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Overview The Strategic Approach: an Introduction

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Presentation on theme: "Overview The Strategic Approach: an Introduction"— Presentation transcript:

0 Teaching Strategic Cost Management
Ed Blocher University 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 Outlines Sample Course Topic: Activity-Based Costing (ABC), Time-Drive ABC (TDABC), and ABM Sample Course Topic: Customer Profitability Analysis Sample Course Topic: The Management and Control of Quality and Accounting for Lean Sample Course Topic: Performance Measurement Using Software in the Cost Management Course

2 Part 1: the Strategic Approach to Teaching Cost/Management Accounting Topics—An Introduction

3 Teaching Strategic Cost Management
What? Why? How?

4 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

5 Strategic Cost Management
The Strategic Perspective Prior Perspective Focus on Financial Reporting Common emphasis on standardization and standard costs The 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 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 organization’s strategy For 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.

8 Balanced Scorecard (BSC)
Introducing Strategy Strengths Weaknesses OpportunitiesThreats Strategy Map Balanced Scorecard (BSC)

9 Michael Porter: Strategic Positioning
Cost Leadership—outperform competitors by producing at the lowest cost, consistent with quality demanded by the consumer Differentiation—creating value for the customer through product innovation, product features, customer service, etc. that the customer is willing to pay for

10 Aspects of the Two Competitive Strategies

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” Activities Manufacturing/Operations “Downstream” Activities

13 Value-Chain Analysis Develop competitive advantage by:
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

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: Financial Customer Internal Processes Learning and Growth

15 vision & mission Integrate systems
Exceed shareholder expectations Diversify income stream Increase sales volume Improve profit margins Financial Diversify customer base Increase sales to existing customers Customer Attract new customers Internal Process Target profitable market segments Optimize internal processes Develop new products Attract new customers Learning & Growth Develop employee skills Integrate systems

16 The Balanced Scorecard (BSC): Feedback to Strategy
Map Balanced Scorecard (BSC)

17 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

18 Part 3: Sample Course Outlines
Management Accounting Cost Accounting Advanced Management Accounting

19 Introduction to Management Accounting
Strategic Positioning Ethics Implementing Strategy Product Costing Cost Behavior (Planning and Operational Control) Product Life Cycle The Value Chain The Balanced Scorecard Volume Based (Job Costing) Activity - based Cost Estimation CVP Analysis Master Budget Decision Making Flexible Budget s Target Life Management Control

20 Strategic Positioning
Cost Accounting Strategic Positioning Ethics Implementing Strategy Product Costing Cost Behavior (Planning and Operational Control) Product Life Cycle The Value Chain The Balanced Scorecard Job Costing ABC Costing Process Cost Joint Costs Standard Cost Estimation CVP Analysis (ABC) Master Budget Decision Making (ABC) Target Life Cycle Managing Constraints

21 Advanced Management Accounting
Strategic Positioning Ethics Implementing Strategy Cost Behavior (ABC - based) Product Life Cycle The Value Chain The Balanced Scorecard (BSC) Cost Es timation (Regression) CVP Analysis Master Budget Decision Making (LP) Target Costing Life Management Control (TP) Executive Compensation Business 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) Traditional Costing Resources Resources Resources Consumed by Consumed by Allocated to Activities Activities Consumed by Consumed by Cost Objects Cost Objects outputs channels Cost Objects Users

24 ABC/M Framework What Things Cost Resource Drivers Resource Costs
Root Causes of Costs Work Activities Performance Measures Cost Reduction Process reengineering Cost of quality Continuous improvement Waste elimination Benchmarking Activity Cost Assignment Activity Drivers Cost Objects Design for manufacturing Make versus Buy Why Things Cost Better Decision Making

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 ABC When 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 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.

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 distinguished by the demands they place on the organization Less profitable customers Small order quantities Special products ordered Heavy discounting Unpredictable demands Delivery times change High technical support Slow payment (imputed interest) More profitable customers Large order sizes Standard products ordered Little discounting Predictable demands Delivery times standard Low technical support On-time payment (imputed interest) These demands can be estimated by activity costs and activity cost drivers 52

32 Migrating Customers to Higher Profitability – A Strategic Analysis
Very Profitable Types of Customers High (Creamy) Profitable Product Mix Margin Unprofitable Low (Low Fat) Very unprofitable Low High Cost-to-Serve 32

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 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?

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 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.

36 Customer Equity The economic value of ALL customer relationships.
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.

37 Part 6: Sample Course Topic—The Management & Control of Quality (including Six-Sigma and Lean)

38 Relationship between TQM & Financial Performance

39 A Strategic Model for Managing Quality

40 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

41 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.

42 Accounting for Lean Lean 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.

43 Lean Accounting – Value Streams

44 Part 7: Sample Course Topic— Operational and Management-level Performance Measurement

45 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

46 Operational Performance Measurement with a Flexible Budget
2010 2010

47 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…

48 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 Role and importance of non-financial performance indicators

49 Performance Measurement: When to Use Profit or Cost Center
Management –Level Performance Measurement: When to Use Profit or Cost Center Customer Plant Warehouse

50 Part 8: Using Software in the Strategic Cost Management Course

51 Using Software in the Strategic Cost Management Course
Excel: Goal Seek Solver ABC: OROS (SAS), SAP, … Excel Simulation: Crystal Excel(Formulas/Functions)

52 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

53 Have a great Meeting and Visit in San Francisco!


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