0 CHAPTER 15 The Strategic Use of Managerial Accounting Information © 2009 Cengage Learning

1 1 Introduction Strategy refers to a set of policies, procedures, and approaches to business that relate to the long-term success of a business. Starts with the organization’s mission statement. The balanced scorecard helps operationalize the mission statement.

2 2 Strategy and Creating a Competitive Advantage Strategies for obtaining a competitive advantage: Cost leadership –Provide same or better value at lower cost than competitors Product differentiation –Offer a product or service that’s distinguished from competitors’ offerings Focusing strategy –Focus on a customer segment or market in which to compete

3 3 Strategy and Creating a Competitive Advantage The key to achieving long-term growth and success is to gain a competitive advantage. Key Concept

4 4 Pricing of Products and Services Determining the selling price of a product is one of the most important decisions management will be required to make. –If price is too high, market demand will be too low to earn a fair profit. –If price is too low, market demand may be very high, but product may produce minimal profit.

5 5 Economic Concepts and Pricing Price affects demand  Elastic demand means that a price increase (decrease) of a certain percent will lower (raise) demand by more than that percentage.  Inelastic demand means that demand is not greatly affected by an increase or decrease in price

6 6 The Selling Price of a Product or a Service The price of a product must be sufficient to cover all the costs of the product and to provide a profit. Key Concept

7 7 Exceptions to Pricing Based on Cost Exception to pricing based on cost: Agriculture The market determines the selling price.

8 8 Target Pricing Target Cost = Target Price – Target Profit Used to determine the maximum cost that can be incurred in order to earn a desired target profit.

9 9 Cost-Plus Pricing The markup percentage must be high enough to 1.Cover costs not included in the product cost 2.Produce an acceptable profit Target Selling Price = Base Cost + (Markup % x Base Cost)

10 Time and Material Pricing In service industries such as CPA firms, prices are often set based on time and material used.

11 Value Pricing Value Pricing is based on the perceived or actual value of the service provided to a customer. Example: Consulting Businesses

12 Legal and Ethical Issues in Pricing Many pricing policies are illegal  Predatory Pricing  Price Discrimination  Price Gouging

13 Cost Management and Strategy Research And Development Product Development Production MarketingDistribution Customer Service The Value Chain Upstream CostsDownstream Costs

14 Cost Management and Strategy Long-term success through the attainment of a competitive advantage requires that managers understand and manage the organization’s value chain. Key Concept

15 Cost Management and Strategy  Structural Activities  Organizational Activities  Operational Activities  Internal linkages  External linkages  Value-chain analysis

16 Supply-Chain Management The key in supply-chain management is that suppliers and buyers work together to develop opportunities for their mutual benefit. Key Concept

17 Customer Relationship Management (CRM)  Identify your customers  Differentiate your customers  Interact with your customers  Customize your business to your customers

18 Customer Relationship Management The goal of customer relationship management (CRM) is to bring a company closer to its customers in order to serve them better. Key Concept

19 Activity-Based Management and the Value Chain Activity-based management is critical in helping companies create and maintain a competitive advantage. Key Concept

20 Value-Added and Non- Value-Added Activities Non-value-added activities don’t add value to the finished product or Service Examples: Storage of inventory Moving of materials and parts from storage to the factory Idle time of employees while waiting for work

21 Successful Implementation of ABC and ABM Utilizing activity-based costing information to reduce costs, eliminate non-value-added activities, and manage more effectively requires the cooperation of all functional areas of business organization and top management.

22 Successful Implementation of ABC and ABM The successful implementation of ABC and ABM requires a long-term commitment by top management and the cooperation of all functional areas of a business organization. Key Concept