Strategic Cost

Management
Module 1

Strategic Cost Management 1

MANAGEMENT
ACCOUNTINGAND
BUSINESS ENVIRONMENT
Module 1

Strategic Cost Management 2

 1. Define Strategy and differentiate the types of customer
Learning 2.
value proposition.
Differentiate managerial accounting from financial
Outcomes accounting.
3. Describe the role of management accountants in an
organization.
4. Explain the basic concepts underlying Lean Production, the
Theory of Constraints, and Six Sigma.
5. Explain the importance of upholding ethical standards.
6. Discuss Corporate Governance.
7. Discuss business risks and enterprise risk management.
8. Discuss the International certification in management
accounting.

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Define Strategy and
Differentiate the types of
customer value proposition.
Learning Outcome 1

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Strategy
A strategy
is a “game plan”
that enables a company
to attract customers
by distinguishing itself
from competitors.

The focal point of a

company’s strategy should
be its target customers.
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 Customer Value Propositions
Customer
Understand and respond to
Intimacy
individual customer needs.
Strategy

Operational Deliver products and services

Excellence faster, more conveniently,
Strategy and at lower prices.

Product
Leadership Offer higher quality products.
Strategy
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Differentiate managerial
accounting from financial
accounting.
Learning Outcome 2

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 The Differences Between
Managerial and Financial
Accounting

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 Financial and Managerial
Accounting
Financial Accounting Managerial Accounting

Users of Accounting Information

Shareholders Management
Creditors
Government
General Public

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 Comparison of Financial and Managerial
Accounting
Financial Accounting Managerial Accounting
1. Users External persons who Managers who plan for
make financial decisions and control an organization
2. Time focus Historical perspective Future emphasis
3. Verifiability Emphasis on Emphasis on relevance
versus relevance verifiability for planning and control
4. Precision versus Emphasis on Emphasis on
timeliness precision timeliness
5. Subject Primary focus is on Focuses on segments
the whole organization of an organization
6. GAAP Must follow GAAP Need not follow GAAP
and prescribed formats or any prescribed format
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7. Requirement Mandatory for Not
external reports Mandatory
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Describe the role of
management accountants in an
organization.
Learning Outcome 3

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 Work of Management

Planning
Directing and
Motivating

Controlling

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Planning
• Establishing a basic strategy
• Selecting a course of action
• Specifying how the action will be implemented

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Planning

Identify
alternatives.

Select alternative that does

the best job of furthering
organization’s objectives.

Develop budgets to guide

progress toward the
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selected alternative.
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Directing and Motivating
Directing and motivating involves managing
day-to-day activities to keep the organization
running smoothly.
• Employee work assignments.
• Routine problem solving.
• Conflict resolution.
• Effective communications.

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 Controlling
The control function ensures
that plans are being followed.

Feedback in the form of performance reports

that compare actual results with the budget
are an essential part of the control function.

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 Planning and Control Cycle
Formulating long-
Begin
and short-term plans
(Planning)

Comparing actual
Implementing
to planned Decision plans (Directing
performance Making and Motivating)
(Controlling)

Measuring
performance
(Controlling)
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Organizational
Structure

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 Organizational Structure
Decentralization is the delegation of decision-
making authority throughout an organization.

Corporate Organization Chart

Board of Directors

President

Purchasing Personnel Vice President Chief Financial

Operations Officer

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Treasurer Controller

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Decentralization Example
• Good Vibrations, an international retailer of music CDs with shops in major
cities scattered across the Pacific Rim. Because of Good Vibrations’
geographic dispersion and the peculiarities of local markets, the company
is highly decentralized.
• Good Vibrations’ president (often synonymous with the term chief
executive officer, or CEO ) sets the broad strategy for the company and
makes major strategic decisions such as opening stores in new markets;
however, much of the remaining decision-making authority is delegated to
managers at various levels throughout the organization.
• Each of the company’s numerous retail stores has a store manager as well
as a separate manager for each music category such as international rock
and classical/jazz. In addition, the company has support departments such
as a central Purchasing Department and a Personnel Department.
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 Line and Staff Relationships

Line positions are Staff positions

directly related to support and assist
achievement of the line positions.
basic objectives of an
organization.
✓ Example: Production ✓ Example: Cost
supervisors in a accountants in the
manufacturing plant. manufacturing plant.

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 The Chief Financial Officer (CFO)
A member of the top management team responsible
for:
• Providing timely and relevant data to support planning
and control activities.
• Preparing financial statements for external users.

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Explain thebasic concepts
underlying Lean Production, the
Theory ofConstraints, andSix
Sigma.
Learning Outcome 4

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Process
Management

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 Process Management
A business
process is a series of
steps that are followed in order to
carry out some task in
a business.

Product Customer
R&D Design Manufacturing Marketing Distribution Service

Business functions making up the value chain

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Value Chain

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 Process Management
There are three approaches to
improving business processes . . .
Theory of
Constraints (TOC)
Lean Six
Production Sigma

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Lean Production

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 Traditional “Push” Manufacturing
Company

Forecast Sales Order components Store Inventory

Make Sales from

Finished Goods Store Produce goods in
Inventory Inventory anticipation of Sales
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 Traditional “Push” Manufacturing Company
Traditional “push” Large
manufacturing inventories

Raw Work in Finished

materials process goods

Materials waiting Completed products

to be processed. awaiting sale.

Partially completed products

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requiring more work before
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Lean Thinking Model
• A five step management approach that organizes resources such
as people and machines around the flow of business processes and
that pulls units through these processes in response to
customers orders.

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 Lean Production
The five step process results in a “pull” manufacturing system
that reduces inventories, decreases defects, reduces
wasted effort, and shortens customer response times.

Customer places Create Production Generate component

an order Order requirements

Goods Strategic
deliveredCost Management
Production begins Components
when needed as parts arrive are ordered
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 Lean Production
 Identify value  Identify the
in specific business process
products/services. that delivers value.

The lean thinking  Organize work

arrangements around
model is a five
the flow of the
step approach. business process.

 Continuously pursue  Create a pull

perfection in the
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system that responds
business process. to customer orders.
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What Does Just-in-Time Do?
• Attacks waste
• Anything not adding value to the product
• From the customer’s perspective
• Exposes problems and bottlenecks caused by variability
• Deviation from optimum
• Achieves streamlined production
• By reducing inventory

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 Lean Production
Lean thinking can be used to improve business
processes that link companies together.

The term supply chain management refers to the

coordination of business processes across
companies to better serve end consumers.
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 A Supply Chain for Beer

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 Theory of Constraints
A constraint (also called a bottleneck) is anything that prevents you from getting
more of what you want.
The Theory of Constraints is based on the observation that effectively managing
the constraint is the key to success.

The constraint in a system is determined

by the step that has the smallest capacity.

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Bottleneck Operation

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Illustration

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 Theory of Constraints
Only actions 2. Allow the
that strengthen weakest link to
the weakest link set the tempo.
in the “chain”
improve the
process.
3. Focus on
1. Identify the improving
weakest link. the weakest
link.

4. Recognize that
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is no longer so.
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 Six Sigma
A process improvement method relying on customer
feedback and fact-based data gathering and analysis
techniques to drive process improvement.

Refers to a process that Sometimes

generates no more associated
than 3.4 defects per million with the term zero
opportunities. defects.

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 Six Sigma
The Six Sigma DMAIC Framework
Stage Goals
Define ● Establish the scope and purpose of the project.
● Diagram the flow of the current process.
● Establish the customer's requirements for the
process.
Measure ● Gather baseline performance data related to
the existing process.
● Narrow the scope of the project to the most
important problems.
Analyze ● Identify the root cause(s) of the problems
identified in the Measure stage.
Improve ● Develop, evaluate, and implement solutions
to the problems.
Control ● Ensure that problems remain fixed.
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● Seek to improve the new methods over time.

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Explain the importance of
upholding ethical standards.
Learning Outcome 5

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Code of Conduct for Management Accountants

The Institute of Management Accountant’s (IMA)

Statement of Ethical Professional Practice
consists of two parts that offer guidelines for:
 Ethical behavior.
 Resolution for an ethical conflict.

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Code of Conduct for Management Accountants
A management accountant has ethical responsibilities in four
broad areas:
1. To maintain a high level of professional competence.
2. To treat sensitive matters with confidentiality.
3. To maintain personal integrity.
4. To disclose information in a credible fashion.

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 IMA Guidelines for Ethical Behavior
Recognize and
communicate professional
limitations that preclude
responsible judgment.

Maintain Follow applicable

professional Competence laws, regulations
competence. and standards.

Provide accurate, clear,

concise, and timely decision
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support information.
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 IMA Guidelines for Ethical Behavior
Do not disclose confidential
information unless legally
obligated to do so.

Do not use
confidential
information for Confidentiality
unethical or illegal
advantage.

Ensure that subordinates do

not disclose confidential
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 IMA Guidelines for Ethical Behavior
Mitigate conflicts of
interest and advise others
of potential conflicts.

Refrain from
conduct that
would prejudice Integrity
carrying out
duties ethically.
Abstain from activities that
might discredit the
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 IMA Guidelines for Ethical Behavior
Communicate information
fairly and objectively.

Disclose delays or
deficiencies in information
Credibility timeliness, processing, or
internal controls.

Disclose all relevant

information that could
influence a user’s
understanding of reports
and recommendations.
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IMA Guidelines for Resolution of an Ethical
Conflict
Follow employer’s established policies.
For an unresolved ethical conflict:
• Discuss the conflict with immediate supervisor or
next highest uninvolved manager.
• If immediate supervisor is the CEO, consider the
board of directors or the audit committee.
• Contact with levels above the immediate supervisor
should only be initiated with the supervisor’s
knowledge, assuming the supervisor is not involved.

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 IMA Guidelines for Resolution of an Ethical
Conflict
Follow employer’s established policies.
For an unresolved ethical conflict:

• Except where legally prescribed, maintain

confidentiality.
• Clarify issues in a confidential discussion
with an objective advisor.
• Consult an attorney as to legal obligations.

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 Company Codes of Conduct
Broad-based statements of a
company’s responsibilities to:

Employees Customers Suppliers

And to the communities in

which the company operates.
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Codes of Conduct on the International Level
The Code of Ethics for Professional
Accountants, issued by the International
Federation of Accountants (IFAC), governs the
activities of professional accountants worldwide.

In addition to integrity and objectivity, resolution of ethical

conflicts, competence, and confidentiality, the IFAC’s code
deals with the accountant’s ethical responsibilities in:
Taxes,
Independence,
Fees and commissions,
Advertising and solicitation,
Handling of monies, and
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Cross-border activities.
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DiscussCorporateGovernance

Learning Outcome 8

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 Corporate Governance
The system by
which a company is directed
and controlled.
Board of Incentives and
Directors monitoring for

Top To pursue
Management objectives of

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 The Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 was intended to protect the
interests of those who invest in publicly traded companies by
improving the reliability and accuracy of corporate financial
reports and disclosures. Six key aspects of the legislation include:
 The Act requires both the CEO and CFO to certify in writing
that their company’s financial statements and disclosures
fairly represent the results of operations.
 The Act establishes the Public Company Accounting Oversight
Board to provide additional oversight of the audit profession.
 The Act places the power to hire, compensate, and terminate
public accounting firms in the hands of the audit committee.
 The Act places restrictions on audit firms, such as prohibiting
public accounting firms from providing a variety of non-audit
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services to an audit client.
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The Sarbanes-Oxley Act of 2002
(continued)
 The Act requires a public company’s independent auditor
to issue an opinion on the effectiveness of the company’s
internal control over financial reporting to accompany
management’s assessment, and both are included in the
company’s annual report.
 The Act establishes severe penalties for certain behaviors,
such as:
• Up to 20 years in prison for altering or destroying any
documents that may eventually be used in an official
proceeding.
• Up to 10 years in prison for retaliating against a
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“whistle blower.”
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Discuss business risks and
enterprise risk management.
Learning Outcome 9

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 Enterprise Risk Management
Should I try to avoid the risk,
share the risk, accept the
risk, or reduce the risk?
A process used
by a company to
proactively identify
and manage risk.

Once a company identifies its risks, perhaps the

most common risk management tactic is to reduce
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risks by implementing specific controls.

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 Enterprise Risk Management
Examples of Controls to
Examples of Business Risks Reduce Business Risks
● Products harming customers ● Develop a formal and rigorous
new product testing program
● Losing market share due to the ● Develop an approach for legally
unforeseen actions of competitors gathering information about
competitors' plans and practices
● Poor weather conditions shutting ● Develop contingency plans for
down operations overcoming weather-related
disruptions
● Website malfunction ● Thoroughly test the website
before going "live" on the Internet
● A supplier strike halting the flow ● Establish a relationship with two
of raw materials companies capable of providing
raw materials
● Financial statements unfairly ● Count the physical inventory on
reporting the value of inventory hand to make sure that it agrees
with the accounting records
● An employee accessing ● Create password-protected barriers
unauthorized information that prohibit employees from
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to do their jobs
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 Corporate Social Responsibility
Corporate social responsibility (CSR) is a concept
whereby organizations consider the needs
of all stakeholders when making decisions.

Environmental
Customers Employees Suppliers Communities Stockholders & Human Rights
Advocates

CSR extends beyond legal compliance

to include voluntary actions that satisfy
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stakeholder expectations.
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 Corporate Social Responsibility
Examples of Corporate Social Responsibility
Companies should provide customers with: Companies and their suppliers should provide
● Safe, high quality products that are fairly employees with:
priced ● Safe and humane working conditions
● Competent, courteous, and rapid delivery ● Non-discriminatory treatments and the
of products and services right to organize and file grievances
● Full disclosure of product-related risks ● Fair compensation
● Easy to use information systems for ● Opportunities for training, promotion,
shopping and tracking orders and personal development
Companies should provide suppliers with: Companies should provide communities with:
● Fair contract terms and prompt payments ● Payment of fair taxes
● Reasonable time to prepare orders ● Honest information about plans such as
● Hassle-free acceptance of timely and plant closings
complete deliveries ● Resources that support charities, schools,
● Cooperative rather than unilateral and civic activities
actions ● Reasonable access to media sources
Companies should provide stockholders with: Companies should provide environmental
● Competent management and human rights advocates with:
● Easy access to complete and accurate ● Greenhouse gas emissions data
financial information ● Recycling and resource conservation data
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● Full disclosure of enterprise risks ● Child labor transparency
● Honest answers to knowledgeable ● Full disclosure of suppliers located in
63 questions developing countries
Discuss the International
certification in management
accounting.
Learning Outcome 10

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 Certified Management Accountant

A management accountant
who has the necessary qualifications and
who passes a rigorous professional exam earns
the right to be known as a Certified
Management Accountant (CMA).

Information about becoming a CMA and the CMA

program can be accessed on the IMA’s website at
www.imanet.org or by calling 1-800-638-4427.
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References:
• Warren, Reeve & Fess, 8th Edition (2004) Financial and Managerial
Accounting, South-Western Thompson Learning
• Garrison, R. H., Noreen, E. W. & Brewer, P. C., 13th edition (2010).
Managerial Accounting, McGraw-Hill/Irwin
• Stevenson, W. J., 8th edition (2005). Operations Management,
McGraw-Hill/Irwin
• Heizer & Render, 7th edition (2004). Operations Management,
Prentice Hall

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ThankYou

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