Title: Strategic Cost Management
1Strategic Cost Management
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CHAPTER
2Strategic 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
3Strategic 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
4Strategic 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)
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5Strategic 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.
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6Strategic 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.
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7Strategic 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.
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8Strategic 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.
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9Strategic 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.
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10Strategic 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
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11Value 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
12Life 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
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13Life 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
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14Just-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
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15Just-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
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