Chapter One

Cost Management and Strategy:

An Overview

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Learning Objectives

• Explain the use of cost management information for

each of the four functions of management and in
different types of organizations, with emphasis on
the strategic management function

• Explain how the contemporary business

environment has influenced cost management

• Explain contemporary management techniques and

how they have influenced cost management

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Learning Objectives
(continued)

• Explain different competitive strategies that

companies can pursue

• Describe the professional environment of the

management accountant, including professional
organizations and professional certifications

• Understand the principles and rules of professional

ethics and explain how to apply them

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Introduction to Strategy

• Success comes from developing and

implementing an effective strategy aided by
management accounting methods
– Clear mission statement
– Strategy is a roadmap to achieve a company’s
mission
• Management accountants can help a
company be successful
– Key to success is having decision-relevant
information
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Competitive Strategies

• A firm succeeds by implementing a set of

policies, procedures, and approaches to
business called strategy

• Strategy must have a long-term focus and adapt

to the changing environment

• Cost management information should be used to

develop and monitor strategic information
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Competitive Strategies (continued)

Aspect Cost Leadership Differentiation

Strategic Broad cross section of Focused cross section
Target the market of the market
Basis of Lowest cost in the Unique product or
competitive industry service
advantage
Product line Limited selection Wide variety
Production Lowest possible cost Innovation in
emphasis and essential features differentiating products
Marketing Low price Premium price and
emphasis innovative features
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Cost Management Information

• Serves all management functions

• Information a manager needs to manage

effectively
– Financial and nonfinancial
• Financial information alone shows a short-term focus
– Developed under the direction of the controller for
the Chief Financial Officer (CFO) of the
organization

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Typical Organization Chart

Chief Executive Officer (CEO)

Chief Financial Vice President Vice President

Officer (CFO) for Marketing for Operations

Controller Chief Information

Treasurer
Officer (CIO)

Cost Management
Financial Systems
Financial Reporting
Other Reporting Obligations (e.g., tax)
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Cost Management vs.

Financial Reporting

• Financial reporting
– External users
– Emphasis on accuracy and compliance
• Cost management
– Internal users
– Emphasis on usefulness and timeliness, key
characteristics of decision-relevant information
• Challenge for controller to reconcile these
potentially conflicting roles
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Four Functions of
Management

Cost management information is

assembled to aid management in
the following functions:
– Strategic management
– Planning and decision-making
– Management and operational control
– Preparation of financial statements

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Management Functions

Strategic management
– Most important management function
– Involves identifying and implementing goals and
action plans to maintain a competitive advantage
– Monitoring of Critical Success Factors (CSFs) is
necessary
– Critical to a firm’s success due to global competition
and rapidly changing markets
– Strategic cost management information vs.
traditional cost management?
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Management Functions (continued)

• Planning and decision-making
– Information is needed to support reoccurring
decisions such as scheduling production and pricing
– Information is needed for short-run planning
(budgeting) and profit planning (Cost-Volume-Profit
analysis)
• Management and operational control
– Information is needed to identify inefficient
operations and reward effective management
practices
• Preparation of financial statements
– Information is needed to guarantee compliance with
regulations (GAAP) and regulatory reporting
requirements
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Types of Organizations

Service
Service Government
Governmentand
and
Manufacturers
Manufacturers Merchandisers
Merchandisers firms
firms Not-for-profit
Not-for-profit

Wholesalers
Wholesalers Retailers
Retailers

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Changes in the Contemporary

Business Environment

1. Shift to a global business environment

– Economic interdependence and increased
competition
2. New manufacturing technologies stemming
from the global business environment
– Just-in-time (JIT) inventory methods and quality
control
– Emphasis on speed-to-market (i.e., time-based
competition)

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Changes in the Contemporary

Business Environment (continued)

3. Importance of information technology

– Increased use of the internet has reduced
processing time and facilitated information
exchange
4. Focus on the customer
– Consumers expect functionality, quality and
customization
– Shorter product life-cycles have intensified
competition
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Changes in the Contemporary

Business Environment (continued)

5. Shifts in management organization

– The focus has shifted from financial measures
and hierarchal command-and-control
organizations to nonfinancial measures and
flexible organizational structures
6. Social, political, and cultural considerations
– Changes include a more diverse workforce, a
renewed sense of ethical responsibility, and
increased deregulation of business

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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How do these changes affect

management accounting?

The management accountant’s role:

– Provide cost-management information at a
rigorous pace to keep up with the ever-changing
environment
– The information provided should include as many
nonfinancial measures as possible – a variety of
operating and financial measures
– The reports should be applicable to cross-
functional teams and conducive with a flexible
management structure
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Kaplan’s Phases for Developing Cost

Management Information Systems
Stage One Cost-management systems are basic
transaction reporting systems
Stage Two Cost-management systems focus on
external reporting–decision-usefulness
of cost-management data is limited
Stage Three Cost-management systems track key
operating data and relevant cost
information for decision-making
Stage Four Strategically relevant cost-management
information is an integral part of the
system
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Contemporary Management
Techniques
• Benchmarking
– Process by which a firm identifies its CSFs,
studies the best practices of other firms in
achieving these CSFs, and institutes change
based on the assessment results
• Total Quality Management (TQM)
– A technique by which management develops
policies and practices to ensure the firm’s
products and services exceed customer’s
expectations
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Contemporary Management
Techniques (continued)
• Business Process Improvement
– Often associated with the previous two techniques,
this method involves managers and workers
committing to a program of continuous improvement
in quality and other CSFs
• Activity-Based Costing and Management
– Activity-Based Costing (ABC) improves the tracing of
costs to individual products and customers
– Activity-Based Management (ABM) improves
operational and management control
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Contemporary Management
Techniques (continued)

• Reengineering
– Process for creating a competitive advantage in
which the firm reorganizes its operating and
management functions, often resulting in modified,
combined, or eliminated jobs
• The Theory of Constraints (TOC)
– Helps firms improve cycle-time (i.e., the rate at
which raw materials can be converted to finished
products)
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Contemporary Management
Techniques (continued)

• Mass Customization
– Customers expect products and services to be
tailored to their unique needs creating the need for
smaller production runs
• Target Costing
– Target Cost = Market-determined price – Desired
Profit

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Contemporary Management
Techniques (continued)
• Life-Cycle Costing
– Costs should be monitored throughout a product’s
life cycle – from research and development to sales
and service
– Traditionally, only the costs incurred for
manufacturing, inspecting, packaging, and
warehousing were monitored
• The Value Chain
– An analysis tool used to identify the specific steps
required to provide a competitive product
– Helps identify steps that can be eliminated or
outsourced
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Contemporary Management
Techniques (continued)

• The Balanced Scorecard (BSC)

– An accounting report that addresses a firm’s
performance in four areas: financial, customer,
internal business processes, and innovation and
learning
– Financial measures reflect only a partial, and
frequently only a short-term, measure of a firm’s
progress so the BSC incorporates both financial
and nonfinancial information

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Professional Organizations

• Organizations that provide guidelines and

regulations:
– Internal Revenue Service (IRS), Federal Trade
Commission (FTC), Securities and Exchange
Commission (SEC), etc.
• Organizations that promote professionalism
and competence:
– Institute of Management Accountants (IMA),
Financial Executives Institute (FEI), and Institute
of Internal Auditors (IIA)
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Professional Certifications

There are three main certifications that are

relevant for management accountants:

– Certified Management Accountant (CMA)

– Certified Financial Manager (CFM)
– Certified Public Accountant (CPA)

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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IMA Statement of Ethical

Professional Practice
• Commitment to competence, integrity, confidentiality, and
credibility is necessary for the management accountant to
provide a useful service to management

• When presented with an ethical issue that cannot be

resolved through your organization’s established policies,
the IMA suggests a three step process:

 Discuss the situation with a superior not involved in the issue

 Clarify the issue through discussion with an IMA Ethics Counselor or
impartial advisor
 Consult your own attorney as to your legal obligations and rights

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Chapter Summary

• Cost management information is used in all four of

the management functions and is important in the
pursuit of a firm’s mission and goals

• The contemporary business environment expects

fast results and has influenced the role of the
management accountant

• There were several contemporary management

techniques noted in this chapter that influence the
collection of cost management information
Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies
2008
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Chapter Summary (continued)

• The two main competitive strategies are cost

leadership and differentiation

• The management accountant looks to professional

organizations for guidelines and professional support

• Professional certifications can be obtained in many

areas, but there are three main areas applicable to
management accountants

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008
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Chapter Summary (continued)

• A commitment to professional ethics allows

management accountants to serve management
effectively

• There is a three-step process provided by the IMA to

guide the management accountant through ethical
issues

Blocher,Stout,Cokins,Chen, Cost Management 4e ©The McGraw-Hill Companies

2008