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Strategic Cost Management

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Title: Strategic Cost Management


1
Strategic Cost Management
11
CHAPTER

2
Strategic Cost Management Basic Concepts
OBJECTIVE
1
  • Strategic planning and decision making requires a
    broad set of information
  • Information about customers, suppliers, different
    product designs
  • Information should
  • Include information about the firms environment
    and internal workings
  • Must be prospective and should provide insight
    about future periods and activities

3
Strategic Cost Management Basic Concepts
OBJECTIVE
1
  • Strategic Decision Making choosing among
    alternative strategies with the goal of selecting
    a strategy for long term growth and survival
  • Strategic Cost Management use of cost data to
    develop and identify superior strategies that
    will help produce a sustainable competitive
    advantage

4
Strategic Cost Management Basic Concepts
OBJECTIVE
1
  • Competitive Advantage
  • creating better customer value for the same or
    lower cost than offered by competitors
  • OR
  • Creating equivalent value for lower cost than
    offered by competitors
  • Customer Value
  • The difference between customer realization (what
    a customer receives) and customer sacrifice (what
    the customer gives up)

11-4
5
Strategic Cost Management Basic Concepts
OBJECTIVE
1
  • A cost leadership strategy happens when the same
    or better value is provided to customers at a
    lower cost than a companys competitors.
  • Example A company might redesign a product so
    that fewer parts are needed, lowering production
    costs and the costs of maintaining the product
    after purchase.

11-5
6
Strategic Cost Management Basic Concepts
OBJECTIVE
1
  • A differentiation strategy strives to increase
    customer value by increasing what the customer
    receives (customer realization).
  • Example A retailer of computers might offer an
    on-site repair service, a feature not offered by
    other rivals in the local market.

11-6
7
Strategic Cost Management Basic Concepts
OBJECTIVE
1
  • A focusing strategy happens when a firm selects
    or emphasizes a market or customer segment in
    which to compete.
  • Example Paging Network, Inc., a paging services
    provider, has targeted particular kinds of
    customers and is in the process of weeding out
    the non-targeted customers.

11-7
8
Strategic Cost Management Basic Concepts
OBJECTIVE
1
There are two types of linkages that must be
analyzed and understood Internal and External
linkages.
  • Internal linkages are relationships among
    activities that are performed within a firms
    portion of the value chain.
  • External linkages describe the relationship of a
    firms value chain activities that are performed
    with its suppliers and customers. There are two
    types supplier linkages and customer linkages.

11-8
9
Strategic Cost Management Basic Concepts
OBJECTIVE
1
Organizational activities are of two types
Structural and Executional.
  • Structural activities are activities that
    determine the underlying economic structure of
    the organization.
  • Executional activities are activities that define
    the processes and capabilities or an organization
    and thus are directly related to the ability of
    an organization to execute successfully.

11-9
10
Strategic Cost Management Basic Concepts
OBJECTIVE
1
Operational activities are day to day activities
performed as a result of the structure and
processes selected by the organization. Operationa
l cost drivers are those factors that drive the
cost of operational activities.
Operational activities and drivers are the focus
of activity based costing
11-10
11
Value Chain Analysis
OBJECTIVE
2
  • Value Chain Analysis
  • Identifying and exploiting internal and external
    linkages with the objective of strengthening a
    firms strategic position
  • Activities before and after production must be
    identified and their linkages identified and
    exploited
  • relationships assessed and used to reduce costs
    and increase values

12
Life Cycle Cost Management
OBJECTIVE
3
  • Product Life Cycle
  • the time a product exists - from conception to
    abandonment
  • Revenue producing life the time a product
    generates revenue for a company
  • Consumable life the length of time a product
    serves the needs of a customer

11-12
13
Life Cycle Cost Management
OBJECTIVE
3
  • Target Costing
  • Useful tool for establishing cost reduction goals
    during the design stage
  • Target cost difference between the sales price
    needed to capture a predetermined market share
    and the desired per unit profit
  • The sales price must reflect product
    functionality if the target cost is less than
    what is currently achievable, then the company
    must find cost reductions to move the actual cost
    toward the target cost
  • Reverse engineering
  • Value analysis
  • Process improvement

11-13
14
Just-in-Time (JIT) Manufacturing and Purchasing
OBJECTIVE
4
  • JIT manufacturing is a demand-pull system
  • Object is to eliminate waste by producing a
    product only when it is needed and only in the
    quantities demanded by the customers
  • Demand pulls products through the manufacturing
    process
  • No production takes place until a signal from a
    succeeding process indicates a need to produce
  • Parts and materials arrive just in time to be
    used in production

11-14
15
Just-in-Time (JIT) Manufacturing and Purchasing
OBJECTIVE
5
  • Accounting for the cost accounting cycle is
    simplified using backflush costing.
  • Backflush costing uses trigger points to
    determine when manufacturing costs are assigned
    to key inventory and temporary accounts
  • Trigger points are simply events that prompt the
    accounting recognition of certain manufacturing
    costs
  • The purchase of raw materials and the completion
    of goods
  • The purchase of raw materials and the sale of
    goods
  • The completion of goods
  • The sale of goods

11-15
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