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Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Ed Blocher University of North Carolina, Chapel Hill Teaching Strategic.

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Presentation on theme: "Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Ed Blocher University of North Carolina, Chapel Hill Teaching Strategic."— Presentation transcript:

1 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Ed Blocher University of North Carolina, Chapel Hill Teaching Strategic Cost Management

2 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Overview 1.The Strategic Approach: an Introduction 2.Tools for Integrating Strategy: Value Chain Analysis, The Strategy Map, and the Balanced Scorecard (BSC) 3.Sample Course Outlines 4.Sample Course Topic: Activity-Based Costing (ABC), Time- Drive ABC (TDABC), and ABM 5.Sample Course Topic: Customer Profitability Analysis 6.Sample Course Topic: The Management and Control of Quality and Accounting for Lean 7.Sample Course Topic: Performance Measurement 8.Using Software in the Cost Management Course

3 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 1: the Strategic Approach to Teaching Cost/Management Accounting TopicsAn Introduction

4 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Teaching Strategic Cost Management What? Why? How?

5 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Three Levels to Teaching … First Level: Explain the topic Second Level: As above, plus require homework Third Level: As above, plus include the topic on exams

6 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Strategic Cost Management Focus on Financial Reporting Focus on Financial Reporting Common emphasis on standardization and standard costs Common emphasis on standardization and standard costs The accountant as functional expert and financial scorekeeper The accountant as functional expert and financial scorekeeper Focus on Financial Reporting Focus on Financial Reporting Common emphasis on standardization and standard costs Common emphasis on standardization and standard costs The accountant as functional expert and financial scorekeeper The accountant as functional expert and financial scorekeeper Prior Perspective The Strategic Perspective # View cost management as a tool for developing and implementing business strategy # The accountant as a business partner # Focus on cost management # View cost management as a tool for developing and implementing business strategy # The accountant as a business partner # Focus on cost management

7 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Consequences of Lack of Strategic Cost-Management Information Decision-making based on guess and intuition Lack of clarity about direction and goals Over time, lack of a clear and favorable perception of the firm by customers and suppliers Incorrect decisions: choosing products, markets, or manufacturing processes that are inconsistent with the organizations strategy For control purposes, cannot link performance effectively to strategic goals …

8 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Definition of Management Accounting: IMA Management accounting is a profession that involves partnering in management decision making, devising planning and performance management systems, and providing expertise in financial reporting and control to assist management in the formulation and implementation of an organizations strategy.

9 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Introducing Strategy Strategy Map Balanced Scorecard (BSC) Opportunities Threats Strengths Weaknesses

10 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Michael Porter: Strategic Positioning Cost Leadershipoutperform competitors by producing at the lowest cost, consistent with quality demanded by the consumer Differentiationcreating value for the customer through product innovation, product features, customer service, etc. that the customer is willing to pay for

11 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Aspects of the Two Competitive Strategies

12 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 2: Tools for Integrating Strategy into Cost Accounting/Cost Management Courses -- The Value Chain -- Strategy Maps & the Balanced Scorecard (BSC)

13 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 oUpstream Activities oManufacturing/Operations oDownstream Activities Value Chain Analysis: A Detailed Look at Strategy… The Value Chain is a linked set of value- adding activities used by an organization to deliver its value proposition to its customers. It consists of:

14 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Value-Chain Analysis Identify value-chain activities Develop competitive advantage by: Identifying opportunities for adding value for the customer Identifying opportunities for eliminating non- value added activities and reducing cost Understand linkages among suppliers, the entity, and customers

15 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Strategy Maps & the Balanced Scorecard (BSC) The BSC and Strategy Map are used to align the organizations activities with achieving strategic goals, using the four perspectives: Financial Customer Internal Processes Learning and Growth

16 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Exceed shareholder expectations Improve profit margins Increase sales volume Diversify income stream Increase sales to existing customers Diversify customer base Attract new customers Target profitable market segments Develop new products Optimize internal processes Attract new customers Develop employee skills Integrate systems vision & mission Learning & Growth Internal Process Customer Financial

17 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Strategy Map Balanced Scorecard (BSC) The Balanced Scorecard (BSC): Feedback to Strategy

18 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Educational Resource: Tartan Manufacturing Case Key Issues: Tartan emphasizes product leadership and quality Limited manufacturing capacity Fast sales growth in certain lines The Classic Line has falling sales and is increasingly difficult to manufacture

19 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 3: Sample Course Outlines Management Accounting Cost Accounting Advanced Management Accounting

20 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010

21 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Managing Constraints

22 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010

23 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 4: Sample Course Topic Activity-Based Costing (ABC), RCA, and TDABC

24 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Evolution of Cost Accounting Systems Traditional Costing Resources Cost Objects Allocated to ABC (simple & minimal) Resources Activities Consumed by Cost Objects Consumed by ABC (multidimensional) Resources Activities Consumed by outputs Consumed by channels Users Cost Objects

25 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 ABC/M Framework Root Causes of Costs Work Activities Performance Measures Cost Reduction Process reengineering Cost of quality Continuous improvement Waste elimination Benchmarking What Things Cost Resource Costs Cost Objects Resource Drivers Activity Drivers Better Decision Making Why Things Cost Design for manufacturing Make versus Buy Activity Cost Assignment

26 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Resource Consumption Accounting (RCA) Resource consumption accounting (RCA) is an adaption of ABC that emphasizes resource consumption by greatly increasing the number of resource cost pools, which allows more direct tracing of resource costs to cost objects than an ABC system with fewer cost centers. 8 RCA is particularly appropriate for large organizations with repetitive operations and high-level information systems such as those provided by SAP, Oracle, and SAS. 8

27 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Time-Driven ABC When a substantial amount of the cost of a companys activities are in a highly repetitive process (much like in the RCA example above), the cost assignment can be based on the average time required for each activity. Time-Driven Activity-Based Costing (TDABC) assigns resource costs directly to cost objects using the cost per time unit of supplying the resource, rather than first assigning costs to activities and then from activities to cost objects.

28 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 TDABC Example TDABC computes the cost per minute of the resources performing the work activity. Assume 2 clerical workers paid $45,000 annually perform a certain activity that is expected to require 17 minutes. TDABC calculates the total cost as $45,000 x 2 = $90,000; TDABC then calculates the total time available for the activity as 180,000 minutes (assuming 30 hours per week with two weeks vacation: 2 workers x 50 weeks x 30 hours x 60 minutes per hour = 180,000 minutes per year). The TDAC rate for the activity is $0.50 per minute ($90,000 / 180,000). The cost of a unit of activity is $0.50 x 17 min = $8.50; if the activity required 20 min, then the allocation would be $.50 x 20 = $10.

29 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 5: Sample Course TopicCustomer Profitability Analysis

30 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Activity Based Costing (ABC) Customer Relationship Management (CRM): Customer Lifetime Value (CLV) Customer Equity Overview of Customer Profitability Analysis

31 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Customer Profitability Analysis: The Whale Curve

32 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 uLess profitable customers t Small order quantities t Special products ordered t Heavy discounting t Unpredictable demands t Delivery times change t High technical support t Slow payment (imputed interest) Profitable and unprofitable customers are distinguished by the demands they place on the organization Profitable and unprofitable customers are distinguished by the demands they place on the organization uMore profitable customers t Large order sizes t Standard products ordered t Little discounting t Predictable demands t Delivery times standard t Low technical support t On-time payment (imputed interest) These demands can be estimated by activity costs and activity cost drivers What Makes for a Profitable Customer?

33 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Types of Customers 32 High(Creamy) Low (Low Fat) Low High Cost-to-Serve Product Mix Margin Very Profitable Veryunprofitable Profitable Unprofitable Migrating Customers to Higher Profitability – A Strategic Analysis

34 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Customer Relationship Management (CRM) Requires Strategic Cost Management Data Who is more important to pursue with the scarce resources of our marketing budget? Our most profitable customers? Our most valuable customers? What is the difference? The customer lifetime value (CLV) measure is intended to answer this question.

35 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 You are a pharmaceutical supplier: which customer is more important? Dentist A Sales = $750,000 profits = $100,000 Age 61 Dentist B Sales = $375,000 profits = $40,000 Age 25 Which is more profitable ? Which is more valuable ?

36 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 What is it? The projected economic value of customer relationships during the whole period of the relationship between the customer and company. The Measure The net present value (NPV) of all future profits from that customer; it is a projection, from when the customer is acquired or from the current date. Customer Lifetime Value (CLV)

37 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 What is it? The economic value of ALL customer relationships. The Measure The sum of the CLVs for all customers. How Used Provides a measure of the value of the company from the perspective of customer profitability. Customer Equity

38 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 6: Sample Course TopicThe Management & Control of Quality (including Six-Sigma and Lean)

39 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Relationship between TQM & Financial Performance

40 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 A Strategic Model for Managing Quality

41 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Lean Manufacturing At the heart of lean manufacturing is the Toyota Production System (TPS): a long-term focus on relationships with suppliers and coordination with these suppliers; an emphasis on balanced, continuous flow manufacturing with stable production levels; continuous improvement in product design and manufacturing processes with the objective of eliminating waste ; and flexible manufacturing systems in which different vehicles are produced on the same assembly line and employees are trained for a variety of tasks

42 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Accounting for Lean There are three reasons why the improvements in financial results typically appear later than the operating improvements from implementing lean. Customers will benefit from the improved manufacturing flexibility by ordering in smaller, more diverse quantities. Improvements in productivity will create excess capacity; as equipment and facilities are used more efficiently, some will become idle. The decrease in inventory that results from lean means that, using full cost accounting, the fixed costs incurred in prior periods flow through the income statement when inventory is decreasing.

43 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Accounting for Lean Lean accounting uses value streams to measure the financial benefits of a firms progress in implementing lean manufacturing. Each value stream is a group of related products or services. Accounting for value streams significantly reduces the need for cost allocations (since the products are aggregated into value streams) which can help the firm to better understand the profitability of its process improvements and product groups.

44 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Lean Accounting – Value Streams

45 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 7: Sample Course Topic Operational and Management-level Performance Measurement

46 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Performance Measurement Motivation and Evaluation –Incentives: right decisions Align performance measurement with strategy –Incentives: working hard Compensation and bonus plans –Equity/fairness Controllability Cost allocations Operational-level and Management-level

47 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Operational Performance Measurement with a Flexible Budget 2010

48 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Management Performance Measurement Cost Centers Engineered Cost (cost driver: volume based) Flexible Budget Discretionary Cost (cost driver?) Master Budget Profit Center – one step from outsourcing…

49 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Management Performance Measurement Profit Centers: Variable costing income statements Issue of transfer pricing Role and importance of nonfinancial performance indicators Investment Centers: ROI vs. RI vs. EVA® Measurement issues Issue of transfer pricing Role and importance of non-financial performance indicators

50 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Management –Level Performance Measurement: When to Use Profit or Cost Center Customer Plant Warehouse

51 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Part 8: Using Software in the Strategic Cost Management Course

52 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Using Software in the Strategic Cost Management Course 1.Excel: Goal Seek Solver 2.ABC: OROS (SAS), SAP, … Excel 3.Simulation: Crystal Ball, @Risk, Excel(Formulas/Functions)

53 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 ABC Software: OROS Quick (from SAS) Comprehensive: resources through objects Allow a couple of classes Short Tutorial, 13 pages, couple of hours Blue Ridge Manufacturing Case

54 Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010 Have a great Meeting and Visit in San Francisco!


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