Presentation for CPE AAA2010

8/8/2019 Presentation for CPE AAA2010

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Teaching Strategic Cost Management: Ed Blocher AAA Annual Meeting, August 2010

Ed Blocher

University of North Carolina, Chapel Hill

Teaching Strategic CostManagement


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Ov er v iew1. T he Strategic Approach: an Introduction

2 . Tools for Integrating Strategy: Value Chain Analysis, T heStrategy Map, and the Balanced Scorecard (BSC)

3 . Sample Course Outlines

4 . Sample Course Topic: Activity-Based Costing (ABC), T ime-Drive ABC ( T DABC), and ABM

5 . Sample Course Topic: Customer Profitability Analysis

6.

Sample CourseT

opic:T

he Management and Control of Quality and Accounting for Lean

7 . Sample Course Topic: Performance Measurement

8 . Using Software in the Cost Management Course


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P art 1: the StrategicApproach to Teaching

Cost/ManagementAccounting TopicsAnIntroduction


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Teaching Strategic CostManagement

What?Why?

How?


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Three Levels to Teaching

F irst Le vel: Ex plain the topic

Second Le vel: As above, plusrequire homework

Third Le vel: As above, plusinclude the topic on e x ams


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Strategic Cost Management

F ocus on Fi nanc ialF ocus on Fi nanc ialReport ingReport ing

Common emphas is onCommon emphas is onstandard iz at ion andstandard iz at ion andstandard costsstandard costs

The accountant asThe accountant asfunct ional expert andfunct ional expert andf inanc ial scorekeeperf inanc ial scorekeeper

F ocus on Fi nanc ialF ocus on Fi nanc ialReport ingReport ing

Common emphas is onCommon emphas is onstandard iz at ion andstandard iz at ion andstandard costsstandard costs

The accountant asThe accountant asfunct ional expert andfunct ional expert andf inanc ial scorekeeperf inanc ial scorekeeper

Pr ior Perspect iv ePr ior Perspect iv e

Pr ior Perspect iv ePr ior Perspect iv eThe Strateg icThe Strateg icPerspect iv ePerspect iv e

The Strateg icThe Strateg icPerspect iv ePerspect iv e

# View cost# View costmanagement as amanagement as atool for de velopingtool for de velopingand implementingand implementingbu siness strategy bu siness strategy

# The accountant as a# The accountant as abu siness partner bu siness partner # Focus on cost# Focus on cost

managementmanagement

# View cost# View costmanagement as amanagement as atool for de velopingtool for de velopingand implementingand implementingbu siness strategy bu siness strategy

# The accountant as a# The accountant as abu siness partner bu siness partner # Focus on cost# Focus on cost

managementmanagement


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Consequences of Lack of StrategicCost-Management Information

Decision-making based on guess and intuitionLack 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 theorganizations strategy

For control purposes, cannot link performanceeffectively to strategic goals


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Definition of Management

Accounting: IMAManagement accounting is a profession thatinvolves partnering in management decision

making, devising planning and performancemanagement systems, and providing e x pertise infinancial reporting and control to assistmanagement in the formulation and

implementation of an organizations strategy.


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Introducing Strategy

ValueChain

St r ategicP itioning

St r ateg yMa p

Balance dSco r eca rd

(BSC )

Opp or tunitiesT hr eats

St r engthsWea knesses


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Michael P orter: StrategicP ositioning

Cost Leadership outperformcompetitors by producing at the lowest

cost, consistent with quality demandedby the consumer

Differentiation creating value for thecustomer through product innovation,product features, customer service, etc . that the customer is willing to pay for


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o Upstream Activitieso Manufacturing/Operationso Downstream Activities

Value Chain Analysis:

A Detailed Loo at StrategyT he Value Chain is a linked set of value-adding activities used by an organization todeliver its value proposition to its customers . Itconsists of:


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Value-Chain Analysis

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


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Strategy Maps &the Balanced Scorecard (BSC)

T he BSC and Strategy Map are usedto align the organizations activitieswith achieving strategic goals, usingthe four perspectives:

Financial

Customer Internal Processes

Learning and Growth


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Exceed shareholder expectations

Improve profit margins

Increase salesvolume

Diversify incomestream

Increase sales toexisting customers

Diversify customer base

Attract new customers

Target profitablemarket segments

Develop new products

Optimize internal processes

Attract new customers

Developemployee skills

Integratesystems

vision &mission

Learning& Growth

InternalP rocess

Customer

Financial


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Educational Resource: TartanManufacturing Case

K ey Issues:

Tartan emphasizes product leadership

and quality Limited manufacturing capacityFast sales growth in certain linesThe Classic Line has falling sales andis increasingly difficult to manufacture


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Introduct ion to M anagement Account ingy Strategic Positioningy Ethics

Implement ingStrategy

ProductCost ing

Cost Beha vi or(Planning andOperationalControl)

Product L ifeCycle

y The ValueChain

y TheBalancedScorecard

y VolumeBased(JobCosting)

y

Activity - basedCosting

y Cost Estimation

y CVP Analysis

y Master Budget

y

DecisionMaking

y Flexible Budgets

y TargetCosting

y LifeCycleCosting

y ManagementControl


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Cost Account ingy Strategic Positioningy Ethics


ProductCost ing

Cost Beha vi or(Planning andOperationalControl)

Product L i feCycle

y

The ValueChain

y TheBalancedScorecard

y Job Costing

y ABC Costing

y Process Cost

y Joint Costs

y StandardCosting

y C ost Estimation

y CVP Analysis(ABC)

y M aster Budget (ABC)

y DecisionMaking (ABC)

y T arget C osting

y Life C ycleC osting

M anaging C onstraints


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Ad v anced M anagement Account ingy Strategic Positioningy Ethics


Cost Beha vi or(ABC-based) Product L ife

Cycle

y The Value Chain

y The BalancedScorecard (BSC)

y C ost Estimation(Regression )

y CVP Analysis

y M aster Budget

y DecisionMaking (LP)

y TargetCosting

y LifeCycleCosting

y Management Control (TP)

y Executive Compensation

y Business Valuation


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P art 4: Sample Course TopicActi vity-Based Costing (ABC)

RCA and T DABC


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Evolution of Cost Accounting SystemsTraditional

Costing

Resources

Cost Obj ects

Allocated to

ABC(simple &minimal)

Resources

Acti vities

Consumed by

Cost Obj ects

Consumed by

ABC(multidimensional)

Resources

Acti vitiesActi vities

Consumed by

outputs

Consumed by

channels

sersCostObj ects


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ABC/M Framewor

Root

Causesof Costs

Work Activi

ties PerformanceM easures

Cost Reduct ionProcess

reeng ineer ingCost of qual i tyCont inuous

impro v ementWaste el im inat ionBenchmark ing

What Th ingsCost

ResourceCosts

Cost Objects

ResourceDr iv ers

Act ivi tyDr iv ers

Better Dec isionM ak ing

Why Th ingsCost

Design for manufacturingMake versus Buy

Act ivi ty CostAss ignment


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Resource Consumpt ionAccount ing (RCA)

Resource consumpt ion account ing (RCA) is anadaption of ABC that emphasizes resource

consumption by greatly increasing the number of resource cost pools, which allows more directtracing of resource costs to cost objects than anABC system with fewer cost centers. 8 RCA is

particularly appropriate for large organizationswith repetitive operations and high-levelinformation systems such as those provided bySAP, Oracle, and SAS.


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T ime-Dr iv en ABCW hen a substantial amount of the cost of acompanys activities are in a highly repetitive

process (much like in the RCA example above),the cost assignment can be based on the averagetime required for each activity.

T ime-Dr iv en Act ivi ty-Based Cost ing (TDABC)

assigns resource costs directly to cost objectsusing the cost per time unit of supplying theresource, rather than first assigning costs toactivities and then from activities to cost objects.


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TDABC ExampleTDABC 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 isexpected to require 17 minutes. TDABC calculates thetotal cost as $45,000 x 2 = $90,000; TDABC thencalculates the total time available for the activity as180,000 minutes (assuming 30 hours per week with twoweeks vacation: 2 workers x 50 weeks x 30 hours x 60minutes 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 $0.50x 17 min = $8.50; if the activity required 20 min, then theallocation would be $.50 x 20 = $10.


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P art 5: Sample CourseTopicCustomer P rofita b ility

Analysis


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Activity Based Costing (ABC)

Customer Relationship Management(CRM):

Customer Lifetime Value (CLV)

Customer E quity

Ov er view of Customer P rofita b ility

Analysis


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Th e h ale r v e: 80% from t h e to 20% (or more!)

Most rof i ta le east rof i ta le

m lat iv e rof i ts

50 %

100 %

100 %20%

300 %

Customer P rofita b ility Analysis:The hale Cur ve


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Types of CustomersTypes of Customers

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HighHigh(Creamy)(Creamy)

LowLow(Low Fat)(Low Fat)

LowLow HighHighCostCost- -toto--Ser veSer ve

P roduct MixP roduct MixMarginMargin

VeryP rofita b le

VeryVeryunprofita b leunprofita b le

Migrating Customers to Higher P rofita b ility A Strategic Analysis


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Customer Relationship Management (CRM)

Requires Strategic Cost Management DataWho is more important to pursue withthe scarce resources of our marketingbudget?

Our most pr ofitable customers? Our most valuable customers?

What is the difference?T he customer lifetime value (CLV)measure is intended to answer thisquestion .


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Y ou are a pharmaceutical supplier:

which customer is more important?

Dentist A

Sales = $750,000profits = $ 1 00,000

Age 6 1

Dentist B

Sales = $375,000profits = $40,000

Age 25

W hich is more profitable?W hich is more valuable?


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What is i t?

The projected economic value of customer relationships during the whole period of therelationship between the customer and company.The M easure

The net present value (NPV) of all future profitsfrom that customer; it is a proj ecti on , from whenthe customer is acquired or from the current date.

Customer Lifetime Value (CLV)


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What is i t?

The economic value of ALL customer relationships.

The M easure

The sum of the CLVs for all customers.

How Used

Provides a measure of the value of the companyfrom the perspective of customer profitability.

Customer Equity


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P art 6: Sample CourseTopicThe Management &

Control of Quality (includingSix-Sigma and Lean)


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Relationship b etween TQM & Financial P erformance


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A Strategic Model for Managing Quality


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Lean M anufactur ingAt the heart of lean manufactur ing is the Toyota

Production System (TPS):a long-term focus on relat ionsh ips w i th suppl iers andcoordination with these suppliers;

an emphasis on balanced, cont inuous flowmanufacturing with stable production levels;cont inuous impro v ement in product design andmanufacturing processes with the objective of eliminatingwaste ; andflex ible manufactur ing systems in which differentvehicles are produced on the same assembly line andemployees are trained for a variety of tasks


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Account ing for LeanThere are three reasons why the improvements infinancial results typically appear later than the operatingimprovements from implementing lean.Customers will benefit from the improved manufacturing

flexibility by ordering in smaller, more d iv ersequant i t ies .Improvements in productivity will create excess capac i ty ;as equipment and facilities are used more efficiently, somewill become idle.The decrease in in v entory that results from lean meansthat, using full cost accounting, the fixed costs incurred in

prior periods flow through the income statement wheninventory is decreasing.


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Account ing for Lean

Lean account ing uses value streams to measurethe financial benefits of a firms progress inimplementing lean manufacturing.

Each v alue stream is a group of related productsor services.Accounting for value streams significantly reducesthe need for cost allocations (since the products

are aggregated into value streams) which can helpthe firm to better understand the profitability of its

process improvements and product groups.


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Lean Account ing ValueStreams

Rimmer CompanyValue Stream Income Statement

Total

Sales 585,000$ 540,000$ 1,125,000$Operating Costs

Materials 25,200$ 12,800$Labor 168,000 88,000 Equipment related costs 92,400 - 48,400

Occupancy costs 11,200 4,800 Total Operating Costs 296,800 154,000 450,800$

Less Other Value Stream CostsManufacturing 120,000 240,000 Selling and Administration 10,000 130,000 10,000 250,000 380,000

Value Stream Profit before inventory change 158,200 136,000 294,200 Less: Cost of decrease in inventory (10,000) (20,000) (30,000)

Value Stream Profit 148,200$ 116,000$ 264,200$

Less Nontraceable CostsManufacturing 155,000 Selling and Administration 54,000

Total Nontraceable Fixed Costs 209,000 Operating Income 55,200$

Digital Cameras Video Cameras


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P art 7: Sample CourseTopic Operational and

Management-le velP erformance Measurement


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P erformance Measurement

Motivation and Evaluation I ncentives : right decisions

Align performance measurement with strategy

I ncentives : working hardCompensation and bonus plans

Equity/fairness

ControllabilityCost allocations

Operational-level and Management-level


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Management PerformanceMeas u rement

Cost CentersE ngineered Cost (cost driver: volume based)

Flexible BudgetDiscretionary Cost (cost driver?)

Master BudgetProfit Center one step from outsourcing


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Management PerformanceMeas u rement

P rofit Centers:Variable costing income statementsIssue of transfer pricing

Role and importance of nonfinancialperformance indicatorsInvestment Centers:

ROI vs. RI vs . E VA

Measurement issuesIssue of transfer pricingRole and importance of non-financial

performance indicators


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P art 8: sing Software in

the Strategic CostManagement Course


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ABC Software: OROS Quic

(from SAS)Comprehensive: resources throughobjectsAllow a couple of classesShort Tutorial, 13 pages, couple of hoursBlue Ridge Manufacturing Case


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Documents

Presentation for CPE AAA2010