STRATEGIC COST management function which is

strategic management.
MANAGEMENT
Cost management information - is a
CHAPTER 1
critical factor in the effective
management of a firm or organization.
WHAT IS MANAGEMENT?
- it is also the information that the
The word "MANAGEMENT" is a broad
manager needs to effectively manage
concept. It can be defined in various
the firm, either profit or non-profit.
ways but into:
- includes financial information about
cost and revenues as well as non-
(1) As a group of people
financial information about
 To most people within the
productivity, quality and etc.
organization, the term
"management" means the group of
Cost management - is the practice of
people (whether executives or
accounting in which accountant
other managers) who are
develops and uses cost management
primarily responsible for decision
information.
making in the organization leading
- for competitive success, not only
to achievement of organization's
focus on financial information but
goals and objectives.
rather focus or give importance to
 In other words, management may
the non-financial and long term
"make or break" an organization
measures of operating performance.
through decision making.

Strategic thinking
(2) As a function or process
- flexibility
 Management is the systematic
- anticipating changes
process of planning, organizing
- creative and integrative thinking
and controlling tasks to achieve
or meet the goals of organization.
USERS OF COST MANAGEMENT
 This is actually the traditional
- Business firms
view or definition of management.
- Gov't units
This chapter will focus on this
- Non-profit organizations
definition since it enumerates the
different functions of
USES OF COST INFORMATION
management.
MANAGEMENT

Strategy - is a set of policies,

Strategic management - involves
procedures and approaches to
development of a sustainable
business that produce long term
competitive position in which the
access.
firm's competitive advantage spells
continued success.
Strategic management - involves the
development of cost management
information to facilitate the principal
 Strategy - set of goals and  They are providing advices to
specific action to achieve managers who is primarily
competitive advantage. responsible for decision making.

 Strategic management -  Tasks:

identifying and implementing - Data accumulation
these goals and action plans. - Interpreting and reporting
information
Planning and decision making - - Problem solving
involves budgeting and profit planning,
cash flow management and other  Again, management accountant
decision related to firms operation. gives advice to the managers who
have admin functions to:
Management and Operation Control -
identifying inefficiencies 1. Planning
 Operational control - takes  is the process of setting goals
place when mid-level managers and objectives of the firm,
monitors the activities of whether short-term or long-term.
operating level managers. This includes evaluating and
 Management control - mid-level choosing of the best courses of
is evaluated by upper level action or best alternatives in
manager meeting the goals.
 Under planning, management must
MANAGEMENT ACCOUNTANT'S evaluate future contingencies
ROLE IN STRATEGIC COST affecting the organization, and
MANAGEMENT shape the future operational and
strategic landscape of the
Management accountants - are company.
accounting professionals who develop
and analyse cost management NOTE: Plans should be SMART
information and other accounting (Specific, Measureable, Attainable,
information. Realistic and Time-bounded).

 They applies: 2. Directing or Organizing

 These are known as tackling
Management accounting - involves activities. Why? Because under
the application of appropriate this function, management
techniques and concepts to economic instructs, guides, and inspires the
data so as to assist the management employees by communicating with
in establishing plans for reasonable them.
economic objectives and rational  Simply stated, management "taps"
decisions towards achieving the the resources of an organization
objective. for better use or consumption
which shall be in accordance with
the plan.
 Management oversees the day-to- position of the business. It is a
day operations to make sure that process of combining the
everything is functioning smoothly decision-making structure with
in carrying out the plan. the cost information, in order to
reinforce the business strategy
3. Controlling as a whole. It measures and
 is the process of performance manages costs to align the same
evaluation. It involves evaluation with the company's business
of actual performance if it strategy.
conforms to the planned results.  Business strategy - the course of
 From the word itself, action or set of decisions which
management "controls" the future assist the entrepreneurs in
actions of an organization by achieving specific business
deciding the corrective actions to objectives.
take if the actual performance  Line positions - positions that
didn't go as planned. have direct responsibility for the
basic objectives of an
4. Decision making organization.
 Decision making was not mentioned on  Staff positions - positions that
the definition since it is inherent in are supportive in nature and have
all management functions. In other only indirect responsibility for an
words, all the aforementioned
organization's basic objectives.
management functions involve
 Controller - manages the
decision making.
accounts and is in charge of the
 Management - consists of the entire accounting department.
interlocking functions of creating They assign duties to the
corporate policy and organizing, department, but are ultimately
planning. controlling, and directing responsible for generating
an organization's resources in reports, ensuring accuracy in the
order to achieve the objectives reports, analysing data, and giving
of that policy. these reports and models to the
 Cost Management - a method of CFO for decision making. Some of
reducing operating or production the essential duties of a
expenses in order to provide less controller include: accounting,
expensive products or services to reporting, accuracy checks,
consumers. In other words, it's consistency of reporting,
the process management uses to budgeting, compliance and tactics.
analyse its production and  Chief Financial Officer (CFO) -
streamline its operations to keep gives financial oversight after
costs low and manage expenses in reviewing reports generated by
the future. the controller and has the
 Strategic Cost Management primary responsibility of making
(SCM) - the cost management forward-looking decisions that
technique that aims at reducing will help the business manage risk
costs while strengthening the and grow. Some of the essential
 duties of the CFO include: Example:
financial analysis. solutions, - Let's take a look at the Kicker
forecasting, financing, planning, Inc.'s Organizational chart to study
implementing, strategies, and the function of a management
coaching other finance managers. accountant in an organization. Kicker
is an organization that designs,
Points to Ponder: produces, and sells audio equipment.
 Who uses the cost management
information? - Internal users
such as managers, executives, and
workers.

 What are the uses of strategic

cost management?
 To provide information for
planning the organization's Line positions: President, General
actions. Manager, Vice President for Sales &
 To provide information for Marketing, Vice President for
controlling the organization's Operations.
actions.
 To provide information for Staff Positions: The purchasing
making effective decisions. manager and the cost accountant, etc.

 What is the role of management The controller, or chief

accountants in Strategic Cost accounting officer, for Kicker is
Management? located in the administration
 The role of managerial department. She supervises all
accountants in an organization accounting functions and reports
is one of support. They assist directly to the general manager and
those individuals who are chief operating officer (COO).
responsible of carrying out an
organization's basic  Although managerial accountants,
objectives. such as controllers and cost
accounting managers, may wield
 What is the difference between considerable influence in the
cost accounting and cost organization, they have no
management? authority over the managers in
 Cost accounting is cost the production area. The
accumulation and allocation to managers in line positions are the
determine cost values. ones who set policy and make the
 Cost management provides decisions that impact the
information to the members company. However, by supplying
of the management for and interpreting the accounting
decision-making purposes. information, managerial
 accountants can have significant  No matter which position
input into policies and decisions. managerial accountants hold, they
must support management in all
 Because of the critical role that phases of business decision
managerial accounting plays in the making. As specialists in
operation of an organization, the accounting, they must be
controller is often viewed as a intelligent, well prepared, up-to-
member of the top management date with new developments, and
team and is encouraged to familiar with the customs and
participate in planning, controlling, practices of all countries in which
and decision-making activities. As their firms operate. They are
the chief accounting officer, the expected to be knowledgeable
controller has responsibility for about the legal environment of
both internal and external business and, in particular, about
accounting requirements. In the Sarbanes-Oxley Act of 2002.
larger firms, this charge may
include direct responsibility for Part II: Ethical Standards for
internal auditing, cost accounting, Management Accountants
financial accounting (including
SEC reports and financial Ethical Behavior
statements), systems accounting  involves choosing actions that
(including analysis, design, and are right. proper, and just.
internal controls), and taxes. The Behavior can be right or wrong; it
duties and organization of the can be proper or improper; and
controller's office vary from firm the decisions we make can be fair
to firm. For example, in some or unfair. Though people often
firms, the internal audit differ in their views of the
department may report directly meaning of the ethical terms
to the financial vice president; cited, there seems to be a
similarly, the systems department common principle underlying all
may report directly to the ethical systems. This principle is
financial vice president or some expressed by the belief that each
other vice president. member of a group bears some
responsibility for the well-being
 In larger companies, the of other members. Willingness to
controller is separate from the sacrifice one's self-interest for
treasury department. The the well-being of the group is the
treasurer is responsible for the heart of ethical action.
finance function. Specifically, the
treasurer raises capital and 10 core value which yields a
manages cash and investments. series of principles that delineate
The treasurer may also be in right and wrong in general terms.
charge of credit and collection
and insurance. 1. Honesty Integrity
2. Promise Keeping
3. Fidelity Yet where should the blame be
4. Fairness assigned? After all, the reward
5. Caring for others system strongly encourages the
6. Respect for others manager to increase profits. Is the
7. Responsible citizenship reward system at fault, or is the
8. Pursuit of excellence manager who chooses to increase
9. Accountability profits at fault? Or both? In reality,
both the manager and reward system
Standards of Ethical Conduct for are probably at fault. It is important
Managerial Accountants to design evaluation and rewards
 In addition to organizations systems so that incentives to pursue
establishing standards of conduct undesirable behaviors are minimized.
for their managers and employees,
professional associations also Members of IMA shall behave
establish ethical standards. Both ethically A commitment to ethical
the American Institute of professional practice includes
Certified Public Accountants overarching principles that express
(AICPA) and the Institute of our values and standards that guide
Management Accountants (IMA) member conduct.
have established ethical
standards for accountant. Principles
Professional accountants are  IMAs overarching ethical
bound by these codes of conduct. principles include. Honesty,
Both the AICPA and IMA stress Fairness, Objectivity, and
the importance of competence, Responsibility Members shall act
confidentiality, integrity, and in accordance with these
credibility or objectivity. principles and shall encourage
others within their organizations
Situational Example: to adhere to them.
Suppose a manger's bonus is linked to
reported profits, with the bonus Standards
increasing as profits increase. Thus,  IMA members have a
the manager has an incentive to find responsibility to comply with and
ways to increase profits, including uphold the standards of
unethical approaches. A manager Competence, Confidentiality,
could delay promotions of deserving Integrity, and Credibility. Failure
employees or use cheaper parts to to comply may result in
produce a product. In either case, if disciplinary action.
the motive is simply to increase the
bonus, the behaviour could be labelled COMPETENCE
as unethical. Neither action is the 1. Maintain an appropriate level of
best interest of the company or its professional leadership and expertise
employees. by enhancing knowledge and skills.
2. Perform professional duties in 3. Report any delays or deficiencies in
accordance with relevant laws, information, timeliness, processing, or
regulations, and technical standard internal controls in conformance with
3. Provide decision support organization policy and/or applicable
information and recommendations law
that are accurate, clear, concise, and 4. Communicate professional
timely. Recognize and help manage limitations or other constraints that
risk. would preclude responsible judgment
or successful performance of an
CONFIDENTIALITY activity
1. Keep information confidential
except when disclosure is authorized Resolving Ethical Issues
or legally required.
2. Inform all relevant parties  In applying the Standards of
regarding appropriate use of Ethical Professional Practice, the
confidential information. member may encounter unethical
3. Refrain from using confidential issues or behavior. in these
information for unethical or illegal situations, the member should not
advantage. ignore them, but rather should
INTEGRITY actively seek resolution of the
1. Mitigate actual conflicts of issue. In determining which steps
interest. Regularly communicate with to follow, the member should
business associates to avoid apparent consider all risks involved and
conflicts of interest. Advise all whether protections exist against
parties of any potential conflicts of retaliation.
interest.  When faced with unethical issues,
2. Refrain from engaging in any the member should follow the
conduct that would prejudice carrying established policies of his or her
out duties ethically organization, including use of an
3. Abstain from engaging in or anonymous reporting system if
supporting any activity that might available.
discredit the profession.
4. Contribute to a positive ethical If the organization does not
culture and place integrity of the have established policies, the member
profession above personal interests. should consider the following courses
of action:
CREDIBILITY • The resolution process could include
1. Communicate information fairly and a discussion with the members
objectively. immediate supervisor. If the
2. Provide all relevant information supervisor appears to be involved, the
that could reasonably be expected to issue could be presented to the next
influence an intended users level of management.
understanding of the reports, • IMA offers an anonymous helpline
analyses, or recommendations. that the member may call to request
how key elements of the IMA
Statement of Ethical Professional in the future is added so that the
Practice could be applied to the company always has a 12-month
ethical issue. plan on hand. It forces managers
• The member should consider to plan ahead constantly -
consulting his or her own attorney to something especially needed when
learn of any legal obligations, rights, firms operate in rapidly changing
and risks concerning the issue. environments.
 Budget committee - reviews the
Note: If resolution efforts are not budget, provides policy guidelines
successful, the member may wish to and budgetary goals, resolves
consider disassociating from the differences that arise as the
organization. budget is prepared, approves the
final budget, and monitors the
Part IV: Budget actual performance of the
organization as the year unfolds.
Terminologies:  Budget director - the controller,
 Budgets - are financial plans for the person responsible for
the future and are a key directing and coordinating the
component of planning. They organization's overall budgeting
identify objectives and the process.
actions needed to achieve them.
 Strategic plan - plots a direction Key points:
for an organization's future
activities and operations; it Advantages of Budgeting
generally covers at least 5 years. • Planning - encourages managers to
The overall strategy is then develop an overall direction for the
translated into the long and short organization, foresee problems, and
term objectives that form the develop future policies.
basis of the budget.
 Planning - looking ahead to see • Information for Decision Making -
what actions should be taken to For example, a restaurant owner who
realize particular goals. knows the expected revenues and the
 Control - looking backward, costs of meat, vegetables, cheeses,
determining what actually and so on might make menu changes
happened and comparing it with that play up the less expensive items
the previously planned outcomes. and reduce the use of more expensive
 Master Budget - the ingredients.
comprehensive financial plan for
the organization as a whole. • Standards for Performance
Typically, the master budget is Evaluation - budget set standards
for a 1-year period, corresponding that can control the use of a
to the fiscal year of the company. company's resources and motivate
 Continuous Budget - a moving 12 employees. A large difference
month budget. As a month expires between actual and planned results is
in the budget, an additional month
feedback that prompts managers to + Direct Materials in Desired Ending
take corrective actions. Inventory
- Direct Materials in Beginning
• Improved Communication and Inventory
Coordination - the budgets serve to
communicate and coordinate the plans D. Direct Labor Budget - shows the
of the organization to each employee. total direct labor hours and the
Accordingly, employees can be aware direct labor cost needed for the
of their particular role in achieving number of units in the production
those objectives. budget.

The Master Budget E. Overhead Budget - shows the

expected cost of all production costs
Operating budgets - describe the other than direct materials and direct
income-generating activities of a firm: labor.
sales, production, and finished goods
inventories. The ultimate outcome of F. Ending Finished Goods Inventory
the operating budget is a pro forma Budget - supplies information needed
or budgeted income statement. for the balance sheet and also serves
as an important input for the
A. Sales Budget - approved by the preparation of the cost of goods sold
budget committee and describes budget.
expected sales in units and dollars.
Since it is the basis for all of the G. Cost of Goods Sold Budget -
other operating budgets and most of reveals the expected cost of the
the financial budgets, it is important goods to be sold.
that it be as accurate as possible.
H. Selling and Administrative
B. Production Budget - tells how Expenses Budget - outlines planned
many units must be produced to meet expenditures for non-manufacturing
sales needs and to satisfy ending activities.
inventory requirements.
Formula: Units to be Produced = H. Budgeted Income Statement -
Expected Unit Sales + Units in With the completion of the budgeted
Desired Ending Inventory cost of goods sold schedule and the
(EL) - Units in Beginning Inventory budgeted selling and administrative
(BI) expenses budget, an estimate of the
operating income can now be prepared.
C. Direct Materials Purchases  Take note that operating income
Budget - tells the amount and cost of is not equivalent to the net
raw materials to be purchased in each income of a firm. To yield net
time period. income, interest expense and
taxes must be subtracted from
Formula: operating income.
Direct Materials Needed for Production
II. Financial Budget or Capital borrowings and repayments, are
Budget considered.
A. Cash budget - one of the most
important budgets in the master Formulas:
budget because cash flow is the Cash Available = Beginning Cash
lifeblood of an organization. The basic Balance + Expected Cash Receipts
structure of a cash budget includes
cash receipts, disbursements, any Ending Cash Balance = Cash Available -
excess or deficiency of cash, and Expected Cash Disbursements -
financing. At its simplest, a cash
budget is cash inflows minus cash
outflows.

Terminologies:
 Cash Available - consists of the
beginning cash balance and the
expected cash receipts
 Cash Disbursements - lists all
planned cash outlays for the
period. All expenses that do not
require a cash outlay are
excluded from the list (e.g.,
depreciation is never included in
the disbursements section)
 Cash Excess or Deficiency - The
cash excess or deficiency line is
compared to the minimum cash
balance required by company
policy.
 Minimum cash balance - the
lowest amount of cash on hand
that the firm finds acceptable.
 Borrowings and Repayments - If
there is a deficiency, this section
shows the necessary amount to be
borrowed. When excess cash is
available, this section shows
planned repayments, including
interest expense.
 Ending Cash Balance - the
planned amount of cash to be on
hand at the end of the period
after all receipts and
disbursements, as well as
 CHAPTER 2 CLASSIFICATION OF COST

NATURE OF COST As to Function

Definition of Cost and Other
Related Terms 1. Manufacturing Costs - all costs
incurred in the factory to convert raw
Cost - amount of resources materials into finished goods.
sacrificed (given up or used) in order a. Direct Materials - raw materials
to obtain some present or future cost that becomes integral part of
economic benefits which will promote the finished product and that can be
the profit-making ability of the conveniently and economically
enterprise. assigned to specific units
manufactured.
Cost Object - anything for which b. Direct Labor - all labor costs
cost is computed or assigned. (e.g. a related to time spent on products
product, a product line, a business that can be conveniently and
unit) economically assigned to specific units
manufactured.
Cost Drivers - any variable/factor c. Manufacturing Overhead - all other
that usually affects cost over a costs incurred in the factory aside
period of time. (e.g. production, from direct materials and direct labor:
number of hours
worked) 2. Non-Manufacturing Costs - all
costs which are not incurred in
Cost Pool - a grouping of similar cost transforming materials to finished
items. (e.g. factory overhead, goods.
advertising cost) a. Selling/Marketing/Distribution
Costs - all costs associated with
Activity - an event, action, marketing or selling a product.
transaction, task or unit of work with b. General and Administrative Costs -
a specified purpose. all executive, organizational and
clerical costs associated with the
Value-adding Activities - activities general management of the
that are necessary to produce a organization rather than with
product. manufacturing, marketing or selling.

Non-value-adding Activities - As to Timing of Recognition as

activities that do not make the Expense
products more valuable to the
customer. 1. Product Costs - costs that
"attach" or cling to the units that are
produced and are reported as assets
until the goods are sold.
2. Period Costs Opportunity Costs - income or
- costs that are recognized as benefit given up when one alternative
expense in the income statement on is selected over another.
the period in which the cost Sunk Costs - costs already incurred
was incurred. and cannot be changed by any decision
made now or to be made in the future
As to Traceability to Cost Object
As to Behavior
1. Direct Costs - costs that are 1. Variable Costs - costs which
related to a particular cost object change in total amount directly in
and can economically and effectively proportion to the change in the
be traced to the cost object. activity level but remain constant on a
per unit basis within the relevant
2. Indirect Costs - costs that are range and time period under
related to a cost object, but cannot consideration.
practically, economically, and 2. Fixed Costs - costs for which the
effectively be traced to that cost total amount remain constant but
object. changes inversely to the change in
activity level on a per unit basis within
As to Managerial Influence the relevant range and time period
1. Controllable Costs - costs that are under consideration.
subject to significant influence by a 3. Mixed Costs - costs which have
particular manager within the time both variable and fixed component.
period under consideration.
COST BEHAVIOR ANALYSIS
2. Noncontrollable Costs - costs over
which a given manager does not have Definition of Relevant Terms
significant influence.
Cost Behavior - refers to how cost
As to Time-Frame Perspective reacts to changes in the level of
1. Committed Costs - costs that are business activity.
inevitable as consequence of a Relevant Range - a range of activity
previous commitment. that reflects the company's normal
2. Discretionary Costs - costs for operating range.
which the size or the time of
incurrence is a matter of choice. Cost Behavior Assumptions:

For Decision-Making 1. Relevant Range Assumption

1. Relevant Costs - future costs Relevant range refers to the band of
that will differ under alternative activity within which the identified
courses of action. cost behavior patterns are valid. Any
2. Differential Costs - difference in level of activity outside this range
costs between any two alternative may have a different cost behavior
courses of action. pattern.
2. Time Period Assumption specifications, labor requirements,
The cost behavior patterns identified equipment usage, production
are true only over a specified period efficiency, power consumption,
of time. Beyond this, the cost may and so on.
show a different behavior.
Conference Method
3. Linearity Assumption  In a Conference Method, each
Within the relevant range, there is a representative of different
strict linear relationship between the departments is convened to
cost and cost driver. Costs may discuss the estimated costs that
therefore be shown graphically as the departments will incur during
straight lines. the year and to be sorted out as
to either depending on the
The Total Cost Function production (variable) or not
Y = a + bx (fixed).
where: Y = total cost
a = total fixed cost (Statistical) Scattergraph Method
b = variable cost per cost unit  Scattergraph Method is a
Note: x is units separation method where cost
y is cost and past activity levels are
plotted against a graph, where
Methods of Separating Mixed Cost costs are plotted on the vertical
axis (considered as dependent
Account Analysis Method variable), while the corresponding
 In Account Analysis, an account is activity levels are plotted on the
classified as either variable or horizontal axis (considered as
fixed based on the analyst's prior independent variable).
knowledge of how the cost in the
account behaves. The total fixed Steps involved in the Use of
cost is the sum of the costs for Scattergraph:
the accounts that have been 1. On a graph, plot actual costs (on
classified as fixed. The estimated vertical axis) during the period under
variable cost per unit is estimated study against the volume levels (on
by dividing the sum of the costs horizontal axis)
for the accounts that have been 2. The line of best fit is then drawn
classified as variable by the total by visual inspection of the plotted
activity. points, the line representing the
trend 3. The fixed cost is estimated
Engineering Approach by extending the left end of the line
 The Engineering Approach to the vertical axis.
involves a detailed analysis of shown by the majority of the points.
what cost behavior should be 3. The variable cost rate or slope of
based on the industrial engineer's the cost line is determined by dividing
evaluation of the production the difference between any two levels
methods to be used, the materials of activities by the difference in
costs corresponding to the same level
of activities.

High-Low Method
 High-Low Method is a simple cost Multiple Regression Analysis
separation method by analyzing  The Multiple Regression Analysis
the change in cost between the is a statistical method of
high and low activities. This separating fixed and variable cost
method is based on the rise-over- which is used when the dependent
run formula for the slope of a variable (cost) is caused by more
straight line. than one factor/independent
Formula: variable.

Summary of Strengths and

Weaknesses of the Methods
* Note: that as possible, outliers must
be removed first before computing Correlation Analysis
using high-low method. An outlier is a
cost or its related level of activity
that is out of line with other
observations.

Least Squares Regression Method

 The Least Squares Regression

Method uses mathematical
formulas to fit the regression line, Correlation - measure of the co-
unlike in scattergraph where the variation between the dependent and
line is fitted by visual inspection. independent variables.
This method involves the • If all plotted points fall on the
computation of a regression line regression line, there is a perfect
that minimizes the sum of correlation.
squared errors or deviations (the • If correlation between the cost and
vertical distance between the cost driver is high and the past
plotted points and the regression relationship between such variables
line). will continue in the future, then the
Formula: cost driver chosen will be useful for
predicting future levels of the costs
being analyzed.
Measures of Correlation

Coefficient of Correlation (r) -

measure of the extent of the linear
relationship between two variables.
Points of consideration:
• Range of values of r: from -1 to 1
• When r = 0, no correlation exists
• When r = 1, there is a positive
perfect relation. Positive correlation
denotes direct relationship between
two variables.
• When r = -1, there is a perfect
negative correlation. Negative
correlation denotes indirect
relationship between the variables.
Formula:

Coefficient of Determination (r') -

represents the percentage of the
total variation in the dependent
variable y
 that is explained or accounted for
by the regression equation. It is a
measure of how well the
regression line represents the
data. If the regression line
passes exactly through every
point on the scatter plot, it would
be able to explain all of the
variation.
Standard Error of Estimates - the
standard deviation about the
regression line. It serves as a
confidence interval or acceptable
range of tolerance, for use in
exercising control over the costs.