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SCM Key Concepts

Strategic cost management is more comprehensive than traditional cost accounting and management accounting, with a broader focus on improving a firm's competitive position through both cost and revenue management. It aims to simultaneously reduce costs while strengthening strategic position, unlike traditional cost management which focuses only on internal cost reduction. Strategic cost management is increasingly important due to intense competition and customer expectations for improved, lower-priced products. It takes a broader view than traditional cost analysis by considering external factors like competitors' costs and the overall value chain.

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17 views

SCM Key Concepts

Strategic cost management is more comprehensive than traditional cost accounting and management accounting, with a broader focus on improving a firm's competitive position through both cost and revenue management. It aims to simultaneously reduce costs while strengthening strategic position, unlike traditional cost management which focuses only on internal cost reduction. Strategic cost management is increasingly important due to intense competition and customer expectations for improved, lower-priced products. It takes a broader view than traditional cost analysis by considering external factors like competitors' costs and the overall value chain.

Uploaded by

maraelvillamor
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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OVERVIEW OF STRATEGIC COST MANAGEMENT

Cost Management
- Not a combination of Cost Accounting and Management Accounting
o Cost Accounting — field of accounting that records, measures, and reports information
about how much things cost
o Management Accounting — mainly focuses on Breakeven Analysis, Economic Order
Quantities, and calculation of variances of actual costs and standard costs
- More comprehensive
- Much more concerned with management’s use of cost information for decision making

Strategic Cost Management


- Application of cost management techniques so that they simultaneously improve the strategic
position of a firm and reduce costs
- Organization’s Competitive Position
o May be:
▪ Positive
▪ Neutral
▪ Negative
- Broad Focus — not confined to the continuous reduction of costs and controlling of costs
- Primary Concerns and Objectives:
o Cost management
o Revenue management

“An organization should never undertake any practices that are predicted to weaken the position of the
organization, even if they would result to reduction of costs.”

Strategic Importance of Cost Management


- Drastically increased in recent years due to intense competition
- Customers in highly competitive markets expect that each generation of products presents
improvements, which may include:
o Improved quality
o Improved functionality
o Reduced prices
- Any of these improvements alone or any combination of them urge a firm to manage its costs to
stay profitable
- In a world of non-sustainable competitive advantage, a firm that fails to reduce costs as rapidly as
its competitors will find its profit margin squeezed and its existence threatened

TRADITIONAL COST MANAGEMENT vs. STRATEGIC COST MANAGEMENT


Traditional Strategic
- Focuses on external events and
Concerned with internal issues, including: relationships;
- Emphasizing the current cost of - Should not restrict its attention to
production the cost structure of the firm alone
Focus - Allocation of the pool of shared or its own supply chain;
resources to various products and - Should monitor the firm’s cost
services performance relative to that of
- Summarizing the results other firms’, in particular, their
competitors

Focused on the notion of “value added”


Perspective - Selling Price less the Cost of Based on value chain analysis
Purchase
- “On Markup”

Has a broader context, where the cost data


Viewed as the process of assessing the
Cost is used to develop superior strategies
financial impact of alternative managerial
Analysis enroute to gaining sustainable competitive
positions
advantage
Only 1 cost driver: Output Volume
- Fixed vs. Variable Cost
- Costs are driven by factors that are
- Average vs. Marginal Cost
Cost Driver interrelated in various ways
- Cost-Volume-Profit Analysis
Concept - Focuses on multiple cost drivers
- Breakeven Analysis
perspective
- Flexible Budgets
- Contribution Margin

Not only cost management, but also to:


- Increase revenues
- Improve productivity and customer
Primary
More on costs alone satisfaction
Concern
- Improve strategic position of the
company

Key
Accounting and Finance Marketing and Economics
Disciplines
Scorekeepers
- Part of the organization’s value
added team
- Participate in the formulation and
implementation of strategy Consultants and Analysts
Primary
Role of - Translate strategic intent and - Source of information and analysis
Accountants capabilities into operational and of insights and opportunities
managerial measures
- Designers of the organization’s
critical management information
systems

Pillars of Strategic Cost Management


- Guiding Principles
o Understand what causes the cost and revenue structure of the business
o Identify firm’s activities that can be used to produce (or sustain) a competitive advantage
o Understand and reduce inter-functional complexity
o Increase effectiveness and continuously improve costs
o Use strategy to manage costs
o Build skills
o Involve employees in decisions
- Key Concepts
o Cost Driver Analysis
o Strategic Positioning Analysis
o Value Chain Analysis
- Objects
- Activities and Analysis Fields
- Instruments
- Key Support Factors

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