11-1 Strategic Cost Management 11

11-2 Strategic Cost Management: Basic Concepts Strategic planning and decision making requires a broad set of information Information about customers, suppliers, different product designs Information should Include information about the firm’s environment and internal workings Must be prospective and should provide insight about future periods and activities 1

11-3 Strategic Cost Management: Basic Concepts 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

11-4 Strategic Cost Management: Basic Concepts 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)

11-5 Strategic Cost Management: Basic Concepts 1 A cost leadership strategy happens when the same or better value is provided to customers at a lower cost than a company’s 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.

11-6 Strategic Cost Management: Basic Concepts 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.

11-7 Strategic Cost Management: Basic Concepts 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.

11-8 Strategic Cost Management: Basic Concepts 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 firm’s portion of the value chain. External linkages describe the relationship of a firm’s value chain activities that are performed with its suppliers and customers. There are two types: supplier linkages and customer linkages.

11-9 Strategic Cost Management: Basic Concepts 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.

11-10 Strategic Cost Management: Basic Concepts 1 Operational activities are day to day activities performed as a result of the structure and processes selected by the organization. Operational cost drivers are those factors that drive the cost of operational activities. Operational activities and drivers are the focus of activity based costing

Value Chain Analysis Identifying and exploiting internal and external linkages with the objective of strengthening a firm’s 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

11-12 Life Cycle Cost Management 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 3

11-13 Life Cycle Cost Management 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 3

11-14 Just-in-Time (JIT) Manufacturing and Purchasing 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

11-15 Just-in-Time (JIT) Manufacturing and Purchasing 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 5