Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin 1 Cost Management and Strategic Decision Making Evaluating Opportunities and Leading Change

Learning Objective 1 1-2

? What is Cost Management? It goes beyond historical measurement and reporting. It assesses the impacts of current or proposed decisions. It is a philosophy, an attitude, and a set of techniques to create more customer value and achieve lower cost. It goes beyond historical measurement and reporting. It assesses the impacts of current or proposed decisions. It is a philosophy, an attitude, and a set of techniques to create more customer value and achieve lower cost. Characteristics of Cost Management 1-3

Learning Objective 2 1-4

Characteristics of Cost-Management Analysts Cost analysts use cost accounting and other data to: Support strategies Improve products Improve services Reduce costs Improve resource use 1-5

Characteristics of Cost-Management Analysts Integrity Ability to work in cross-functional teams Broad knowledge of the business 1-6

Ethical Standards for Cost- Management Analysts Cost-management analysts must maintain high standards of ethical behavior because they can control the information used for important strategic management decisions. The IMA (Institute of Management Accountants) Statement of Ethical Professional Practice, published for its management accountant membership, offers guidance for ethical behavior applicable to cost-management analysts. 1-7

PRINCIPLES IMA Overarching Ethical Principles Honesty FairnessObjectivity Responsibility 1-8

Competence Follow applicable laws, regulations and standards. Maintain professional expertise, and communicate any limitations or constraints. Provide decision support information and recommendations that are accurate and timely. IMA Standards for Ethical Behavior 1-9

Confidentiality Do not disclose confidential information unless legally obligated to do so. Inform relevant parties about the proper use of confidential information. Do not use confidential information for personal advantage. IMA Standards for Ethical Behavior 1-10

Avoid conflicts of interest and advise others of potential conflicts. Abstain from activities that might discredit the profession. Refrain from conduct that could compromise ethical performance. Integrity IMA Standards for Ethical Behavior 1-11

Communicate information fairly and objectively. Disclose all information that should influence an intended user’s understanding of reports and analyses. Credibility IMA Standards for Ethical Behavior Disclose delays or deficiencies in information and its processing. Disclose delays or deficiencies in information and its processing. 1-12

Sarbanes-Oxley Act (SOX) (Section 404) The CEO and CFO are now personally responsible for their company’s financial statements. They must sign the statements and take responsibility for their accuracy. The CEO and CFO are responsible for their company’s system of internal controls over its financial reporting. Accurate cost measurement has gained in importance. 1-13

Internal Control System (to assure that a company achieves…) Effectiveness and efficiency in its operations Reliability in its financial reporting Compliance with laws and regulations 1-14

Learning Objective

Strategic Decision Making An organization’s overall plan or policy to achieve its goals. Strategy Key questions How do we want to get there? Where do we want to go? 1-16

Where do We Want to Go? – Strategic Missions Low Medium High RISK REWARDS Divest Harvest Hold Build Declining market Exit at lowest cost Minimize losses Find a buyer quickly Continuing market Maintain cash flow Maintain volume Cut costs Continuing market Maintain growth Be a major player Protect market share New market potential Be early entrant Achieve growth Capture market share Exh

How Do We Want to Get There? Managers are more successful in attaining objectives if they: Understand sources and threats to competitive advantages. Use effective decision making techniques. Competitive advantages result from achieving a value chain that enables an organization to provide more value (perhaps at a lower cost) than its competitors. Competitive advantages result from achieving a value chain that enables an organization to provide more value (perhaps at a lower cost) than its competitors. 1-18

The Value Chain Where do we want to go? How do we want to get there? Physical resources Physical resources Human resources Human resources Support services Accounting Human resources Legal services Information systems Telecommunications Support services Accounting Human resources Legal services Information systems Telecommunications R & D Desig n Supply Production Marketing D istri- bution Customer service Value of products and services Value of products and services Primary processes Exh

Outsourcing and the Value Chain Focus resources on parts of the value chain that are most important to company goals. Outsource those value chain processes that can be done more efficiently by others. What is most likely to be outsourced? Information services, legal, logistics, human resources, payroll, accounting, tax. What is most likely to be outsourced? Information services, legal, logistics, human resources, payroll, accounting, tax. Potential problem Loss of control and internal expertise. 1-20

Competitive Advantages, Sources and Threats Exh. 1.3 Product Strategy Business Unit Strategy Low Cost Production Product Differentiation Market Focus Build Hold Harvest Divest Source of Capability Create New Knowledge Imitate Others Substitutes New Competitors Existing Competitors Customers Suppliers 1-21

Formulation of Strategic Action Plans 1. Identify need for change. 2. Create team to lead and manage change. 3. Create vision of the change and strategy for achieving vision. 4. Communicate vision and strategy for change and have change team act as a role model. 5. Encourage innovation and remove obstacles to change. 6. Ensure that short-term achievements are frequent and obvious. 7. Use successes to create opportunities for improving entire organization. 8. Reinforce culture of more improvement, better leadership, more effective management. 1. Identify need for change. 2. Create team to lead and manage change. 3. Create vision of the change and strategy for achieving vision. 4. Communicate vision and strategy for change and have change team act as a role model. 5. Encourage innovation and remove obstacles to change. 6. Ensure that short-term achievements are frequent and obvious. 7. Use successes to create opportunities for improving entire organization. 8. Reinforce culture of more improvement, better leadership, more effective management. An 8-step process at Pursuit Data 1-22

Learning Objective

Evaluating Plans and Outcomes Operational performance analysis Strategic performance analysis Has short-run performance met expectations? Has long-run performance met expectations? 1-24

Evaluating Plans and Outcomes Cost Benefit Analysi s Variance Analysis Differences between the expected and actual costs of business operations Quantitative information and qualitative information about a proposed plan 1-25

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