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Cost Management – Retrospect and Prospect

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1 Cost Management – Retrospect and Prospect
K.Sreekumar Professor (Finance & Control) FISAT Business School Angamaly Campus 1

2 The Competitive Advantage of Nations
“The economic goal of a nation should be to produce a high and rising standard of living for its citizens. To do this a nation, or rather the industries of a nation, must become more productive .Hence the studies what makes an industry and then later an economy productive. Upgrading is the key. Improving factor productivity allows firms to compete in sophisticated industrial segments and new industries while maintaining full employment. A failure to upgrade results in slower productivity growth, declining Competitiveness and eventually unemployment. Porter uses these concepts to create a "diamond, "the four forces that determine success of an industry.” - Michael Porter

3 Indian Competitiveness: Where Does the Nation Stand. Prof. Michael E
Indian Competitiveness: Where Does the Nation Stand? Prof.Michael E .Porter made a presentation on India in Mumbai on 21st January 2004

4 Porters Diamond Model for the Competitive Advantage of Nations

5 "The essence of formulating competitive strategy is relating a company to its environment .”
-Michael Porter [Competitive Strategy -1980] Michael Porter asks: Why do some nations seem to specialize in certain industries with lots of competitors, while other nations do not seem to know that an industry exists? [Competitive Advantage of Nations -1990]

6 Accounting Strategy Management

7 Industry environment -Share of Manufacturing in GDP
Target – 35% in GDP by 2016 Prime Minister’s message – 2006 Source: National Manufacturing Competitiveness Council ‘s National Manufacturing Strategy document

8 Increased Competition: Example of Commercial Vehicle Segment
Before 1990 After 1990


10 Four-Stage Model of Cost System Design
System Aspects Stage I Systems Broken Stage II Financial Reporting Driven Stage III Systems Specialized Stage IV Systems Integrated Data Quality ●Many Errors ●Large Variances ●No surprises ●Meets audit standards ●Shared data bases ●Stand alone systems Informal linkages ●Fully linked databases and systems External Financial Reporting ●Inadequate ●Tailored to financial reporting needs ●Stage II system maintained ●Financial reporting systems Product/Customer Costs ●Inaccurate ●Hidden costs and profits ●Several stand-alone ABC systems ●Integrated ABM Operational and Strategic Control ●Limited feedback ●Delayed feedback performance measurement systems ●Operational and Strategic performance Cost and Effect -Robert S Kaplan and Robin Cooper,1998 (p.12)

11 —Gary Hamel and C.K. Prahalad,
STRATECY GAP? We often come across companies that have set an ambitious long term goal, perhaps to double revenue and profits over five years, or to dramatically increase the proportion of revenues coming from new businesses, but have devoted almost no intellectual effort to thinking through the medium-term capability-building program that is needed to support that goal. In too many companies there is a grand, and overly vague, long-term goal on one hand And detailed short-term budgets and annual plans on the other hand with nothing in between to link the two together There seems to be, in many companies, an implicit assumption that the short term and long term abut each other, rather than being dovetailed together. But the long term doesn’t start at year five of the current strategic plan. It starts right now! —Gary Hamel and C.K. Prahalad, Annual Business Plan

12 1.Activity Based Costing 2.Value Chain Analysis 3.Target Costing
Cost Management Kaleidoscope – Different Tools of Management Accounting RETROSPECT 1.Activity Based Costing 2.Value Chain Analysis 3.Target Costing 4.Quality Costing 5.Life Cycle Costing 6.Balanced Score Card

Business Analytics & Predictive Modeling– Big Data & Cloud Computing Business Model Reporting

14 2000 +

15 Typical Manufacturing Cost – in %
Dominant Cost - Material

16 Typical IT Services Cost in % Dominant Cost : Employee

17 Chemical Industry State Sector
Source : Review of Public Enterprises -CMD

18 Kerala Minerals and Metals Ltd
Source : Review of Public Enterprises -CMD

19 What is the full form of SAP?
Systems Applications and Products in Data Processing Renamed in 1977 Before 1977 : Systems Analysis and Program Development (German : Systemanalyse und Programmentwicklung) When was SAP founded? Founded in 1972 by Wellenreuther, Hopp, Hector, Plattner and Tschira (all ex-IBM employees)

20 SAP R/3 client server architecture evolved in year 1992
Which is the latest SAP product? mySAP Business Suite

21 Flow Of Overhead in M. Affiliates
Company General Production Variances Executive M’gement Projects Profitability Segment Service Cost Center Admin. C.Centers Utility Prod. S. C. Center Production C. Center Production Order Over/Under absorption Primary Cost Pools Cost Centers - collect primary expenses which are not attributed to a particular cost object e.g. Communication, Medical expenses, Rents, Insurance, Housing Maintenance etc. The accumulated primary cost will be distributed to the receiving objects on appropriate bases. Executive Cost Centers - includes the cost of senior management of the affiliate, legal office, internal audit, strategic planning and other expenses associated with these functions. Executive Overheads are assessed to appropriate Profit Centers (at Product group level per company Code) for PCA Reporting. Administrative Support Cost Centers - all administrative cost centers in the affiliates (except executives, legal, strategic planning, internal audit) are included in the product cost. The admin overheads are allocated to cost centers via indirect activity allocation based on appropriate basis. Service Cost Centers - examples are, Maintenance, Utility Facilities, Engineering etc, they usually exchange services between each others also. The direct service cost is allocated to receiver objects (e.g. cost centers, product cost collectors) based on unit of consumption or other appropriate bases via direct activity allocation. Production Support Cost Centers - are fully dedicated for production, but serve more than one production cost centers. The costs are allocated (distributed) in full to receivers based on unit of consumption or other appropriate bases. Production Cost Centers - include all direct overheads of the production unit that are not charged directly to product cost collector via production orders. The cumulated cost is charged to production order based on consumption, production volume via direct activity allocation.

22 Module SAP CO – Controlling
Represents the flow of cost and revenue Instrument for organizational decisions Key elements of the CO application module include : Cost center accounting Product cost Planning Product Costing Profitability analysis Profit center accounting Activity based costing Enterprise controlling


24 A similar story was seen between Ambassador cars and Maruti cars
A similar story was seen between Ambassador cars and Maruti cars. Recently, Mahindra Scorpio’s weight reduced (by 60 kg) to 2140 kg and Maruti Swift (by 30 kg) to 970 kg. Maruti has saved Rs.147 crores by working on weight reductions on components – less fuel and less pollution, for consumers.

25 Why classification between fixed and variable?
If the Variable Cost of a product is more than 50%, it is better to reduce the cost than to increase the volume and when the Variable Cost is less than 50%, volume increase will result in higher profits.

Particulars Actuals 5% Cost Reduction 5% Volume Increase Sales Value Less: Variable Cost Contribution Less: Fixed Cost Profit 100 60 40 20 57 43 23 105 63 42 22 % Increase in Profits 15% 10%

Particulars Actuals 5% Cost Reduction 5% Volume Increase Sales Value Less: Variable Cost Contribution Less: Fixed Cost Profit 100 40 60 20 38 62 42 105 63 43 % Increase in Profits 5% 7.5%

28 mySAP Industry Solutions (Some Examples)
SAP for Aerospace & Defense SAP for Media SAP for Automotive SAP for Mill Products SAP for Banking SAP for Mining SAP for Chemicals SAP for Oil & Gas SAP for Consumer Products SAP for Pharmaceuticals SAP for Engineering, Construction & Operations SAP for Professional Services SAP for Healthcare SAP for Public Sector SAP for High Tech SAP for Retail SAP for Higher Education & Research SAP for Service Providers SAP for Industrial Machinery & Components SAP for Telecommunications SAP for Insurance SAP for Utilities Industry solution is the latest value proposition of SAP to customer. Industry solutions are aimed at addressing the specific business process areas of different industries differently, hence pre-customizing the package for generic industry purpose. Through its industry solutions, SAP addresses the unique core processes of more than 25 distinct industries. Combined with industry-specific applications and best business practices, all industry solution sets use and build upon mySAP™ Business Suite solutions, powered by the SAP NetWeaver™ platform. SAP currently around 27 Industry solutions. Some of the key verticals are listed below: 1. Manufacturing Industries SAP for Automotive SAP for Chemicals SAP for Consumer Products SAP for Engineering, Construction & Operations (SAP for EC&O) SAP for High Tech SAP for Oil & Gas (SAP for O&G) 2 Service Industries SAP for Media SAP for Professional Services SAP for Retail SAP for Telecommunications SAP for Utilities 3 Public Services SAP for Healthcare and SAP for Public Sector 4 Financial Services SAP for Banking, SAP for Financial Service Providers and SAP for Insurance

29 The Value Chain Defined
The idea of a value chain was first suggested by Michael Porter (1985) to depict how customer value accumulates along a chain of activities that lead to an end product or service. Porter describes the value chain as the internal processes or activities a company performs “to design, produce, market, deliver and support its product.” He further states that “a firm’s value chain and the way it performs individual activities are a reflection of its history, its strategy, its approach to implementing its strategy, and the underlying economics of the activities themselves.”

30 Internal Value Chain Analysis – Manufacturing
Purchasing R & D Manufacturing Sales & Marketing 40% 3% 5% 10% 3% 20% 6% 13% Raw Material Stocking Engineering Distribution Value Added Managing with Dual Strategies – Derek F.Abell

31 Value Chain for the Petroleum Industry

32 $28,000 $41,500 People Express $1,000 $1,300 $9,000 $13,200 $4,900
VALUE CHAIN COMPARISON BETWEEN PEOPLE EXPRESS AND UNITED AIRLINES COST PER Seat Miles People Express United Airlines $1,000 Advertising & Publicity $1,300 Ticketing Offices Ticket Counter Operations $9,000 $13,200 Gate Operations Baggage Handling $4,900 Fleets Maintenance $6,700 $11,600 Aircraft Operations $15,600 On-board Service $1,500 $4,700 $28,000 $41,500

33 CMA Competency Map

34 PROSPECT (FUTURE) Business Analytics & Predictive Modeling– Big Data & Cloud Computing Business Model Reporting

35 What is a Business Model ?
A system of inputs, value-adding activities and outputs that aims to create value over the short, medium and long term. Source: CIMA Integrated Reporting Prototype Framework (2012) Business Model Cost Structure Revenue Model

36 Understanding your Business Model
The Business model must answer the following questions: How does the organisation create value? How does it deliver value? How does it preserve some of the value for its owners? Know where value is being created or destroyed - helps to identify opportunities and risks Understand how your business model interacts - within the organisation - with the external environment

37 Integrated Reporting Framework
Creation of Value Over Time through Cost Management Source :CIMA Presentation

38 Building Resilience into your Business Model
Short-term actions + long-term aspirations • Cost leadership • Durable supply chain • Satisfied customers • Innovation • Motivated staff

39 PROSPECT (Future) of Cost Management
Business Analytics & Predictive Modeling– Big Data & Cloud Computing In a sense, a key economic driver for IT would be the use of remote capacity popularly known as cloud computing ( IBM has already come out with Smart Cloud Enterprise Services. (COGNOS,SPSS) Oracle Hyperion and Peoplesoft Resilient Business Models

40 What’s Driving IT Priorities?
BPM is a discipline that leverages software and services to provide total visibility into your organization. Discover, document, automate, and continuously improve business processes to increase efficiency and reduce costs. Source:IBM 83% Analytics 74% Mobility 68% Cloud 60% BPM 58% Security Intelligence

41 What Business Executives Expect From Next Gen Analytics

42 Cloud Computing Cloud computing is the use of computing resources (hardware and software) that are delivered as a service over a network (typically the Internet). The name comes from the use of a cloud-shaped symbol as an abstraction for the complex infrastructure it contains in system diagrams. Cloud computing entrusts remote services with a user's data, software and computation.

43 There are many types of public cloud computing
Infrastructure as a service (IaaS) Platform as a service (PaaS) Software as a service (SaaS) Network as a service (NaaS) Storage as a service (STaaS) Security as a service (SECaaS) Data as a service (DaaS) Desktop as a service (DaaS - see above) Database as a service (DBaaS) Test environment as a service (TEaaS) API as a service (APIaaS) Backend as a service (BaaS) Integrated development environment as a service (IDEaaS) Integration platform as a service (IPaaS), see Cloud-based integration

44 Cloud Computing – Logical Diagram

45 Manage with Cloud:- Cloud adoption continues to accelerate
“Do you currently have a cloud computing initiative or strategy in place within the organization?” 47% 52% 13% adopters 44% adopters/ planners 2010 Base: IT and business decision-makers from companies with 20 or more employees Source:-Forrsights Strategy Spotlight: Cloud In Asia Pacific Excluding Japan, Q3 2011

46 Future of Cost Management

47 “Data is the New Oil” In its raw form, oil has little value.
Ann Winbald, Co-founder Hummer Winbald Venture Capital “Data is the New Oil” In its raw form, oil has little value. Once processed & refined, it helps power the world.


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