Strategic cost management 

is the process of reducing total costs while improving the strategic position
of a business.

This goal can be accomplished by having a thorough understanding of which costs support a company's
strategic position and which costs either weaken it or have no impact.

Big names that use strategic cost management techniques are Toyota and Ford.

Both Toyota and Ford use Total Quality Management (TQM), Just-in-time (JIT), and Kaizen costing to
manage its cost properly and be more competitive.

1. Total Quality Management (TQM) was developed by William Deming, which is the continual
process of detecting and reducing or eliminating errors in manufacturing, streamlining supply
chain management, improving the customer experience, and ensuring that employees are up to
speed with training. 

2. Just-In-Time (JIT) inventory system is a management strategy that aligns raw-material orders
from suppliers directly with production schedules. Hence, converting available raw materials
into finished goods, thereby, removing the work in process inventory that would lessen the
entity's product cost.

3. Kaizen is a Japanese term meaning "change for the better" or "continuous improvement." It is a
Japanese business philosophy regarding the processes that continuously improve operations
and involve all employees. Kaizen sees improvement in productivity as a gradual and methodical
process.

As we move forward with this canvas course, we will learn more strategic cost management tools that
managers use for sound decision making.

As stated earlier, strategic cost management is one of the core courses under Management Advisory
Services (MAS).

Other core courses are:

1. Strategic business analysis

2. Financial management

3. Financial market

4. Management science

Strategic cost management strategic business analysis and management science represent the
Management accounting side of MAS and we will focus on management accounting in this course.

To discuss the overview of management accounting, let us recall the work of management in the
organization, which is planning, controlling, and decision making.

For the management to perform their work most effectively and efficiently, they need the aid of
management accounting.
Because management accounting aid the management in performing their works, let us enum

Because management accounting aid the management in performing their works, let us enumerate
them one by one:

1. Management accounting prepares budget reports to help management in planning.

2. Management accounting analyzes financial statements to help management in control.

3. Management accounting performs cost volume profit analysis, relevant costing, variable
costing to name a few, to help management in decision making.

In this regard, management accounting plays an important role in the business world.

But, what is the difference in management accounting in financial accounting? The answer lies in the
organization chart of the finance and accounting department. 

The organization chart of a company's management team includes the Chief Executive Officer (CEO) as
head of the management team, under CEO is the Chief Operating Officer (COO) as the head of the
operation and the Chief Financial Officer (CFO) as the head of finance and accounting. 

Since our course subject is Management accounting, let us focus on the side of CFO:

Under the CFO is the Controller as the head of Accounting and Treasury director as the head of Cash
management and investment.

The controller is the top position of the company's accounting function and under controllership,
generally are Financial Accounting, Taxation, and Management Accounting.

The table below shows the difference between the branches of accounting:
Auditing is hidden since it is not under the controllership but coordinates directly to the controller.

As a BSA or BS AIS student, you can be a Financial accountant, Tax specialist, Auditor, or a Management
Accountant soon.  Excelling in your position can promote you to Controller and excelling as a controller
and promote you to the highest position under the Finance and accounting function - the CFO.

The above table also shows the difference between the group:

1. The financial accountant prepares the financial statements using Philippine Financial Reporting
Standards (PFRS) and Philippine Accounting Standards (PAS) as the basis, the tax specialist
prepares the tax return using tax code, BIR rulings, and memorandum as the basis, and the
management accountant prepares management reports such as Budgets using Management
policy.

2. The time frame of Financial accounting and taxation are both historical because we prepare last
year's financial statement today (e.g. 2019 Financial statements as early as 2020). On the other
hand, Management accounting is more on the future, on projection, that is why they prepare
the budget for 2020 as early as 2019.

3. In management accounting, we study and prepare reports that cater to the needs of the
management (internal users) such as financial statement analysis, cost volume profit analysis,
variable costing, and budgeting to name a few while financial accounting and taxation cater to
external users.

As we move along on this online course, we will explore the work of a Management Accountant. 

Who knows, you can be a Management accountant in the future and one of the major work is to analyze
the financial statements.

Cost as to nature are:

1. Product cost

2. Period cost

Product costs are costs related to the production of goods. It is subdivided into direct materials, direct
labor, and manufacturing overhead. The sold portion is charged to the Cost of goods sold while the
unsold portion is part of ending finished goods inventory. Period costs are cost related to support the
production such as selling and administrative expenses

We already learn about this in cost accounting but as a management accountant, we need to
incorporate this to cost as to behavior.

To further analyze cost, management accountants categorized cost according to behavior, namely: 

1. Fixed cost and

2. Variable cost

An activity base (also called a cost driver and cost pools) is a measure of what causes the incurrence of
variable costs.                                                                        

It can be machine hours, labor hours, etc.                                                                

Keynotes:                                                                    

1. Total Variable cost varies directly proportional to the activity level.

2. Total Fixed cost is constant regardless of activity level

3. Fixed cost per unit varies inversely proportional to the activity level

4. Variable cost per unit is constant regardless of activity level         

Accordingly, the activity level can be sales volume or production volume.

As sales volume increases, total variable cost also increases but total fixed cost remains constant.

Now, we incorporate fixed and variable cost to the product cost and period cost:

We justify, as the company constructs more wooden houses, they need to purchase more wood and
nails and even hire more carpenters but as the company constructs a fewer wooden house, they only
need to purchase fewer woods and nails and even hire fewer carpenters. However, the variable cost per
unit remains constant regardless if sales volume increases or decreases.
But the total rent expense of the factory site under normal capacity will still be the same regardless of
the company construct more or less wooden houses. However, the fixed cost per unit will decrease if
sales volume increases and vise versa.

Generally, direct materials, direct labor, and indirect materials are variable costs.

Why does the management need to identify variable cost and fixed cost? Because fixed costs are
irrelevant to decision making, once the contract is already entered, whether you like it or not, you need
to incur the same amount of fixed cost. While the management can control variable cost and is relevant
to decision making if sales are large, they need to purchase more and if sales are low, they need to
purchase less.

 Let us have an illustration of the High-low method:

Hence, the management accountant can now report that from the P9,800 maintenance cost, P5,100 is
the variable portion or the controllable cost
We learn from cost accounting and financial accounting (or Intermediate accounting), the traditional
presentation of an Income statement. In management accounting, we call this traditional presentation
of the income statement as Absorption costing.

But in management accounting, we present Income statement in another manner. This is called Variable
costing Income statement.

Variable costing emphasizes fixed cost and variable cost which what management needs.

The comparative presentation between Absorption costing and Variable costing are:

***S and A stands for Selling and Administrative expenses.

Notice that under absorption costing, the cost of goods sold (product cost) is deducted from net sales to
arrive at gross margin. The gross margin is then reduced by selling and administrative expenses to arrive
at net operating income (NOI).

While under the variable costing income statement, the variable cost is now deducted from net sales to
arrive at the contribution margin. The contribution margin replaces the gross margin. The contribution
margin is further reduced by fixed cost to arrive at NOI.

The further difference shows that Fixed factory overhead is a product cost in absorption costing while it
is a period cost in variable costing.

This reiterates that in Management accounting, we classify cost as to its behavior namely fixed cost and
variable cost. Because management can control variable cost and fixed cost is constant throughout the
activity level.

Both income statement presentations are correct, however, variable costing caters more to the needs of
the management. 

We apply the concepts by preparing the Income statement of Mimi Company using Absorption costing.
Solution:

Step 1: Compute for the product cost per unit.

Hence, product cost per unit for Absorption costing is P36 while for Variable costing is only P33, the
difference lies in the treatment of fixed overhead.

Note: If the total cost is provided then you divide it with units produced.

Simply stated, the total product cost divided by Units produced.

We move forward and use the product cost per unit to prepare the income statement.

Step 2: Prepare an Income statement.

This presentation is familiar to you, now we continue to variable costing on the next page.

This time, we prepare the Mimi Company's income statement using the variable costing method.

Step 1: Compute for the product cost per unit.

Under variable costing, we remember that product cost per unit is P33 and we will be using that in
preparing for the income statement.

Step 2: Prepare for Variable costing's income statement.

Differences:

1. Under variable costing, variable cost is deducted to sales to arrive at the contribution margin.
Under absorption costing, the cost of goods sold is deducted to sales to arrive at gross margin.

2. Fixed manufacturing overhead is included in the upper portion (COGS) under absorption costing
but under variable costing, it is included in the lower portion (fixed cost).

3. The net operating income (NOI) under absorption costing is P16,000 but under variable costing,
NOI is P17,500.

Let us reconcile the difference on the next page.

We apply the concept by computing the difference between Absorption costing and variable costing.
Keynotes:

1. Units produced are P1,000 which is lower than units sold of P1,500, this would mean the net
operating income under variable costing is higher than absorption costing.

2. The opposite is true if the units produced is greater than units sold, therefore, net operating
income under absorption costing is higher than that of variable costing,

3. The P1,500 difference is due to the treatment of fixed manufacturing overhead. Because under
absorption costing, all the 1,500 units sold are charged with P3 fixed overhead per unit. This is
equal to P4,500  while under variable costing, the P3,000 fixed overhead is only charged.

4. Which is correct? Both, absorption costing is used for external users while variable costing is
used for internal users (the management). Why? Because for management, categorizing the cost
according to behavior will lead to better decision making.