BM2021

COST MANAGEMENT AND STRATEGY

The Four (4) Functions of Management (Blocher et al., 2019)

Cost management consists of financial information about costs and revenues and non-financial
information about customer retention, productivity, quality, and other key success factors for the
organization.
Management accountants are the accounting and finance professionals who develop and use cost
management information to assist in implementing the organization’s strategy. They use their unique
expertise (decision making, planning, performance management, among others) to help the organization
succeed in formulating and implementing its strategy.
Cost management information is required for each of the four (4) major management functions:
1. Strategic Management. Cost management information is needed to make sound organizational
decisions regarding choice of products, manufacturing methods, marketing techniques and
distribution channels, customer profitability, and other long-term issues. Strategic management
involves the development and implementation of a sustainable competitive position in which the
firm’s competitive advantage provides continued success. A strategy is a set of goals and specific
action plans that, if achieved, provide the desired competitive advantage. Strategic management
involves identifying and implementing these goals and action plans.
2. Planning and Decision-Making. Cost management information is needed to support recurring
arrangements regarding replacing equipment, managing cash flow, budgeting materials
purchases, scheduling production, and pricing. Planning and decision making involve budgeting
and profit planning, cash flow management, and other decisions related to the firm’s operations,
such as deciding when to lease or buy a facility, when to repair or replace a piece of equipment,
when to change a marketing plan, and when to begin development of a new product.
3. Management and Operational Control. Cost management information is needed to provide a fair
and effective basis for identifying inefficient processes and rewarding and motivating the most
effective managers. Operational control occurs when mid-level managers (e.g., site managers,
product managers, regional managers) monitor the activities of operating-level managers and
employees (e.g., production supervisors and various department heads). In contrast,
management control is the evaluation of mid-level managers by upper-level managers (e.g., the
controller or the Chief Financial Officer).
4. Preparation of Financial Statements. Cost management information is needed to provide
accurate accounting for inventory and other assets, in compliance with reporting requirements,
and for the preparation of financial reports. In the preparation of financial statements,
management complies with the reporting requirements of relevant groups (such as the Financial
Accounting Standards Board) and relevant government authorities (e.g., the Bureau of Internal
Revenue). The financial statement preparation role has recently received a renewed focus as
countries worldwide have adopted International Financial Reporting Standards (IFRS).
Strategic Management and the Strategic Emphasis on Cost Management (Blocher et al., 2019)
Effective strategic management is critical to the success of the firm or organization. The growing pressures
of economic recession, global competition, technological innovation, and changes in business processes
have made cost management much more critical and dynamic than ever before. Managers must think
competitively and implement an effective strategy to rise above the competition.
Strategic thinking involves anticipating changes in products, services, and operating processes, among
others, in accordance with evolving customer demands. Firms must integrate flexibility and create fast
changes due to the emerging trends of e-commerce and modern manufacturing. Product life cycles—the

01 Handout 1 *Property of STI

 [email protected] Page 1 of 5
 BM2021

time from the introduction of a new product to its removal from the market— are expected to become
shorter and shorter. Success in the recent past days or months is no longer a measure of ultimate success.
The strategic emphasis also requires creative and integrative thinking by identifying and solving problems
from a cross-functional view. The business functions are often identified as marketing, production,
finance, and accounting/controllership. Instead of viewing a problem as a production problem, a
marketing problem, or a finance and accounting problem, cross-functional teams view it from an
integrative approach that combines skills from all functions simultaneously. This integrative approach is
necessary for a dynamic and competitive environment.
Types of Organizations (Blocher et al., 2019)
Cost management information is useful in all organizations: business firms, governmental units, and non-
profit organizations. The following are the main categories of business firms:
• Merchandising firms. They purchase goods for resale. Merchandisers that sell to other
merchandisers are called wholesalers; those selling directly to consumers are called retailers.
Examples of merchandising firms are the large retailers, such as Walmart, Target, and Amazon.
• Manufacturing firms. They use materials, labor, and manufacturing facilities and equipment to
produce products. They sell these products to merchandising firms or to other manufacturers as
materials to make other products. Examples of manufacturers are Ford and General Electric (GE).
• Service firms. They provide a service to customers that offers convenience, freedom, safety, or
comfort. Common services include transportation, health care, financial services (banking,
insurance, accounting), personal services (physical training, hair styling), and legal services. In the
United States, service industries are growing at a much faster rate than manufacturing or
merchandising, in part because of the increased demand for leisure and convenience and society’s
increased complexity and need for information.
• Government and non-profit firms. They provide services, much like the firms in service industries.
However, these organizations provide the services for which no direct relationship exists between
the amount paid and the services provided. Instead, both the nature of these services and the
customers who receive them are determined by the government or philanthropic organizations.
The resources are provided by governmental units and/or charities. The services provided by
these organizations are often called public goods to indicate that no typical market exists for
them. Public goods have a number of unique characteristics, which include the impracticality of
limiting consumption to a single customer (e.g., clean water and police and fire protection are
provided for all residents of a particular locality).
Contemporary Management Techniques (Blocher et al., 2019)
The following are the contemporary management techniques directed on strategy implementation and
business process improvement:
• The Balanced Scorecard (BSC). An accounting report that evaluates the firm’s critical success
factors using both financial and non-financial perspectives. The balanced scorecard provides a
basis for a more complete analysis than is possible with financial data alone. The use of the
balanced scorecard is thus a critical ingredient for firms to become and remain competitive. An
example of a balanced scorecard is shown in Table 1. The following are the four (4) different
perspectives in the BSC approach:
o Financial performance. This includes measures of profitability and market value, among
others, as indicators of how well the firm satisfies its owners and shareholders.
o Customer satisfaction. This includes measures of quality, service, and low cost, among
others, as indicators of how well the firm satisfies its clients.

01 Handout 1 *Property of STI

 [email protected] Page 2 of 5
 BM2021

o Internal processes. These include measures of the efficiency and effectiveness with which
a firm produces its products or services.
o Learning and growth. These include measures of the firm’s ability to develop and utilize
human resources to meet its present and future strategic goals.

Financial Measures of Success Non-financial Measures of Success

Sales growth Customer Satisfaction
Earnings growth Market share and growth in market share
Dividend growth Customer service (based on number of complaints)
Bond and credit ratings On-time delivery
Cash flow Customer satisfaction (customer survey)
Increase in stock price Brand recognition (growth in market share)
Internal Processes
Product quality
Manufacturing productivity
Cycle time (the time from receipt of a customer’s order to
delivery)
Product yield and reduction in waste
Learning and Growth
Competence of managers (education attained)
Morale and firm-wide culture (employee survey)
Education and training (training hours)
Innovation (number of new products)
Table 1. The balanced scorecard: Financial and non-financial measures of success
Source: Cost management: A strategic emphasis, 2019, p. 13.

• Strategy map. A diagram that links the various perspectives in a balanced scorecard. For any
company, high achievement in the learning and growth perspective contributes directly to higher
achievement in the internal process perspective, which causes greater achievement in the
customer satisfaction perspective, which then produces the desired financial performance.
Therefore, the strategy map is a useful means in understanding how improvement in certain
critical success factors contributes to other goals and to the ultimate financial results.
• The Value Chain. An analytical tool firms use to identify the specific steps required to provide a
product or service to the customer. In particular, an analysis of the firm’s value chain helps
management discover which steps or activities are not competitive, where costs can be reduced,
or which activity should be outsourced. Also, management can use the analysis to find ways to
increase value for the customer at one or more steps of the value chain. For example, companies
such as General Electric, IBM, and Harley-Davidson have found greater overall profits by moving
downstream in the value chain to place a greater emphasis on high-value services and less
emphasis on lower-margin manufactured products. A key idea of value-chain analysis is that the
firm should carefully study each step in its operations to determine how each step contributes to
the firm’s profits and competitiveness.
• Activity-Based Costing and Management. Activity-based costing (ABC) is used to improve the
accuracy of cost analysis by improving the tracing of costs to products or to individual customers.
Activity-based management (ABM), on the other hand, uses activity analysis and activity-based
costing to help managers improve the value of products and services and increase the
organization’s competitiveness. Activity analysis is the process of developing a detailed

01 Handout 1 *Property of STI

 [email protected] Page 3 of 5
 BM2021

description of the specific activities performed in the firm’s operations to improve planning,
product costing, operational control, and management control.
• Business Analytics (BA). An approach to strategy implementation in which the management
accountant uses data to understand and analyze business performance. Business analytics often
uses statistical methods to predict consumer behavior, measure customer satisfaction, or develop
models for setting prices, among other uses. BA is best suited for companies that have a distinctive
capability that can be derived from measurable critical success factors. BA is similar to the BSC
because it focuses on critical success factors; the difference is that BA uses analytical tools to
develop predictive models of core business processes.
• Target Costing. It determines the desired cost for a product based on a given competitive price,
such that the product will earn a desired profit. In this technique, cost is determined by price.
Using target costing, the firm must often adopt strict cost reduction measures or redesign the
product or manufacturing process to meet the market price and remain profitable. Target costing
forces the firm to become more competitive because even small price differences attract
consumers to the lower-priced product. The camera manufacturing industry is a good example of
a set of businesses where target costing is used. Camera manufacturers such as Canon know the
market price for each line of camera they manufacture, so they redesign the product (add/delete
features, use less expensive parts and materials) and redesign the production process to get the
manufacturing cost down to the predetermined target cost.
• Life-Cycle Costing. A method used to identify and monitor the costs of a product throughout its
life cycle. The life cycle consists of all steps from product design and purchase of materials to
delivery and service of the finished product. The steps typically include (1) research and
development; (2) product design, including prototyping, target costing, and testing; (3)
manufacturing, inspecting, packaging, and warehousing; (4) marketing, promotion, and
distribution; and (5) sales and service. Cost management has traditionally focused only on costs
incurred at the third step, manufacturing. Thinking strategically, management accountants now
manage the product’s full life cycle of costs, including upstream (research and development,
design) and downstream (marketing, sales and service) costs as well as manufacturing costs. This
expanded focus means careful attention to product design, since design decisions lock in most
subsequent life-cycle costs.
• Benchmarking. A process by which a firm identifies its critical success factors, studies the best
practices of other firms (or other business units within a firm) for achieving these critical success
factors, and then implements improvements in the firm’s processes to match or beat the
performance of those competitors. Benchmarking was first implemented by Xerox Corporation in
the late 1970s. At present, many firms use benchmarking. Some firms are recognized as leaders,
and therefore benchmarks, in selected areas — for example, Ritz-Carlton (an American
multinational company that operates the luxury hotel chain) in service, the Boeing Company (a
company that designs, manufactures, and sells airplanes, rotorcraft, rockets, satellites,
telecommunications equipment, and missiles worldwide) in manufacturing, and Apple in
innovation, among others.
• Business Process Improvement (BPI). A management method by which managers and workers
commit to a program of continuous improvement in quality and other critical success factors.
Continuous improvement is very often associated with benchmarking and total quality
management as firms seek to identify other firms as models to learn how to improve their critical
success factors. While BPI is an incremental method, business process reengineering (BPR) is more
radical. BPR is a method for creating competitive advantage in which a firm reorganizes its
operating and management functions, often with the result that positions are modified,
combined, or eliminated.

01 Handout 1 *Property of STI

 [email protected] Page 4 of 5
 BM2021

• Total Quality Management (TQM). A method by which management develops policies and
practices to ensure that the firm’s products and services exceed customers’ expectations. This
approach includes increased product functionality, reliability, durability, and serviceability. Cost
management is used to analyze the cost consequences of different design choices and to measure
and report the many aspects of quality, including, for example, production breakdowns and
production defects, wasted labor or materials, the number of service calls, and the nature of
complaints, warranty costs, and product recalls.
• Lean Accounting. The accounting technique uses value streams to measure the financial benefits
of a firm’s progress in implementing lean manufacturing (a methodology that focuses on
minimizing production waste). Lean accounting places the firm’s products and services into value
streams, each of which is a group of related products or services. For example, a company
manufacturing consumer electronics might have two (2) groups of products (and two (2) value
streams)—digital cameras and video cameras—with several models in each group. Accounting for
value streams can help the firm to better understand the impact on profitability of its lean
manufacturing improvements.
• Theory of constraints (TOC). A methodology that improves profitability and cycle time by
identifying the bottleneck in the operation and determining the most profitable product mix given
the bottleneck. TOC helps to eliminate bottlenecks—places where partially completed products
tend to accumulate as they wait to be processed in the production process. In the competitive
global marketplace common to most industries, the ability to be faster than competitors is often
a critical success factor. Many managers argue that the focus on speed in the TOC approach is
crucial. They consider speed in product development, product delivery, and manufacturing to be
paramount as global competitors find ever-higher customer expectations for rapid product
development and prompt delivery.
• Sustainability. This method involves creating a balance between the company’s short- and long-
term goals in all three (3) dimensions of performance — social, environmental, and financial.
Sustainability involves identifying and implementing ways to reduce costs and increase revenue
as well as to maintain compliance with social and environmental regulations and expectations.
This can be accomplished through technological innovation and new product development, as
well as commonsense measures to improve the social and environmental impacts of the
company’s operations. Ford Motor Company saves money through improvements in its
stormwater draining system at its River Rouge, Michigan, plant; other leaders in sustainability
include Toyota and Honda, McDonald’s, and Walmart, among many others.
• Enterprise risk management (ERM). A framework and process that organizations use to manage
the risks that could negatively or positively affect the company’s competitiveness and success.
Risk is considered broadly to include (1) hazards such as fire or flood; (2) financial risks due to
foreign currency fluctuations, commodity price fluctuations, and changes in interest rates; (3)
operating risk related to customers, products, or employees; and (4) strategic risk related to top
management decisions about the firm’s strategy and implementation thereof.

Reference:
Blocher, E., Jurds, D., Smith, S., & Stout D. (2019). Cost management: A strategic emphasis. McGraw-Hill.

01 Handout 1 *Property of STI

 [email protected] Page 5 of 5