCOSTMANAGEMENT-FALL2004STRATEGICCOSTMANAGEMENT-2004StrategicCostManagementProfeSession1A--Introduction&CostAccountingReviewCostManagementFinancialNon-Financial2STRATEGICCOSTMANAGEMENT-FALL2004Session1A--Introduction&CosFinancialManagementEvolutionDATAINFORMATIONANALYSISIMPLEMENTATIONToday’sCorporateFocusisonResults!3STRATEGICCOSTMANAGEMENT-FALL2004FinancialManagementEvolutionCompanyF/SUsersEconomicDecisionsFinancialImpact(useful&relevant)FinancialAccountingModel4STRATEGICCOSTMANAGEMENT-FALL2004CompanyF/SUsersEconomicFinanciManagerialAccountingModelPlanImplementMonitorAdjustAccountingInformationCommunicationEnvironment5STRATEGICCOSTMANAGEMENT-FALL2004ManagerialAccountingModelPlaFourManagementFunctions

…anotherPerspectiveStrategicManagementPlanningandDecisionMakingManagementandOperationalControlF/SPreparationHowisCostManagementInfoUsed?6STRATEGICCOSTMANAGEMENT-FALL2004FourManagementFunctions

…anoFactorsInfluencingToday’sBusinessEnvironmentGlobalcompetitionManufacturingandITadvancesCustomerfocusRevisedorganizationalstructuresSocial,politicalandculturalchanges7STRATEGICCOSTMANAGEMENT-FALL2004FactorsInfluencingToday’sBuContemporaryMgt.TechniquesBenchmarkingTotalQualityManagement(TQM)ContinuousImprovementActivity-BasedCosting(ABC)andMgt.(ABM)ReengineeringTheoryofConstraints(TOC)MassCustomizationTargetCostingLife-cycleCostingTheBalancedScorecard8STRATEGICCOSTMANAGEMENT-FALL2004ContemporaryMgt.TechniquesBeEthicsLackofethics--everyonelosesRecentexamplesEnronWorldComAdelphiaArthurAndersen9STRATEGICCOSTMANAGEMENT-FALL2004EthicsLackofethics--everyoneEthicsandYouYouwillfaceanethicalchallengeItcouldimpactYourjobYourfamilyYourrelationshipsYourfinancialstabilityYourphysicalwell-beingYouhaveonlyONEreputation...10STRATEGICCOSTMANAGEMENT-FALL2004EthicsandYouYouwillfaceanCostActg.ReviewCost…aneconomicsacrifice11STRATEGICCOSTMANAGEMENT-FALL2004CostActg.ReviewCost…aneconoCriticalCostTermsFixedvs.VariableProductvs.PeriodManufacturingvs.Non-manufacturingDirectvs.IndirectControllablevs.UncontrollableOpportunityandSunkCostsDifferentialCostandRevenueCostDrivers12STRATEGICCOSTMANAGEMENT-FALL2004CriticalCostTermsFixedvs.VCostDriversand

FinalCostObjectivesCostDriversAnythingthatcausesacosttooccurFinalCostObjective(FCO)GenerallyusedinconjunctionwithActivityBasedCosting13STRATEGICCOSTMANAGEMENT-FALL2004CostDriversand

FinalCostOManufacturingCostFlowsBOHIOEOHRAWMATERIALWORK-IN-PROCESSFINISHEDGOODSBO/HR/MBO/HWIPBO/HF/GR/MPURCHASESTRANSFERSTOWIPEO/HR/MR/MTRANSFERSDIR.LABORMFGOVERHEADMANUFACTURINGCOSTSCOSTOFGOODSMANUFACTURED(COGM)EO/HWIPCOGMCOSTOFGOODSSOLD(COGS)EO/HF/GP&L14STRATEGICCOSTMANAGEMENT-FALL2004ManufacturingCostFlowsBOHRAWDirectCostingAlsoknownas“ContributionMarginFormat”DirectcostingdirectcostsP&Lformat:Sales xxxVariablecosts -xxxContributionmargin xxxFixedcosts -xxxNetincome xxx15STRATEGICCOSTMANAGEMENT-FALL2004DirectCostingAlsoknownas“CCVPAnalysisUsesRevenueplanningCostclassificationCommissionanalysisVolumeandmixdeterminationABCmodifications16STRATEGICCOSTMANAGEMENT-FALL2004CVPAnalysisUses16STRATEGICCOBreak-evenAnalysisSales-variablecosts=fixedcostsContributionMarginApproachFC/contributionmarginratio($)FC/unitcontributionmargin(units)EquationApproach(UnitSP)x-(unitVC)x=FC(units)X-(VC%)x=FC($)CMapproachistheeasiertoapply17STRATEGICCOSTMANAGEMENT-FALL2004Break-evenAnalysisSales-varMarginofSafetyActualsales-B/EsalesMarginofsafetypercentageMarginofsafety/actualsales18STRATEGICCOSTMANAGEMENT-FALL2004MarginofSafetyActualsales-OperatingLeverageCM/NIReflectsthepercentageincreaseinsalescomparedtothepercentageincreaseinnetincomeHighOLreflectshighopportunityandhighrisk19STRATEGICCOSTMANAGEMENT-FALL2004OperatingLeverageCM/NI19STRATMultipleProductLineFormat20STRATEGICCOSTMANAGEMENT-FALL2004MultipleProductLineFormat20BehavioralIssuesRiskaversionbiasUncertainty21STRATEGICCOSTMANAGEMENT-FALL2004BehavioralIssuesRiskaversionCVPLimitationsRelevantrangeassumptionDifficultyincostdeterminationAllocationsThe“ScarletLetter”ofaccounting22STRATEGICCOSTMANAGEMENT-FALL2004CVPLimitationsRelevantrangeScarletLetterofAccountingLacksCostMgt.ErrorProneDistraction23STRATEGICCOSTMANAGEMENT-FALL2004ScarletLetterofAccountingLSession1B--StrategicCostManagement&the

OrganizationalRoleofManagementAccountants24STRATEGICCOSTMANAGEMENT-FALL2004Session1B--StrategicCostManStrategicCostManagementStrategiccostmanagementisthedevelopmentofcostmanagementinformationtofacilitatetheprincipalmanagementfunction--strategicmanagement.25STRATEGICCOSTMANAGEMENT-FALL2004StrategicCostManagementStratAnsari:SMAStrategicTriangle(QCT)Competitionbasedonquality,cost&TimeMgt.Acctg.Triangle(TBC)Impactstechnical,behavioral&culturalaspectsMgt.Acctg.LinksStrategywithActionItisnotanenduntoitselfItisanintegratingtool26STRATEGICCOSTMANAGEMENT-FALL2004Ansari:SMAStrategicTriangleSMA,cont.ThetwotrianglesaredependentuponeachotherThisprocessisaframeworktoensurethatourmanagementaccountingtoolspossesstheattributesnecessarytoachieveourstrategicgoals27STRATEGICCOSTMANAGEMENT-FALL2004SMA,cont.ThetwotrianglesarSMA,cont.QCTTriangleSelfevidentTBCTriangleProvidesTechnicalinsightEncouragesBehavioralchangesSupportsCulturalbeliefs28STRATEGICCOSTMANAGEMENT-FALL2004SMA,cont.QCTTriangle28STRATEAccountingBusinessSkills

“TheWhat”BusinessPerspectiveOrganizationalFocusBiasforActionCommunicationExcellencePeopleProficiency29STRATEGICCOSTMANAGEMENT-FALL2004AccountingBusinessSkills

“ThFinancialManagementGuidelines

“TheHow”Cc:communicationversuscontrolKTT:knowtheterritoryMBWA:managebywanderingaroundR?R3:respectisafunctionof...responsivenessreliabilityrelevance30STRATEGICCOSTMANAGEMENT-FALL2004FinancialManagementGuidelineStrategicCostManagementProfessorWilliamF.O’Brien,MBA,CPAFall200431STRATEGICCOSTMANAGEMENT-FALL2004STRATEGICCOSTMANAGEMENT-2004StrategicCostManagementProfeSession1A--Introduction&CostAccountingReviewCostManagementFinancialNon-Financial32STRATEGICCOSTMANAGEMENT-FALL2004Session1A--Introduction&CosFinancialManagementEvolutionDATAINFORMATIONANALYSISIMPLEMENTATIONToday’sCorporateFocusisonResults!33STRATEGICCOSTMANAGEMENT-FALL2004FinancialManagementEvolutionCompanyF/SUsersEconomicDecisionsFinancialImpact(useful&relevant)FinancialAccountingModel34STRATEGICCOSTMANAGEMENT-FALL2004CompanyF/SUsersEconomicFinanciManagerialAccountingModelPlanImplementMonitorAdjustAccountingInformationCommunicationEnvironment35STRATEGICCOSTMANAGEMENT-FALL2004ManagerialAccountingModelPlaFourManagementFunctions

…anotherPerspectiveStrategicManagementPlanningandDecisionMakingManagementandOperationalControlF/SPreparationHowisCostManagementInfoUsed?36STRATEGICCOSTMANAGEMENT-FALL2004FourManagementFunctions

…anoFactorsInfluencingToday’sBusinessEnvironmentGlobalcompetitionManufacturingandITadvancesCustomerfocusRevisedorganizationalstructuresSocial,politicalandculturalchanges37STRATEGICCOSTMANAGEMENT-FALL2004FactorsInfluencingToday’sBuContemporaryMgt.TechniquesBenchmarkingTotalQualityManagement(TQM)ContinuousImprovementActivity-BasedCosting(ABC)andMgt.(ABM)ReengineeringTheoryofConstraints(TOC)MassCustomizationTargetCostingLife-cycleCostingTheBalancedScorecard38STRATEGICCOSTMANAGEMENT-FALL2004ContemporaryMgt.TechniquesBeEthicsLackofethics--everyonelosesRecentexamplesEnronWorldComAdelphiaArthurAndersen39STRATEGICCOSTMANAGEMENT-FALL2004EthicsLackofethics--everyoneEthicsandYouYouwillfaceanethicalchallengeItcouldimpactYourjobYourfamilyYourrelationshipsYourfinancialstabilityYourphysicalwell-beingYouhaveonlyONEreputation...40STRATEGICCOSTMANAGEMENT-FALL2004EthicsandYouYouwillfaceanCostActg.ReviewCost…aneconomicsacrifice41STRATEGICCOSTMANAGEMENT-FALL2004CostActg.ReviewCost…aneconoCriticalCostTermsFixedvs.VariableProductvs.PeriodManufacturingvs.Non-manufacturingDirectvs.IndirectControllablevs.UncontrollableOpportunityandSunkCostsDifferentialCostandRevenueCostDrivers42STRATEGICCOSTMANAGEMENT-FALL2004CriticalCostTermsFixedvs.VCostDriversand

FinalCostObjectivesCostDriversAnythingthatcausesacosttooccurFinalCostObjective(FCO)GenerallyusedinconjunctionwithActivityBasedCosting43STRATEGICCOSTMANAGEMENT-FALL2004CostDriversand

FinalCostOManufacturingCostFlowsBOHIOEOHRAWMATERIALWORK-IN-PROCESSFINISHEDGOODSBO/HR/MBO/HWIPBO/HF/GR/MPURCHASESTRANSFERSTOWIPEO/HR/MR/MTRANSFERSDIR.LABORMFGOVERHEADMANUFACTURINGCOSTSCOSTOFGOODSMANUFACTURED(COGM)EO/HWIPCOGMCOSTOFGOODSSOLD(COGS)EO/HF/GP&L44STRATEGICCOSTMANAGEMENT-FALL2004ManufacturingCostFlowsBOHRAWDirectCostingAlsoknownas“ContributionMarginFormat”DirectcostingdirectcostsP&Lformat:Sales xxxVariablecosts -xxxContributionmargin xxxFixedcosts -xxxNetincome xxx45STRATEGICCOSTMANAGEMENT-FALL2004DirectCostingAlsoknownas“CCVPAnalysisUsesRevenueplanningCostclassificationCommissionanalysisVolumeandmixdeterminationABCmodifications46STRATEGICCOSTMANAGEMENT-FALL2004CVPAnalysisUses16STRATEGICCOBreak-evenAnalysisSales-variablecosts=fixedcostsContributionMarginApproachFC/contributionmarginratio($)FC/unitcontributionmargin(units)EquationApproach(UnitSP)x-(unitVC)x=FC(units)X-(VC%)x=FC($)CMapproachistheeasiertoapply47STRATEGICCOSTMANAGEMENT-FALL2004Break-evenAnalysisSales-varMarginofSafetyActualsales-B/EsalesMarginofsafetypercentageMarginofsafety/actualsales48STRATEGICCOSTMANAGEMENT-FALL2004MarginofSafetyActualsales-OperatingLeverageCM/NIReflectsthepercentageincreaseinsalescomparedtothepercentageincreaseinnetincomeHighOLreflectshighopportunityandhighrisk49STRATEGICCOSTMANAGEMENT-FALL2004OperatingLeverageCM/NI19STRATMultipleProductLineFormat50STRATEGICCOSTMANAGEMENT-FALL2004MultipleProductLineFormat20BehavioralIssuesRiskaversionbiasUncertainty51STRATEGICCOSTMANAGEMENT-FALL2004BehavioralIssuesRiskaversionCVPLimitationsRelevantrangeassumptionDifficultyincostdeterminationAllocationsThe“ScarletLetter”ofaccounting52STRATEGICCOSTMANAGEMENT-FALL2004CVPLimitationsRelevantrangeScarletLetterofAccountingLacksCostMgt.ErrorProneDistraction53STRATEGICCOSTMANAGEMENT-FALL2004ScarletLetterofAccountingLSession1B--StrategicCostManagement&the

OrganizationalRoleofManagementAccountants54STRATEGICCOSTMANAGEMENT-FALL2004Session1B--StrategicCostManStrategicCostManagementStrategiccostmanagementisthedevelopmentofcostmanagementinformationtofacilitatetheprincipalmanagementfunction--strategicmanagement.55STRATEGICCOS