UNIT - 01

Strategic
Cost Management
 Cost Accounting
Journey
Cost Cost
Ascerta Manag
inment ement
 Accounting Journey – Cost Accounting
• Cost Ascertainment: Realization of
Companies – required an information
system for themselves – to ascertain the
costs of goods and services – Costing

• Cost Control and Cost Reduction:

Companies realized the need for exercising
maximum control over the costs – Cost
Effectiveness – Price Competitiveness –
Competitive Advantage – Cost Accounting
 Accounting Journey –
Management Accounting
1. Management Accounting: An information system to
assist the management in its decision making
process – Futurity of the Present Decisions
2. Entry of Foreign Companies, MNCs, LPG, etc: No
other alternative except managing the costs
successfully to obtain higher value to the customers
3. Hence, the need for the study of Cost
Management - Strategic Cost Management
 Cost Management - Definitions
1. Cost Management deals with the approaches, actions
and activities of management in short run and long
run planning and control decisions that increase the
value for customers and lower costs of products
and services.
2. Cost Management has a broader focus and it includes
the continuous control of costs. Cost Management
cannot be practiced in isolation.
3. Cost Management deals with the programmes that
regularly analyze the activities of the organization to
achieve lowest total cost and maximum total value
to the company and to customers.
 Cost Management – Few more Definitions
1. Cost Management is the process by which companies
control and plan the costs of doing business. Individual
projects should have customized cost management plans,
and companies as a whole also integrate cost
management into their overall business model.
2. Cost Management identifies, collects, measures,
classifies, and reports information that is useful to
managers for determining the cost of products, customers
and suppliers and other relevant objects and for planning,
controlling, making continuous improvements and
decision making.
3. Cost Management System is defined as a set of cost
management techniques that function together to support
the organizational goals and activities.
Cost Management – Few more Definitions
Do not
Focus on
Eliminate
undertake
Value-added
Non-Value-
any activity
ActivitiesAdded
-
which
Reduce their
Activities
weakens
Consumptio
firm's
n Cost Position
Manage
ment -
Dimensi
ons
Cost Management
Value
Analysis and Activity-
Value Based Costing
Engineering
Business Activity-
Process Re- Based
engineering Management

Learning Tools and Target

Curve Theory Techniques Costing
of Cost
Management
Theory of Life Cycle
Constraints Costing

Just-in-Time Total Quality

Policy Management
Bench- Balanced
marking Scorecard
 Strategic Cost Management - Definitions
1. It is defined as scrutinizing every process within the
organization, knocking down the departmental barriers, and
helping them to improve their processes with a clear plan of
action for addressing/controlling costs continuously and the
decisions that affect them.
2. R. Cooper (1998) defined strategic cost management as the
application of cost management techniques that simultaneously
improve the strategic position of a firm and reduce costs.
3. Similarly, Leslie G. Eldenburg and Susan K. Wolcott (2005)
have defined strategic cost management as referring to a
simultaneous focus on reducing costs and strengthening an
organization’s strategic position.
4. Don R. Hansen and Maryanne M. Mowen have also defined strategic
cost management as the use of cost data to develop and identify superior
strategies that will produce a sustainable competitive advantage .
 Key Elements
of Strategic Cost Management
There are three key elements of Strategic Cost Management
which are to be studied.

[Link] Chain Analysis – which recognizes the linked

set of value-creating activities all the way from
acquisition of basic raw material through end-use
product delivery,
[Link] Driver Analysis – which recognizes that cost
is caused or driven by many inter-related factors,
and
[Link] Positioning Analysis – which focuses on
cost as it relates to how it chooses to compete.
 Strategic Cost Management

Strategy • A plan of action that shapes the

direction of organization’s success

Operation •Setting priorities according to significance

and ensure that all the tasks are performed
s efficiently and effectively

Organizat •Company should check, time and again, whether

it is allocating its limited scarce resources

ion
optimally to generate more value for the entire
organization
 Principles
of Strategic Cost Management
[Link] what causes the cost and revenue
structure of the business.
[Link] the firm's activities and select those that
can be used to produce (or sustain) a competitive
advantage
[Link] and reduce inter-functional complexity
[Link] effectiveness and continuously improve
costs
[Link] strategy to manage costs
[Link] skills
[Link] employees in decisions
Accounting Information System
Accounting Information System
Financial accounting system
follows established rules and conventions to
provide information (financial statements) to
external users such as investors, government
agencies, and banks.
Cost management system
identifies, collects, measures, classifies, and
reports information that is useful to managers in
costing (determining what something costs),
planning, controlling, and decision making.
 Subsystems of the
Accounting Information System
 Cost Management System
A cost management system (CMS) is
a collection of tools and techniques
that identifies how management’s
decisions affect costs.

The primary purposes of a cost management

system are:
[Link] provide cost information for strategic
management decisions and operational
control and
[Link] measures of inventory value and cost
of goods sold for financial reporting.
 Cost Management System
Cost accounting system
assigns costs to individual products and
services and other cost objects as specified by
management; satisfies financial reporting and
management decision-making needs

Operational control system

provides accurate and timely feedback
concerning performance; concerned with what
activities should be performed and assessing
those activities.
Cost Leadership Strategy

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