1. Copyright © 2013 Nelson Education Ltd. PowerPoint Presentations for Cornerstones of Cost Accounting First Canadian Edition Adapted by George Gekas Ryerson University

2. Strategic Cost Management 13 13-2 Copyright © 2013 Nelson Education Ltd.

3. 13-3 Strategic planning and decision making requires a broad set of information Information about customers, suppliers, different product designs Should include: Information about the firm’s environment and internal workings Be prospective and should provide insight about future periods and activities Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

4. 13-4 Basic Concepts 1 Strategic Decision Making Choosing among alternative strategies with the goal of selecting a strategy for long-term growth and survival Strategic Cost Management Use of cost data to develop and identify superior strategies that will help produce a sustainable competitive advantage Copyright © 2013 Nelson Education Ltd.

5. 13-5 Competitive Advantage Creating better customer value for the same or lower cost than offered by competitors or Creating equivalent value for lower cost than offered by competitors Customer Value The difference between customer realization (what a customer receives) and customer sacrifice (what the customer gives up) Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

6. 13-6 Three general strategies help increase customer value to achieve a competitive advantage: 1. Cost leadership 2. Product differentiation 3. Focusing Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

7. 13-7 Cost Leadership Strategy The same or better value is provided to customers at a lower cost than a company’s competitors Example: A company might redesign a product so that fewer parts are needed, lowering production costs and the costs of maintaining the product after purchase. Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

8. 13-8 Differentiation Strategy Strives to increase customer value by increasing what the customer receives (customer realization) Example: Computer retailer might offer an on-site repair service, a feature not offered by other rivals in the local market. Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

9. 13-9 Focusing Strategy When a firm selects or emphasizes a market or customer segment in which to compete Example:  Paging Network, Inc., a paging services provider, has targeted particular kinds of customers and is in the process of weeding out the non-targeted customers. Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

10. 13-10 Basic Concepts 1 Industrial value chain linked set of value-creating activities from basic raw materials to the disposal of the finished product by end use customers Fundamental to a value- chain framework is the recognition that there exist complex linkages and interrelationships among activities both within and external to the firm. Copyright © 2013 Nelson Education Ltd.

11. 13-11 Internal Linkages Relationships among activities that are performed within a firm’s portion of the value chain External Linkages Describe the relationship of a firm’s value chain activities that are performed with its suppliers and customers Two types: supplier linkages and customer linkages Basic Concepts 1 Linkages Copyright © 2013 Nelson Education Ltd.

12. 13-12 Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

13. 13-13 Basic Concepts 1 Structural Activities Determine the underlying economic structure of the organization Executional Activities Define the processes and capabilities of an organization and thus are directly related to the ability of an organization to execute successfully Organizational Activity Types Copyright © 2013 Nelson Education Ltd.

14. 13-14 Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

15. 13-15 Basic Concepts 1 Operational activities are day-to-day activities performed as a result of the structure and processes selected by the organization. Operational cost drivers are those factors that drive the cost of operational activities. Operational activities and drivers are the focus of activity-based costing Copyright © 2013 Nelson Education Ltd.

16. 13-16 Basic Concepts 1 Copyright © 2013 Nelson Education Ltd.

17. 13-17 Internal Value Chain 2 Value Chain Analysis Identifying and exploiting internal and external linkages with the objective of strengthening a firm’s strategic position Activities before and after production must be identified and their linkages identified and exploited Relationships assessed and used to reduce costs and increase values See Cornerstones 13-1 and 13-2 Copyright © 2013 Nelson Education Ltd.

18. 13-18 Internal Value Chain 2 Copyright © 2013 Nelson Education Ltd.

19. 13-19 Life-Cycle Cost Management 3 Product Life Cycle The time a product exists—from conception to abandonment Revenue-producing life: The time a product generates revenue for a company Consumable life: The length of time a product serves the needs of a customer Copyright © 2013 Nelson Education Ltd.

20. 13-20 Life-Cycle Cost Management 3 There are three basic views of the product life cycle: 1.Marketing viewpoint 2.Production viewpoint 3.Consumable life viewpoint Copyright © 2013 Nelson Education Ltd.

21. 13-21 Life-Cycle Cost Management 3 Marketing Viewpoint Copyright © 2013 Nelson Education Ltd.

22. 13-22 Life-Cycle Cost Management 3 Production Viewpoint Copyright © 2013 Nelson Education Ltd.

23. 13-23 Life-Cycle Cost Management 3 Copyright © 2013 Nelson Education Ltd.

24. 13-24 Life-Cycle Cost Management 3 Useful for establishing cost reduction goals during design stage Target cost: Difference between the sales price needed to capture a predetermined market share and the desired per unit profit Role of Target Costing Copyright © 2013 Nelson Education Ltd.

25. 13-25 Life-Cycle Cost Management 3 Sales price must reflect product functionality If target cost is less than what is currently achievable, then company must find cost reductions to move the actual cost toward the target cost Cost reduction methods: Reverse engineering (“tear down” analysis) Value analysis Process improvement Role of Target Costing Copyright © 2013 Nelson Education Ltd.

26. 13-26 Life-Cycle Cost Management 3 Copyright © 2013 Nelson Education Ltd.

27. 13-27 Just-in-Time (JIT) Manufacturing and Purchasing 4 JIT manufacturing is a demand-pull system Objective: Eliminate waste by producing a product only when it is needed and only in the quantities demanded by the customers Demand pulls products through the manufacturing process No production takes place until a signal from a succeeding process indicates a need to produce Parts and materials arrive just in time to be used in production Copyright © 2013 Nelson Education Ltd.

28. 13-28 Just-in-Time (JIT) Manufacturing and Purchasing 4 Plant Layout Pattern: Traditional versus JIT Copyright © 2013 Nelson Education Ltd.

29. 13-29 Just-in-Time (JIT) Manufacturing and Purchasing 4 Total Quality Management Copyright © 2013 Nelson Education Ltd.

30. 13-30 JIT and Its Effect on the Cost Management System 5 Traceability of Selected Costs Comparisons Copyright © 2013 Nelson Education Ltd.

31. 13-31 5 Simplified accounting approach Uses trigger points to determine when manufacturing costs are assigned to key inventory and temporary accounts Trigger points: Events that prompt the accounting recognition of certain manufacturing costs Purchase of raw materials and the completion of goods Purchase of raw materials and the sale of goods Completion of goods Sale of goods JIT and Its Effect on the Cost Management System See Cornerstone 13-5 Backflush Costing Copyright © 2013 Nelson Education Ltd.

32. 13-32 End of Chapter 13