STRATEGIC COST MANAGEMENT - BA122B - Fall 2005Slide 2-1 Mgt. Acctg.--Strategic Implications n...

STRATEGIC COST MANAGEMENT - BA122B - Fall 2005 Slide 2-1

Mgt. Acctg.--Strategic Implications

M/A’s must use KTT in their business decisions to meet “customer” needs.

M/A’s must be cost efficient and cost effective.

M/A’s must promote the economics of time and excel at their own time mgt.


IMA’s M/A Roles

Business and strategic partner Provider of strategic business

understanding Participant in problem solving Team member Provider of information Process facilitator


From Scorekeeper to Player

Role change driven by: Information technology Global competition

Two models for M/A’s Corporate cop--evaluator Business advocate--enabler

Dual accountability & org. structure Solid vs dotted-line relationship


Mgt. Acctg.--Attribute Implications

M/A’s must possess broad business oriented technical skills.

M/A’s must possess the behavioral attributes of a team member, be tolerant with ambiguity and be comfortable with “soft” future-oriented numbers.


Mgt. Acctg.--Attribute Implications

M/A’s must be culturally ethical and develop the mindset of a participant.


Cost Actg. Review

Cost…an economic sacrifice


Critical Cost Terms Fixed vs. Variable Product vs. Period Manufacturing vs. Non-manufacturing Direct vs. Indirect Controllable vs. Uncontrollable Opportunity and Sunk Costs Differential Cost and Revenue Cost Drivers FCO’s


Cost Drivers and Final Cost Objectives

Cost Drivers Activity Volume Other

Structural Executional

Final Cost Objective (FCO)


Manufacturing Cost Flows

BOH

I

O

EOH

RAW MATERIAL WORK-IN-PROCESS FINISHED GOODS

B O/H R/M B O/H WIP B O/H F/G

R/M PURCHASES

TRANSFERS TOWIP

E O/H R/M

R/M TRANSFERSDIR. LABORMFG OVERHEADMANUFACTURINGCOSTS

COST OF GOODSMANUFACTURED(COGM)

E O/H WIP

COGM

COST OF GOODSSOLD(COGS)

E O/H F/GP&L


Activity Based Costing (ABC)


Trad. Costing Limits

Overall purpose: accounting values Volume Size Complexity


Activity Based Costing

Benefits More accurate costs More accurate operating information Better access to relevant costs

Limits Allocations are still used Cost omission Time and expense


Contemporary Advantages

Comprehensive cost information Emphasis on operations and

activities Costs are attached to activities Provides driver visibility


Ansari: MOA

Strategic Implications Info @ the cost of value-added features Info @ the overall cost of the product Reflects time considerations in the

attribution process


MOA, cont. Attribute Implications

Technical Provides decision relevant information Enhances process understanding

Behavioral Cost structure visibility Facilitates communication Empowers employees Risk of “failed expectations” re: “true” cost

Cultural Supports process focus Encourages cross-functional participation


ABC Implementation Select an area Identify primary activities (5-10) Cost each activity Determine one driver for each activity Apply the costs to the final cost

objectives on the basis of the drivers.


Remember...

ABC does NOT yield “true” costs!


ABC/ABM Case-Gulfstream Recreation

Gulf Stream Recreation, a major sporting goods firm in California has two major products--the Bobcat Racer and the Snidley Whiplash Cruiser. For the current year, overhead was planned at $850K. Overhead is applied on the basis of machine hours. Each racer uses 2 machine hours and each cruiser uses 1 machine hour. GSR planned to build 10K racers and 50K cruisers. The cost structure for each product is as follows:

Racer CruiserDirect Material $35 $50Direct Labor 25 13Machine Hours 2 1

GSR is considering some type of activity based costing system. Sandra Jones, the cost accounting manager, suggested the following drivers:

Driver Relationship to FCO Driver Total Activity Cost Total Racer Cruiser ActivityP.O.'s (#) $300K 2000 1250 750 Purchasing

Rework Hrs. (Hrs) $200 450 200 250 Quality ControlInvoices (#) $200 600 150 450 BillingChange Orders (#) $150 300 150 150 Mfg. Eng.

1. Calculate the unit costs of each product under the traditional method.2. Calculate the unit costs of each product under activity based costing.3. What pricing implications are inherent in this example.


Gulfstream Recreation Solution

Standard Overhead Rate:$850K/70K Mhrs. = $12.14 per machine hour

Traditional Cost Structure:Racer Cruiser

Direct materials $35 $50Direct labor $25 $13Overhead $24 $12

Total $84 $75


Gulfstream Solution, continuedABC Overhead Rate:

Racer CruiserPurchasing $187.5 $112.5Quality control $ 88.9 $111.1Billing $ 50.0 $150.0Mfg. Engineering $ 75.0 $ 75.0

Total $401.4 $448.6Per unit $40.10 $ 8.97

ABC Cost Structure:Racer Cruiser

Direct materials $35 $50Direct labor $25 $13Overhead $40 $ 9

Total $100 $72


Implementation Strategy

Involve management and employees

Parallel system approach Find a winner KISS Incentivize Education users


Activity Based Management (ABM)


Ansari: ABM

Strategic Implications Visibility on the efficiency & effectiveness

(the quality) of activities Visibility of costs for process redesign Insight into timing consideration of

actions


ABM, cont. Attribute Implications

Technical Greater focus on work Provides cross-functional cost impact Highlights operational interdependencies

Behavioral Heightens importance of process knowledge Reinforces continuous improvement Empowers employees--be careful of “non-value” terminology

Cultural Reorients focus on process not people Challenges current thinking May add cultural conflict


ABM, cont.

ABM Process Obtain existing cost information Determine the major processes Identify process inputs and outputs Determine the specific activities Identify the resources used Define output measures (what we measure) Define performance measures (how we measure it) Assess performance through benchmarking Brainstorm improvements


ABC, ABM & Strategic Cost Applications

Comparison of cost structure to competition Pricing, design and other operational impact Mass customization impact Behavioral impact of common components Changes in the production process Changes in the distribution system Changes in source and types of supplies/suppliers Profitability impact Identification and elimination of non-value added

activities Quality and time implications

STRATEGIC COST MANAGEMENT - BA122B - Fall 2005Slide 2-1 Mgt. Acctg.--Strategic Implications n...

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