INTRODUCTION TO STRATEGIC COST MANAGEMENT

Time Duration and Allotment: Week 1; 3 hours

Abstract:

This focuses on the introduction of Strategic Cost Management, professional environment of Cost
Management, contemporary business environment and strategic focus of Cost Management, and
developing a competitive strategy and contemporary cost management techniques.

Lesson Objectives:

As a result of completing this learning module, students will be able to:

1. Enable to understand and differentiate the Cost Management, Cost Accountant, Strategies, and
its other relative components

2. Describe the position, functions, and responsibilities of the Management Accountant, Treasurer
and Controller in the organization structure of the business firm

3. Explain the role and the relationship between the Chief Financial Officer, the Controller and the
Treasurer

4. Describe and explain the more recent changes in contemporary business environment such as:
• The Global Business Environment
• Advances in Manufacturing Techniques
• Advances in Information
• A greater focus on customers
• New forms of organization
• Changes in the Social, Political & Cultural Environment

5. Explain and understand the strategic measures of success, financial and nonfinancial factors
and the basic approach of how a firm's competitive strategy is developed

6. Describe the two basic competitive strategies, namely:

a. Cost Leadership
b. Product Differentiation

7. Understand and describe the contemporary cost management techniques such as

• Total Quality Management
• Just-in-Time Production System
• Process Reengineering
• Benchmarking
• Mass Customization
• Balanced Scorecard
• Activity-based Costing and Management
• Theory of Constraints
• Life Cycle Costing
• Target Costing
• Computer-Aided Design and Manufacturing
• Automation
• E-Commerce
• The Value Chain

Module Guide: Study topic content presented below. (TOPIC CONTENT)

Study topic content presented below. (TOPIC CONTENT)

Study
TOPIC CONTENT: OVERVIEW OF COSTtopic content presented
MANAGEMENT AND below. (TOPIC CONTENT)
STRATEGY

Strategy- is a set of policies, procedures and approaches to business that produce long-term success while
Strategic Management involves the development of a sustainable competitive position. Strategic Cost
Management involves the development of cost management information to facilitate the principal
management function which is strategic management.
Cost management information is the information that the manager needs to effectively manage the firm,
profit-oriented as well as not-for-profit organization. This includes both financial information about cost and
revenues as well as relevant nonfinancial information about productivity, quality and other key success
factors for the firm.

Cost management is the practice of accounting in which the accountant develops and uses cost
management information. For competitive success, it is not enough to emphasize only on financial
information. This could lead the manager to stress cost reduction (a financial measure) while ignoring or
even lowering quality standards (a nonfinancial measure). This decision could be a critical mistake which
could lead to the loss of customers and market share in the long run. If a firm is to compete successfully,
importance should be given to nonfinancial and long-term measures of operating performance such as
product and manufacturing advances, product quality and customer loyalty. Cost management information,
is thus a value-added concept. It adds value by helping a firm be more competitive.

USERS OF COST MANAGEMENT INF0RMATION

• Business firms
• Governmental Units
• Not-for-profit Organization

USES IF COST MANAGEMENT INFORMATION

1. Strategic Management – involves the development of a sustainable competitive position in which the
firm’s competitive advantage spells 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. Management must make sound strategic
decisions regarding the choice of products, manufacturing methods, marketing techniques and channels
and other log-term issues

2. Planning and Decision Making- involves budgeting and profit planning, cash flow management and
other decision related to the firm’s operation such as deciding whether to lease or buy a facility, whether to
replace or just repair as equipment, when to change a marketing plan or when to begin new product
development.

3. Management and Operational Control – takes place when mid-level managers (e.g., product
managers, regional managers) Monitors the activities of operating-level managers and employers (e.g.,
production supervisors, department heads). Management control on the other hand, is the evaluation of
mid-level manager by upper-level manager (e.g., Controller of the Chief Financial Officer(CFO)).

4. Reportorial and Compliance to Legal Requirements – require the management to comply with the
financial reporting requirements to regulatory agencies such as the Securities and Exchange Commission
(SEC) Bureau of Internal revenue (BIR), and other relevant government authorities and agencies.

MANAGEMENT ACCOUNTANT ROLE IN ATRATEGIC COST MANAGEMENT

Cost Management is the practice of accounting in which the accountant develops and uses cost
management information. This area of accountancy practice is performed by management accountants.
Management Accountants are the accounting professionals who develop and analyze cost management
information and other accounting information.

Management Accounting involves the application of appropriate techniques and concepts to economic
data so as to assist management establishing plans for reasonable economic objectives and in the making
of rational decisions with a view toward achieving these objectives. It is the process of identification,
measurement, accumulation, analysis, preparation, interpretation, and communication of financial
information, which is used by management to plan, evaluate and control activities within an organization.

Management Accountants (including cost accountants) are concerned with providing information to
managers, that is, people inside an organization who direct and control the operations. They provide a
variety of reports. Some reports focus on how well managers and business units have performed while
other reports provide timely and frequent updates on key indicators, analysis of business situation or
opportunity and analytical reports that are needed to investigate specific problems.

Task of Management Accountants:

a. Scorekeeping or data Accumulation
b. Interpreting and Reporting of Information
c. Problem-Solving

Important guidelines of Management Accountants:

1. Employ a Cost-Benefit approach

2. Recognize behavioral as well as technical considerations and
3. Use appropriate cost concepts for different purpose

Specifically, the management accountant provides a system which allows management to receive the
necessary information used in performing its administrative functions of:

(a) planning which involves setting of goals for the firm, evaluating the various ways to meet the goals and
picking out what appears to be the best way to meet the goals;

(b) controlling which involves the evaluation of whether actual performance conforms with planned goals;
and

(c) decision making which involves determination of predictive information (e.g. relevant costs) for making
important business decisions.

Planning

A key activity for all companies is planning. Planning involves identifying alternatives and selecting a
course of action and specifying how the action will be implemented to further the organization's objectives.

Control

Control of organizations is achieved by evaluating the performance of managers and the operations for
which they are responsible. The distinction between evaluating managers and evaluating the operations
they control is important. Managers are evaluated to determine how their performance should be rewarded
or punished, which in turn motivates them to perform at a high level. Based on an evaluation indicating
good performance, a manager might receive substantial bonus compensation. An evaluation indicating a
manager performed poorly might lead to the manager being fired. In part because evaluations of managers
are typically tied to compensation and promotion opportunities, managers work hard to ensure that they will
receive favorable evaluations.

Figure 1-1 presents the major steps in the planning and control process. Once a plan has been made,
actions are taken to implement it. These actions lead to results, which are compared with the original plan.
Based on this evaluation, managers are rewarded (e.g., given substantial bonuses or promoted if
performance is judged to be good) or punished (e.g., given only a small bonus, given no bonus, or even
fired if performance is judged to be poor). Also, based on the evaluation process, operations may be
changed. Changes may consist of expanding (e.g. adding a second shift), contracting (e.g., closing a
production plant), or improving operations (e.g., training employees to do a better job answering customer
product inquiries). Changes may also consist of revising an unrealistic plan.

Figure 1-1: Planning and Control Process

Plan

Decision to change operations Action taken to implement

or services plan

Results

Decisions to reward or punish Comparison of planned and

managers actual results

Evaluation
Decision Making

As indicated in Figure 1-1, decision making is an integral part of the planning and control process-decisions
are made to reward or punish managers, and decisions are made to change operations or revise plans.
Should a firm add a new product? Should it drop an existing product? Should it manufacture a component
used in assembling its major product or contract with another company to produce the component? What
price should a firm charge for a new product? These questions indicate just a few of the key decisions that
confront companies. And how well they make these decisions will determine future profitability and,
possibly, the survival of the company. Recognizing the importance of making go0d decisions. we will devote
all of Chapter 11 to the topic.

RELATIONSHIP BETWEEN COST ACCOUNTING AND COST MANAGEMENT

Cost accounting is a systematic set of procedures for recording and reporting measurements of the cost
of manufacturing goods and performing services in the aggregate and in detail. It includes methods for
recognizing. classifying, allocating, aggregating and reporting such costs and comparing them with
standard costs.

Cost Management needs the output of cost accounting. Its purpose is to provide managers with
information which aids decision. There are no generally accepted principles which specify how
management accounting information is to be reported. While systems such as direct costing and standard
costing exist in management accounting, each accounting report should be tailored to the needs of the
decision and the decision maker. The most effective systems result when the manager-decision maker and
the accountant work together until the accountant understands the decision to be made and the manager
understands the source of information that the accountant will report.

STRATEGIC DECISION AND THE COST MANAGEMENT ACCOUNTANT

A company earns profit by attracting customers willing to pay for the goods and services it offers. Customers
compare the goods and services offered by a company to the same goods and services offered by other
companies. The key to a company's success is creating value for customers while differentiating itself from
its competitors. Identifying how a company will do this is what strategy is all about. However, a chosen
strategy is only as good as how effectively it is implemented. The management accountant provides input
that aids in developing strategy, building resources and capabilities, and implementing strategy understand
the management accountant's role, we must first understand the manager s tasks in more detail.

Line authority is the authority to command action or give orders to subordinates. Line managers are
directly responsible for attaining the objectives of the business firm as efficiently as possible. Sales and
production managers typically have line authority. Staff authority is the authority to advise but not
command others; it is exercised laterally or upward. Staff managers give support, advice and service to line
departments. Examples of staff authority are found in personnel, purchasing, engineering and accounting.

THE CHIEF FINANCIAL OFFICER AND THE CONTROLLER

The chief financial officer (CFO) - also called the finance director in many countries-is the executive
responsible for overseeing the financial operations of an organization. The responsibilities of the CFO vary
among organizations, but they usually include the following areas:

• Controllership - includes providing financial information for reports to managers and reports to
shareholders and overseeing the overall operations of the accounting system.

• Treasury - includes banking and short- and long-term financing, investments, and management of
cash.

• Risk management - includes managing the financial risk of interest-rate and exchange-rate
changes and derivatives management.

• Taxation- includes income taxes, sales taxes, and international tax planning
 • Internal audit - includes reviewing and analyzing financial and other records to attest to the
integrity of the organization's financial reports and to adherence to its policies and procedures.

In some organizations, the CFO is also responsible for information systems. In other organizations, an
officer of equivalent rank to. the CFO- called the chief information officer-is responsible for information
systems.

The controller (also called the chief accounting officer) is the financial executive primarily responsible for
management accounting and financial accounting. This book focuses on the controller as the chief
management accounting executive. Modern controllers do not do any controlling in terms of line authority
except over their own departments. Yet, the modern concept of controllership maintains that the controller
does control in a special sense. That is, by reporting and interpreting relevant data (problem-solving and
attention-directing roles), the controller exerts a force or influence that impels management toward making
better-informed decisions.

Figure 2-1 is an illustrative organization chart of the CFO and the corporate controller of an apparel
company

Figure 2-1: Reporting Relationships for the CFO and the Corporate Controller

Chairman
Board of Directors
Chief Executive Officer
(CEO)

President
Chief Operating Officer
(COO)

Chief Financial Officer

(CFO)

Controller Treasurer

The Controller as the Top Management Accountant

Controllership is the practice of the established science of control which is the process by which
management assures itself that the resources are procured and utilized according to plans in order to
achieve the company's objectives.

A simplified illustration of the organization chart for the controller's office is shown in Figure 2-2. Note that
one of the areas reporting to the controller is cost accounting. Most medium-sized and large manufacturing
companies have such a department. Cost accountants estimate costs to facilitate management decisions
and develop cost information for purposes of valuing inventory.

The controller is an integral part of the top management team. If one wants a high- level career in
management accounting, he/she will need not only strong accounting skills but also skills required of all
high-level executives. These skills include excellent written and oral communication skills, solid
interpersonal skills and a deep knowledge of the industry in which the firm competes.

The controller's authority is basically staff authority in that the controller's office gives advice and service to
other departments. However, in his own department, he has line authority. In the modern concept of
controllership, it is maintained that the controller does control in a special sense. That is, by reporting and
interpreting relevant data, the controller exerts a force or influence that impels management toward logical
decisions consistent with objectives.
Figure 2-2: A Typical Organization Chart Showing the Functions of the Controller

Controller

Financial Reporting Budgeting and Financial Analysis Cost Management

Performance and Special Studies
Reporting

Systems Development Taxation Reporting

Basic Functions of Controllership

The basic principal functional responsibilities and activities of controllership may be categorized as follows:

1. Planning. Establish and maintain an integrated plan of operation consistent with the company's goals
and objectives, both short and long term, analyzed and revised, as required, communicated to all levels of
management, with appropriate systems and procedures installed.

2. Control. Develop and revise standards against which to measure performance and provide guidance
and assistance to other members of management in insuring conformance of actual results to standards.

3. Reporting. Prepare, analyze, and interpret financial results for utilization by management in the decision-
making process, evaluate the data with reference to company and unit objectives, prepare and file external
reports as required to satisfy government regulatory bodies, shareholders, financial institution, customers,
and the general public.

4. Accounting. Design, establish, and maintain general and cost accounting8 systems at all company
levels, including corporate, divisional, plant, and unit to properly record all financial transactions in the books
of accounts and records in accordance with sound accounting principles with adequate internal control.

5. Other Primary Responsibilities. Manage and supervise such functions as taxes, including interface
with the respective taxing authorities and agents; maintain appropriate relationships with internal and
external auditors, develop and maintain systems and procedures, develop record retention programs;
Supervise assigned treasury functions; institute investor and financial public relations programs; office
management; and direct other assigned functions.

Treasurership

Treasurership is concerned with the acquisition, financing and management or assets of a business
concern to maximize the wealth of the firms for its owners.

In addition to the position of the controller, many companies have a position called treasurer. The treasurer
has custody of cash and funds invested in various marketable securities. In addition to money management
duties, the treasurer is responsible for maintaining relationships with investors, banks, and other creditors.
Thus, the treasurer plays a major role in managing cash and marketable Securities, preparing cash
forecasts and obtaining financing from banks and other lenders. Both the controller and the treasurer report
to the chief financial officer (F0) who is the senior executive responsible for both accounting and
financial operations.

In most firms the treasurer has the following responsibilities:

1. Funds Procurement
This involves raising of funds in accordance with the firms planned capital structure. 1his responsibility may
require negotiating for loans, short-term or long-term, issuing equity of debt instruments at the best terms
and Conditions possible.

2. Banking and Custody of Funds

This involves direct management of cash and cash equivalents and maintenance of good relations with
banks and other non-bank institution.

3. Investment of Funds

This involves management of the company's placements and securities or purchase of debt or equity
instruments such as ordinary or preference shares in other corporate entities. This responsibility also
includes analysis of decisions related to investment in property, plant and equipment.

4. Operating Responsibilities related to

(a) Credit and Collection

(b) Inventory Management
(c) Corporate pension and retirement fund
(d) Investor Relations
(e) Insurance
(f) Compliance with legal and regulatory provisions relating to funds procurement, use and distribution
as well as coordination of the finance function with accounting function.

CONTEMPORARY BUSINESS ENVIRONMENT

The business environment in recent years has been characterized by increasing competition and relentless
drive for continuous improvement. These changes include (1) an increase in global competition; (2)
advances in manufacturing technologies; (3) advances in information technologies, the Internet,
and e commerce; (4) a greater focus on the customer; (5) new forms of management organization;
and (6) changes in the social, political, and cultural environment of business. As businesses turned
global and product lines expanded, operations have become more complex, forward-looking companies
saw a tremendous need for management oriented data that was separate from financial-oriented data.

Corporate executives are now using cost data to chart successful futures for their companies. Adapting
management accounting system to better meet management's needs for information is crucial to an
organization s survival when competing in global markets. Global competitors now have relatively free
access to markets around the world. As a result, domestic markets on virtually every country face greater
challenges from foreign competition. With increased reliance on global markets, companies need not only
respond quickly to changing market conditions but also tailor products to different consumer tastes and
demands and this has to be done at a level that assures profit and gives satisfactory returns to shareholders.

DEVELOPING A COMPETITIVE STRATEGY

A strategy is a set of policies, procedures and approaches to business that produce long-term success.

Finding a strategy begins with determining the purpose and long-range direction or on in other words, the
mission of the company. The mission is developed into specific performance objectives which are then
implemented by specific corporate or company's strategies, that is, specific actions to achieve the objectives
that will fulfill the mission. A firm succeeds by implementing a strategy

Strategy specifies how an organization matches its own capabilities with the opportunities in the market
place to accomplish its objectives. In other words, strategy describes how a compete will compete and the
opportunities its employee should seek and pursue. Companies follow one of two broad strategies. Some
companies such as Jollibee, Pure Gold and Cebu Pacific Airline compete on the basis of providing a quality
product or service at low prices. This is also known as "Cost Leadership" strategy. Other companies such
as Rustan's Department Store and BGC Shangri-La Hotel compete on their ability to ofer unique products
or services that are often priced higher than the products or services of competitors. This is known as
"Product Differentiation" strategy.
STRATEGIC MEASURES OF SUCCESS

Firms use cost management to support their strategic goals. The strategic cost management system
develops strategic information, including both financial and non-financial information.

Financial performance measures include among others

a. growth in sales and earnings
b. cash flows
c. stock price

They show the impact of the firm's policies and procedures in the firm's current financial position and
therefore, its current return to the shareholders

Non-financial measures of operation include among others

a. market share
b. product quality
c. customer satisfaction
d. growth opportunities

The nonfinancial factors show the firm's current and potential competitive position as measured from
three additional perspectives, namely:
1. the customer
2. internal business process and
3. innovation and learning

Strategic financial and nonfinancial measures of success are also commonly called: Critical Success
Factors (CSFs)

COMPETITIVE STRATEGIES

For a firm to sustain a competitive position, it must purposefully or as result of market forces, arrive at one
of the two competitive strategies, namely

Cost Leadership and Product Differentiation

Cost Leadership

This is a competitive strategy in which a firm succeeds in producing products or services at the lowest cost
in the industry. A firm that is a cost leader makes sustainable profits at lower prices, thereby limiting the
growth of competitions in the industry through its success in price wars and undermining the profitability of
competitors which must meet the firm's low price.

Product Differentiation

The differentiation strategy is implemented by creating a perception among consumers that the product or
service is unique in some important way, usually by being of higher quality, features or innovation. This
perception allows the firm to charge higher prices and outperform the competition in profits without reducing
cost significantly. Most industries, including automobile, consumer electronics, and industrial equipment,
have differentiated firms. The appeal of differentiation is especially strong for product lines which the
perception of quality and image is important, as in cosmetics, jewelry and automobiles. Tiffany, Rolex,
Ferrari and BMW are good examples of firms that emphasize differentiation.

CONTEMPORARY COST MANAGEMENT TECHNIQUES

Managers commonly use the following tools to implement the firm's broad strategy and to facilitate the
achievement of success on critical success factors: Just-in-time OT, total quality management, process
reengineering, benchmarking mass customization. balanced scorecard, activity-based costing and
management. theory of constraints (TOC). life cycle costing, target costing, computer-aided design and
manufacturing, automation, e-commerce and the value chain and supply-chain analysis.

The basic concepts of these cost management techniques are discussed in the succeeding section:
a. Total Quality Management

To survive in an increasingly competitive environment, firms realize that they must produce high-quality
products. As a result, an increasing number of companies have instituted total quality management
programs to ensure that their products are of the highest quality and that production processes are efficient.

Total quality management (TQM) is a technique in which management develops policies and practices to
ensure that the firm's products and services exceed customer expectations.

Currently, there is no generally agreed upon "perfect way to institute a TQM program. But most companies
with TQM develop a company that stresses listening to the needs of customers, making products right the
first time, reducing defective products that must be reworked, and encouraging workers to continuously
improve their production process. That is why some TQM programs are referred to as continuous quality
improvement programs.

TQM affects product costing by reducing the need to track the cost of scrap and rework related to each job.
if TQM is able to reduce these costs to a very low level, the benefit of tracking the costs is unlikely to exceed
the cost to the accounting system.

Total Quality Management (TOM) is a formal effort to improve quality throughout an organization's value
chain. The two major characteristics of TQM are

(1) a focus on serving customers, and

(2) systematic problem-solving using teams made up of front-line
workers.

b. Just-In-Time (JIT)

Just-in-1ime (JIT) is the philosophy that activities are undertaken only as needed or demanded. JIT is a
production system also known as pull-it through approach, in which materials are purchased and units are
produced only as needed to meet actual customer demand. In a JIT system, inventories are reduced to the
minimum and in some cases, zero.

Just-in-Time (JIT) production is a system in which each component on a production line is produced
immediately as needed by the next step in the production line. In a JIT production line, manufacturing
activity at any particular workstation is prompted by the need for that stations output at the following station.
Demand triggers each step of the production process, starting with customer demand for a finished product
at one end of the process and working all the way back to the demand for direct materials at the other end
of the process. In this way, demand pulls a product through the production line. The demand-pull feature
of JIT production systems achieves close coordination among work centers. It smoothes the flow of goods,
despite low quantities of inventory.

Financial Benefits of JIT

JIT tends to focus broadly on the control of total manufacturing costs instead of individual costs such as
direct manufacturing labor. For example, 1die time may rise because production lines are starved for
materials more frequently than before. Nevertheless, many manufacturing costs will decline. JIT can
provide many financial benefits, including

1. Lower investment in inventories.

2 Deductions in carrying and handling costs of inventories.
3. Reductions in risk of obsolescence of inventories.
4. Lower investment in plant space for inventories and production.
5. Reductions in setup costs and total manufacturing costs.
6. Reduction in costs of waste and spoilage as a result improves quality.
7. Higher revenues as a result of responding faster to customers
8. Reductions in paperwork.

Major Features of JIT Production System

There are five main features in a JIT production system:

 1. Production is organized in manufacturing cells, a grouping of all the different types or equipment
used to manufacture a given product.
2. Workers are trained to be multiskilled so that they are capable of performing a variety of operations
and tasks.
3. Total quality management 1s aggressively pursued to eliminate defects.
4. Emphasis is placed on reducing setup time, which is the time required to get equipment, tools and
materials ready to start the production of a component or product, and manufacturing lead time, which
is the time from when an order is ready to start on the production line to when it becomes a finished
good.
5. Suppliers are carefully selected to obtain delivery of quality-tested
parts in a timely manner.

c. Process Reengineering

Reengineering is a process for creating competitive advantage in which a firm reorganizes its operating
and management functions, often with the result that jobs are modified, combined, or eliminated. It has
been defined as the fundamental rethinking and radical design of business to achieve dramatic
improvements in critical, contemporary measures of performance, such as cost, 9uanty, service, and
Speed.

Process reengineering, a more radical approach to improvement than TQM, is an approach where a
business process is diagrammed in detail, questioned and then completely redesigned in order to eliminate
unnecessary steps, to reduce opportunities for errors and to reduce costs. A business process is any
series of steps that are followed in order to carry out some task in a business.

The main objective of this approach is the simplification and elimination of wasted effort and the central
idea is that all activities that do not add value to product or service should be eliminated. n its most simplified
version, the steps used in process reengineering are:

1. A business process is diagrammed in detail.

2. Every step in the business process must be analyzed and justified.
3. The process is redesigned to include only those steps that make the product or service more valuable.

This process can yield the following anticipated results:

1. Process is simplified
2. Process is completed in less time
3. Costs are reduced, and
4. Opportunities for errors are reduced.

Process reengineering has one basic recurrent problem, that is- employee resistance. AS with other
improvement projects, employees fear loss of Jobs which may lead to lost morale and failure to improve
the bottom line (e.g., profits). For the process to prosper and succeed, employees must be convinced that
the end result of the improvement will be more secure, rather than less secure jobs. They can be made to
understand that improving the processes, the company can generate more business, produce a better
product at lower cost and will have the competitive strength to prosper

d. Benchmarking

Benchmarking is a process by which a firm

• determines its critical success factors

• studies the best practices of other firms (or other 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.

Today benchmarking efforts are facilitated by cooperative networks of noncompeting firms that exchange
benchmarking information.

e. Mass Customization
Many manufacturing and service firms increasingly find that customers Expect products and services to be
developed for each customer's unique needs. And many firms have been successful with a strategy that
targets customer’s unique needs.

Mass customization is a management technique in which marketing and production processes are
designed to handle the increased variety that results from delivering customized products and services to
customers.

The growth of mass customization is in effect another indication of the increased attention given to satisfying
the customer

f. Balanced Scorecard

The balanced scorecard is an accounting report that includes the firm's critical success factors in four areas
(a) financial performance
(b) customer satisfaction,
(c) internal business process, and
(d) innovation and learning.

The concept of balance captions the intent of broad coverage, financial and nonfinancíal of all the factors
that contribute to the success of the firm in achieving its strategic goals. The use of the balanced scorecard
is thus a critical ingredient of the overall approach that firms take to become and remain competitive.

g. Activity-based Costing and Management

Activity analysis is used to develop a detailed description of the specific activities performed in the
operation of the firm. Many firms have found that they can improve planning, product costing, operational
control, and management control by using activity analysis to develop a detailed description of the specific
activities performed in the firm's operations. The activity analysis provides the basis for activity-based
costing and activity-based 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) uses activity analysis to improve operational control and management control. ABC
and ABM are key strategic tools for many firms, especially those with complex operations, or great diversity
of products.

h. Theory of Constraints (TOC)

The Theory of Constraints is a sequential process of identifying and removing constraints in a system.

The Theory of Constraints emphasizes the importance of managing the organization's constraints or
barriers that hinder or impede progress toward an objective. Since the constraint is whatever is holding
back the organization, improvement efforts usually must be focused on the constraint to be really effective.

The basic sequential steps followed in applying TOC are

1. Analyze all the factors of production (materials, labor, facilities, methods, etc.) required in the
production chain.
2. Identity the weakest link, which 1s the constraint.
3. Focus improvement efforts on strengthening the weakest link.
4. If improvement efforts are successful, eventually the weakest link will improve to the point where it
is no longer the weakest link.
5. At this point, a new weakest link (new constraint) must be identified and improvement efforts must
be shifted over that link.

The Theory of Constraints approach is a perfect complement to Total

Quality Management and Process Reengineering- it focuses improvement
efforts where they are likely to be most effective.

i. Life Cycle Costing

Life-cycle costing is a management technique to identity and monitor the costs of a product throughout
its lifecycle. It consists of all steps from product design and purchase of raw material to delivery of and
service or the finished product. The steps 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
(5) sales and service.

Cost management traditionally has focused only on costs incurred up to the third step manufacturing.
Management accountants now strategical manage the product's full life cycle of costs, including upstream
and downstream costs as well as manufacturing costs.

J. Target Costing

Target costing involves the determination of the desired cost for a product or the basis of a given
competitive price so that the product will earn a desired profit. The basic relationship that is observed in this
approach is

Target cost= Market determined price - Desired profit

The entity using target costing must often adopt strict cost-reduction measures to meet the market price
and remain profitable. This is a common strategic approach used by intensely competitive industries where
even small price differences attract consumers to the lower-priced product.

k. Computer-Aided Design and Manufacturing

More companies are using computer-aided design (CAD) and computer aided manufacturing (CAM) to
respond to changing consumer tastes more quickly. These innovations allow companies to Significantly
reduce the time necessary to bring their products from the design process to the distribution stage.

Computer-aided design (CAD) is the use of computers in product development, analysis, and design
modification to improve the quality and performance of the product. Computer-aided manufacturing
(CAM) is the use of computers to plan, implement, and control production.

l. Automation

Automation involves and requires a relatively large investment in computers, computer programming,
machines, and equipment. Many firms add automation gradually, one process at a time. To improve
efficiency and effectiveness continuously, firms must integrate people and equipment into the smoothly
operating teams that have become a vital part of manufacturing strategy. Flexible manufacturing systems
(FMS) and computer-integrated manufacturing (CIM) are two integration approaches. A flexible
manufacturing system (FMS) is a computerized network of automated equipment that produces one or
more groups of parts or variations of a product in a flexible manner. It uses robots and computer controlled
materials-handling systems to link several stand-alone, computer-controlled machines in switching from
one production run to another.

Computer-integrated manufacturing (CIM) is a manufacturing system that totally integrates all office and
factory functions within a company via a computer-based information network to allow hour-by-hour
manufacturing

The major characteristics of modern manufacturing companies that are adopting FMS and CM are
production of high-quality products and services, low inventories, high degrees of automation, quick cycle
time, increased flexibility, and advanced information technology. These innovations shift the focus from
large production volumes necessary to absorb fixed overhead to a new emphasis on marketing efforts,
engineering, and product design.

m. E-Commerce

A number of internet-based companies have emerged and been proven successful in last decade. This E-
Commerce business model adopted by Amazon.com and eBay has also attracted many investors to
pursue the use of Internet in conducting business. Established companies will undoubtedly continue to
expand into cyberspace both for business-to-business transactions and for retailing. The Internet has
important advantages over more conventional marketplaces for some kinds of transaction such as
 mortgage banking. It is also very likely that a blockbuster business may be built around the concept of
selling low-value, low-margin and bulky items like groceries over the Internet.

n. The Value Chain

Value chain refers to the sequence of business functions in which usefulness is added to the products or
services of a company. The term value refers to the increase in the usefulness of the product or service
and a result its value to the customer.

The value chain is an analysis tool that firms use to identify the specific steps required to provide a product
or service to the customer. The key idea of this concept is that the firm studies each step in its operation to
determine how each activity contributes to the firm's competitiveness and profits.

Analyzing 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, and
• how to increase value for the customer at one or more of the steps of the value chain.

Activities, Resources, and Assessment

Online Blended Offline
(Hybrid Model) (Asynchronous Model) (Flex Model)
Resources: Resources: Resources:
Schoology App/Messenger Schoology App/Messenger
Strategic Cost Management Strategic Cost Management (2019- Strategic Cost Management
Textbook: (2019-2020 edition) by; Ma. Textbook: 2020 edition) by; Ma. Elenita Textbook: (2019-2020 edition) by; Ma.
Elenita Balatbat Cabrera Balatbat Cabrera Elenita Balatbat Cabrera
Activities: Activities: Activities:
Topic discussion will be through GoogleMeet Topic discussion will be through GoogleMeet Topic discussion will be during classroom
App. Students will be grouped accordingly. App. Students will be grouped accordingly. meetups. Students will be grouped
Each group will be tasked to prepare PPT Each group will be tasked to prepare PPT file accordingly. Each group will be tasked to
file relative to the TOPIC CONTENT, which relative to the TOPIC CONTENT, which will be prepare PPT file relative to the TOPIC
will be presented and graded during the sent via e-mail address. This output will be CONTENT, which will be presented and
teleconferencing. graded accordingly. graded during the class session.

Assessment: Assessment: Assessment:

Topic quiz will be publish at Schoology App. Topic quiz will be publish at Schoology App. Topic quiz will be issued to you and will be
Instructions as to the time allocated for Instructions as to the time allocated for answered at home, which will be
answering and deadline for submission of answering and deadline for submission of quiz immediately due for submission the following
quiz will be announced via Messenger Group will be announced via Messenger Group Chat. day at the box placed at the SVCI guard
Chat. house. Communication as to the receipt the
said quiz will be through text messaging.