Acctg Ed 18 – Strategic Cost Management Cost management nature and scope

Cost Management Nature of Cost Management

- the process of identifying, collecting, - an interdisciplinary subject drawing its
measuring, classifying, and reporting materials from several other disciplines
information that is useful to managers and like costing, statistics, mathematics,
internal users to ascertain cost, plan, financial accounting, etc.
control and make decisions
- the approaches and activities in short-run Scope of Cost Management
1) Cost Ascertainment:
and long-run planning and control
- deals with the collection and analysis of
decisions that increase the value for the
expenses, the measurement of production
customers and lower the costs of products of the different products at the different
and services stages of manufacture and the linking up
- includes all the activities and related of production with the expenses
infrastructures that an entity employs to 2) Cost Accounting
set and measure the achievement of its - the process of accounting for cost which
goals and objectives begins with recording of expenditure and
ends with the preparation of statistical
Cost management information data.
- developed for the Chief Financial Officer - A formal mechanism by means of which
costs of products or services are
and other managers to use to manage the
ascertained and controlled.
firm and make it more competitive and 3) Cost Control
successful - the guidance and regulation by executive
- provided for each of the four major action of the costs of operating an
management functions: undertaking
1) strategic management - aims at guiding the actual performance
- involves identifying and implementing towards the line of targets; regulates the
actual if they deviate or vary from the
goals and action plans to achieve desired
targets
competitive advantage and continued 4) Budgetary Control:
success - the establishment of budgets relating to
2) planning and decision-making the responsibilities of executives to the
- involves budgeting and profit planning, requirements of a policy and the
cash flow management and other continuous comparison of actual with
decisions on operations e.g., capital budgeted results
budgeting 5) Cost Audit:
3) control - the verification of the correctness of cost
- involves assessment, monitoring, and accounts and a check on the adherence to
evaluation of activities the cost accounting plan
a) operational control
Objectives of Cost Management
- monitoring activities of operating-level
1) reduce costs expended by an organization
managers and employees (e.g., production
while strengthening the strategic position
supervisors and different department
of the firm
heads) by mid-level managers (e.g., plant
2) enhance profit consciousness
managers, product managers, and
3) more focus on more efficient operations
regional managers)
b) management control Types of cost management
- evaluation of mid-level managers by 1) those that strengthen the organization’s
upper-level managers (e.g, controller or competitive position
CFO, CEO, etc.) 2) those that have no impact on the
4) preparation of financial statements organization’s position
- compliance by management with 3) those that weaken the organization’s
reportorial requirements of various position
relevant entities (e.g., BIR, Bangko Sentral
ng Pilipinas, SEC, etc.)
Costs involved with cost management
 direct costs - using mathematical parameters to predict
- costs that are physically related to a project costs
project - models can be simple or complex
- subject to the influence of the manager - most reliable when –
 service costs a) the historical information is correct
- costs that cannot be specifically related, b) the parameters are quantifiable
but can be linked, to a project c) the model can be applied to both large
- assigned based on usage or consumption and small-scale projects
 general and administrative costs  bottom-up estimating
- cannot be specifically related to a project - estimating the cost of work items and then
but benefit all activities summing the estimates to get a project
total
Resource planning for cost management  computerized tools
- determining what physical resources (i.e.,
- project management software and
people, equipment and materials) are
spreadsheets that aid in project estimation
needed to complete a project
- resources are evaluated to assess the Benefits of effective cost management
value the organization will get from taking 1) improve pricing decisions
the project or changing its methods to 2) identify the source of costs
make it a more efficient organization 3) link corporate strategies
4) evaluate the effectiveness of activities for
Elements for cost management assessment: investment
 work breakdown structure (WBS)
- identifies the elements that will need Cost avoidance, reduction and control
resources in the project in order for the
project to be successfully completed Cost avoidance
- the primary input to resource planning - any actions that avoid having to incur
 historical information costs in the future
- provides information regarding what types - preemptive actions that avert potential
of resources were required for similar work increases in costs
on similar projects - will never be reflected in the budget or the
 scope statement financial statements
- contains the project justification and - examples:
objectives a) reduction of a proposed price increase
 resource pool description from a vendor
- knowledge of the physical resources b) elimination of the need for additional
available/necessary for project completion personnel through process
 organizational policies improvements, or
- policies of the organization regarding c) a change in maintenance schedules for
staffing and the rental/purchase of critical equipment to avoid work
supplies/equipment stoppages.

Techniques for cost estimating: Cost-saving

 analogous estimating (top-down - any actions that lower current spending,
estimating) investment, or debt levels
- using the cost of a previous similar project - results in a tangible financial benefit for
as a reference for predicting the cost of the organization
the current project - amount of money saved should always be
- a form of expert judgment and used when reflected in the financial statements and
there is a limited amount of information next year’s budget
about the project **actual should be visible in the
financial statements compared to prior
periods
 parametric modelling **planned cost savings should be
reflected in the budget.
- examples: when compared with similar
a) reduction of overtime hours projects/services
b) elimination of temporary labor - determining the cause of variance and
employees decide if corrective action is to be made
c) negotiation of price decreases for  additional planning
products and services, or - usually done when projects do not go as
d) the negotiation of a lower rental fees planned
for facilities and equipment. - revisions may be made and alternative
approaches adopted
Cost reduction  computerized tools
- a planned, positive approach to bring
- used to track planned costs versus actual
costs down of goods manufactured or
costs, and to predict cost changes
services rendered without impairing their
quality or suitability for their intended use,
or without reducing their value in terms of
customer satisfaction
- Goals:
1) reduce cost per unit
2) increasing productivity
- Steps:
1) elimination of wastes
2) improving operations
3) increasing productivity
4) search for cheaper materials
5) improved standards of quality
6) finding other means to reduce unit
costs
- Difficulties generally found in cost
reduction programs:
1) workers and employees may resist the
implementation of the programs
2) they are usually carried out on an ad
hoc basis
3) the schemes may be covered in some
areas but it should cover all activities
4) they may be implemented hurriedly

Cost control
- the comparative analysis of actual costs
with appropriate standards or budgets to
facilitate performance evaluation and
formulation of corrective measures
- management actions to keep costs within
standards and/or budget
- aims at accomplishing conformity between
actual results and standards or budgets,
keeping expenditures within prescribed
limits
- techniques:
 performance measurement
- helps assess the magnitude of any
variations that occur within performance