Scribd
Upload
95 views

Lesson 3

The document discusses changes in the contemporary business environment and the strategic focus of cost management. It outlines six key changes: 1) increased global competition 2) advances in manufacturing technologies 3) advances in information technologies 4) greater customer focus 5) new management organization forms 6) changes in the social, political, and cultural environment. It also discusses generic business strategies of cost leadership, product differentiation, and focus. Finally, it examines how cost management systems and the accounting system should evolve in relation to business strategy and the changing environment.

Uploaded by

Monique Villa
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
95 views

Lesson 3

The document discusses changes in the contemporary business environment and the strategic focus of cost management. It outlines six key changes: 1) increased global competition 2) advances in manufacturing technologies 3) advances in information technologies 4) greater customer focus 5) new management organization forms 6) changes in the social, political, and cultural environment. It also discusses generic business strategies of cost leadership, product differentiation, and focus. Finally, it examines how cost management systems and the accounting system should evolve in relation to business strategy and the changing environment.

Uploaded by

Monique Villa
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

CHAPTER 3

CONTEMPORARY BUSINESS ENVIRONMENT AND


STRATEGIC FOCUS OF COST MANAGEMENT

RECENT CHANGES IN THE BUSINESS ENVIRONMENT


(1) increase in global competition - operations have become more complex
(2) advances in manufacturing technologies
(3) advances in information technologies, the Internet, and e-commerce
(4) greater focus on the customer
(5) new forms of management organization
(6) changes in the social, political, and cultural environment of business

1. THE GLOBAL BUSINESS ENVIRONMENT


The growth of international markets and trade are the key development factors that drive the extensive
changes in the contemporary business environment. The global business environment is very competitive
and firms need cost management information to sustain competitiveness. They also need financial and
nonfinancial information about doing business and competing effectively.

2. ADVANCES IN MANUFACTURING TECHNOLOGIES


Firms around the world adopt new manufacturing technologies to remain competitive in the face of the
increased global competition. A key competitive edge that firms have is the ability to deliver the product or
service faster than the competition. This is known as speed-to-market.

3. ADVANCES IN INFORMATION TECHNOLOGIES, THE INTERNET AND E-COMMERCE


The increasing use of information technology, the internet and e-commerce is perhaps the most
fundamental of all business changes in recent years. These technologies have resulted in the growing
focus in cost management by reducing the time required to process transactions, thereby expanding the
individual's access to information within the firm, the industry and the business environment around the
world.

4. GREATER FOCUS ON CUSTOMERS


Today, many of the critical success factors are customer oriented. Cost management practices are also
changing. Cost management reports now include specific measures of customer preference and customer
satisfaction.
Generally, firms chose a strategic position corresponding to one of two (or three) general strategies:
(a) cost leadership
(b) superior product through differentiation (also called product differentiation)
(c) focus (not in our textbook)
Successful pursuit of cost leadership and/or differentiation strategies requires an understanding of a firm's
value chain (internal) and supply chain (external).

⮚ Cost Leadership - a firm sets out to become the low cost producer in its industry.
⮚ Product Differentiation - a firm seeks to be unique in its industry along some dimensions that
are widely valued by buyers. 
⮚ Focus - The generic strategy of focus rests on the choice of a narrow competitive scope within an
industry. The focuser selects a segment or group of segments in the industry and tailors its
strategy to serving them to the exclusion of others.

5. NEW FORMS OF MANAGEMENT ORGANIZATION


The hierarchical command-and-control type of organization is being replaced by a more flexible
organizational from that encourages teamwork and coordination among business functions. In response to
these changes cost management practices are also changing to include reports that are useful to cross-
functional teams of managers; the reports reflect the multinational roles of these teams and include a
variety of operating and financial information: product quality, unit cost, customer satisfaction, and
production bottlenecks.

6. CHANGES IN THE SOCIAL, POLITICAL, AND CULTURAL ENVIRONMENT OF BUSINESS


Significant changes have taken place in the social, political, and cultural environments that affect business.
Although the nature and extent of these changes vary a great deal from country to country, they include a
more ethically and racially diverse workforce, a renewed sense of ethical responsibility among managers
and employees, and an increased deregulation of business by the national government.

STRATEGIC FOCUS OF COST MANAGEMENT


A competitive firm incorporates the emerging and expected change in the contemporary environment of
business into its business planning and practices. Guided by strategic or long-term thinking, the
management accountant focuses on what makes the company successful rather than just focusing on cost
control and other financial measure.
Cost management should focus not on the measurement per se, but on the identification of those
measures that are critical to the firm's success.
Kaplan’s Phases for Development Cost Management Information Systems:
o Phases that focus on measurement and reporting:
▪ Stage 1 - Cost management systems are basic transaction reporting systems.
▪ Stage 2 - Cost management systems focus on external financial reporting. The objective is reliable
financial reports; accordingly, the usefulness for cost management is limited.
o Phase the focus on operational control
▪ Stage 3 - Cost management systems track key operating data and develop more accurate and
relevant cost information for decision making; cost management information is developed.
o Phase the focus on operational control
▪ Step 4 - Strategically relevant cost management information is an integral part of the system.

Stages 1 and 2 of cost system development focus on the management accountant's measurement and
reporting role. Stage 3 shifts to operational control. Stage 4, the management accountant becomes an
integral part of management, not just a reporter but a full business partner, with the skills of identifying,
summarizing and reporting critical factors necessary for the firm's success.

Critical Success Factors (CSFs) are measures of those aspects of the firm's performance essential to its
competitive advantage and, therefore, to its success. Many of these critical success factors are financial,
but many are nonfinancial.
COST MANAGEMENT AND ACCOUNTING SYSTEMS
Cost management can be described as the approaches and activities of managers in short-run and long-
run planning and control decisions that increase value for customers and lower costs of products and
services. Information from accounting systems help managers, but the information and the accounting
systems themselves are not cost management.

WHEN SHOULD THE INTERNAL ACCOUNTING SYSTEM BE CHANGED?


There is no such thing as the ideal management accounting system. Each organization has different
circumstances that lead to different management accounting decisions. Also, accounting must continually
deal with trade-offs among external users wanting information describing firm performance and internal
users wanting information for decision making and control. Surviving organizations must meet the demands
of changing technologies and markets by revising their business structures and organizational
architectures. Because organizational architectures are in a constant state of change, the accounting
system must regularly adapt.

Observations of the integrative framework:


1. Changes in the accounting system rarely occur in a vacuum. Accounting system changes generally
occur at the same time as changes in the firm's business strategy and other organizational changes,
particularly with regard to the partitioning of decision rights and the performance evaluation and reward
systems.
2. Alterations in the firm's organizational architecture, including changes in the accounting system, are
likely to occur in response to changes in the firm's business strategy caused by external shocks from
technology and shifting market conditions.

Three significant managerial implications are derived from these two observations.
First, before implementing an accounting or other organizational change, it is important to understand what
is driving the change.
Second, an accounting system should not be adopted merely because other firms are doing so; they may
be reacting to a different set of external shocks.
Third, an accounting system should not be changed without concurrent, consistent changes in the way
decision rights are partitioned as well as in the performance reward systems. All three parts of the
organization's architecture must be internally consistent and coordinated.

You might also like