Presentation on theme: "Overview The Strategic Approach: an Introduction"— Presentation transcript:
0 Teaching Strategic Cost Management Ed BlocherUniversity of North Carolina, Chapel Hill
1 Overview The Strategic Approach: an Introduction Tools for Integrating Strategy: Value Chain Analysis, The Strategy Map, and the Balanced Scorecard (BSC)Sample Course OutlinesSample Course Topic: Activity-Based Costing (ABC), Time-Drive ABC (TDABC), and ABMSample Course Topic: Customer Profitability AnalysisSample Course Topic: The Management and Control of Quality and Accounting for LeanSample Course Topic: Performance MeasurementUsing Software in the Cost Management Course
2 Part 1: the Strategic Approach to Teaching Cost/Management Accounting Topics—An Introduction
4 Three Levels to Teaching… First Level: Explain the topicSecond Level: As above, plus require homeworkThird Level: As above, plus include the topic on exams
5 Strategic Cost Management The Strategic PerspectivePrior PerspectiveFocus on Financial ReportingCommon emphasis on standardization and standard costsThe accountant as functional expert and financial scorekeeper# View cost management as a tool for developing and implementing business strategy# The accountant as a business partner# Focus on cost management
6 Consequences of Lack of Strategic Cost-Management Information Decision-making based on guess and intuitionLack of clarity about direction and goalsOver time, lack of a clear and favorable perception of the firm by customers and suppliersIncorrect decisions: choosing products, markets, or manufacturing processes that are inconsistent with the organization’s strategyFor control purposes, cannot link performance effectively to strategic goals…
7 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 organization’s strategy.
9 Michael Porter: Strategic Positioning Cost Leadership—outperform competitors by producing at the lowest cost, consistent with quality demanded by the consumerDifferentiation—creating value for the customer through product innovation, product features, customer service, etc. that the customer is willing to pay for
11 -- Strategy Maps & the Balanced Scorecard (BSC) Part 2: Tools for Integrating Strategy into Cost Accounting/Cost Management Courses-- The Value Chain-- Strategy Maps & the Balanced Scorecard (BSC)
12 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:“Upstream” ActivitiesManufacturing/Operations“Downstream” Activities
13 Value-Chain Analysis Develop competitive advantage by: Identify value-chain activitiesDevelop competitive advantage by:Identifying opportunities for adding value for the customerIdentifying opportunities for eliminating non- value added activities and reducing costUnderstand linkages among suppliers, the entity, and customers
14 Strategy Maps & the Balanced Scorecard (BSC) The BSC and Strategy Map are used to align the organization’s activities with achieving strategic goals, using the four perspectives:FinancialCustomerInternal ProcessesLearning and Growth
16 The Balanced Scorecard (BSC): Feedback to Strategy MapBalanced Scorecard (BSC)
17 Educational Resource: Tartan Manufacturing Case Key Issues:Tartan emphasizes product leadership and qualityLimited manufacturing capacityFast sales growth in certain linesThe “Classic” Line has falling sales and is increasingly difficult to manufacture
21 Advanced Management Accounting Strategic PositioningEthicsImplementingStrategyCost Behavior(ABC-based)Product LifeCycleThe Value ChainThe BalancedScorecard (BSC)Cost Estimation(Regression)CVP AnalysisMaster BudgetDecisionMaking (LP)TargetCostingLifeManagement Control (TP)Executive CompensationBusiness Valuation
22 Part 4: Sample Course Topic—Activity-Based Costing (ABC), RCA, and TDABC
23 Evolution of Cost Accounting Systems ABC(simple &minimal)ABC(multidimensional)TraditionalCostingResourcesResourcesResourcesConsumedbyConsumedbyAllocatedtoActivitiesActivitiesConsumedbyConsumedbyCost ObjectsCost ObjectsoutputschannelsCostObjectsUsers
24 ABC/M Framework What Things Cost Resource Drivers Resource Costs RootCauses of CostsWork ActivitiesPerformanceMeasuresCost ReductionProcess reengineeringCost of qualityContinuous improvementWaste eliminationBenchmarkingActivity CostAssignmentActivityDriversCost ObjectsDesign for manufacturingMake versus BuyWhy ThingsCostBetter DecisionMaking
25 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.
26 Time-Driven ABCWhen a substantial amount of the cost of a company’s 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.
27 TDABC ExampleTDABC 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.
28 Part 5: Sample Course Topic—Customer Profitability Analysis
29 Overview of Customer Profitability Analysis Activity Based Costing (ABC)Customer Relationship Management (CRM):Customer Lifetime Value (CLV)Customer Equity
30 Customer Profitability Analysis: The Whale Curve
31 What Makes for a Profitable Customer? Profitable and unprofitable customers are distinguishedby the demands they place on the organizationLess profitable customersSmall order quantitiesSpecial products orderedHeavy discountingUnpredictable demandsDelivery times changeHigh technical supportSlow payment (imputedinterest)More profitable customersLarge order sizesStandard products orderedLittle discountingPredictable demandsDelivery times standardLow technical supportOn-time payment (imputed interest)These demands can be estimatedby activity costs and activity cost drivers52
32 Migrating Customers to Higher Profitability – A Strategic Analysis VeryProfitableTypes of CustomersHigh(Creamy)ProfitableProduct MixMarginUnprofitableLow(Low Fat)VeryunprofitableLowHighCost-to-Serve32
33 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.
34 You are a pharmaceutical supplier: which customer is more important? Dentist ASales = $750,000profits = $100,000Age 61Dentist BSales = $375,000profits = $40,000Age 25Which is more profitable?Which is more valuable?
35 Customer Lifetime Value (CLV) What is it?The projected economic value of customer relationships during the whole period of the relationship between the customer and company.The MeasureThe 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.
36 Customer Equity The economic value of ALL customer relationships. What is it?The economic value of ALL customer relationships.The MeasureThe sum of the CLVs for all customers.How UsedProvides a measure of the value of the company from the perspective of customer profitability.
37 Part 6: Sample Course Topic—The Management & Control of Quality (including Six-Sigma and Lean)
38 Relationship between TQM & Financial Performance
40 Lean ManufacturingAt 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 ; andflexible manufacturing systems in which different vehicles are produced on the same assembly line and employees are trained for a variety of tasks
41 Accounting for LeanThere 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.
42 Accounting for LeanLean accounting uses value streams to measure the financial benefits of a firm’s 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 Part 7: Sample Course Topic— Operational and Management-level Performance Measurement
45 Performance Measurement Motivation and EvaluationIncentives: right decisionsAlign performance measurement with strategyIncentives: working hardCompensation and bonus plansEquity/fairnessControllabilityCost allocationsOperational-level and Management-level
46 Operational Performance Measurement with a Flexible Budget 20102010
48 Management Performance Measurement Profit Centers:Variable costing income statementsIssue of transfer pricingRole and importance of nonfinancial performance indicatorsInvestment Centers:ROI vs. RI vs. EVA®Measurement issuesRole and importance of non-financial performance indicators
49 Performance Measurement: When to Use Profit or Cost Center Management –LevelPerformance Measurement: When to Use Profit or Cost CenterCustomerPlantWarehouse
50 Part 8: Using Software in the Strategic Cost Management Course
51 Using Software in the Strategic Cost Management Course Excel:Goal SeekSolverABC:OROS (SAS), SAP, …ExcelSimulation:Crystal Excel(Formulas/Functions)
52 ABC Software: OROS Quick (from SAS) Comprehensive: resources through objectsAllow a couple of classesShort Tutorial, 13 pages, couple of hoursBlue Ridge Manufacturing Case
53 Have a great Meeting and Visit in San Francisco!