Chapter 01 - Cost Management and Strategy
CHAPTER 1: COST MANAGEMENT AND STRATEGY
QUESTIONS
1-1 Firms Using Cost Management. Here are some examples; there are many
possible answers.
1. Walmart: to keep costs low by streamlining restocking and sales
2. Hewlett-Packard or Dell Computer: to keep costs low by improving
manufacturing performance and by using target costing and other management
techniques
3. Citicorp: to keep costs low by using activity analysis to identify key operations
and to find those that add little or no value
4. A municipality or public agency: to keep costs low in order to provide the best
possible service given available funds
5. Procter & Gamble or any similar large, diversified manufacturer: to assess the
profitability of its different products
6. A small machine shop: to determine whether it should repair or replace a
machine
7. A dance studio: to analyze and choose between different compensation plans
for its teachers; and to determine whether it should open a new studio
1-2 Firms that will likely use somewhat different types of cost management
information because of their unique competitive strategies include: :
1. Microsoft: here the focus is on forming strategic alliances, innovation and
competition; cost management is more important for other firms in the
information technology business, such as Hewlett-Packard, and Dell Computer
that compete in part on innovation but also on price
2. Versace: a high fashion firm competes on innovation and product leadership;
the development and communication of attractive new ideas is the key to
competitive success rather than cost management
3. Other firms in the fashion industry, such as Chanel, Coach, Gucci, and
Armani: for reasons similar to Versace
4. Major league sports: dependent primarily on the development of fan support,
good coaching and player acquisition
1-3 Cost management information is a broad concept. It is the information the
manager needs to implement the strategy of the firm or not-for-profit organization
-- both financial information about costs and revenues and relevant non-financial
information about productivity, quality, and other key success factors for the firm.
Typically, cost management is the responsibility of the Chief Financial Officer
(CFO) who often delegates much of this responsibility to the Controller.
1-4 In the private sector, the Financial Accounting Standards Board, an independent
organization, and the American Institute of Certified Public Accountants (AICPA)
supply guidance regarding financial reporting practices. The Sarbanes-Oxley Act
1-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
,Chapter 01 - Cost Management and Strategy
of 2002 also created the Public Company Accounting Oversight Board which
reports to the SEC to oversee auditing standards and practices. The AICPA also
provides educational opportunities. In the public sector, the Cost Accounting
Standards Board (CASB) sets cost accounting standards for those doing
business with the federal government, especially defense contractors. The
Institute of Management Accountants (IMA) is the principal organization devoted
primarily to management accountants in the United States. The IMA has
magazines, newsletters, research reports, management accounting practice
reports, professional development seminars, and monthly technical meetings that
serve the broad purpose of providing continuing educational opportunities for
management accountants. In Canada, the Society of Management Accountants
provides a similar role. Similar organizations are present in most other countries
around the world. The Financial Executives International (FEI) organization
provides services much like the IMA for financial managers, including controllers
and treasurers. Because of the nature of its membership, the FEI tends to focus
on management and operational control issues, and less on the product costing,
planning, and decision-making functions.
1-5 The Certificate in Management Accounting (CMA) is the most relevant
certification program for management accountants since it focuses on the types
of skills that are most in demand for management. Other relevant certificates
include the Certified Public Accountant (CPA) and the Chartered Global
Management Accountant (CGMA).
1-6 The four functions of management are:
1. Strategic Management -- information is needed by management to make
sound strategic decisions regarding choice of products, manufacturing methods,
marketing techniques and channels, and other long term issues.
2. Planning and Decision Making -- information is needed to support recurring
decisions regarding replacement of equipment, managing cash flow, budgeting
raw materials purchases, scheduling production, and pricing.
3. Management and Operational Control -- information is needed to provide a fair
and effective basis for identifying inefficient operations, and to reward and
support the most effective managers.
4. Preparation of Financial Statements -- information is needed to provide
accurate accounting for inventory and other assets, in compliance with reporting
requirements, for the preparation of financial reports and for use in the three
other management functions.
1-7 Strategic management is the most important management function since it most
directly relates to the overall success of the firm. In strategic management, top
managers determine how the firm is to compete and what specific goals it must
set and achieve to be successful. The determination of these strategies and
goals drives all other activities in the firm.
1-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
,Chapter 01 - Cost Management and Strategy
1-8 Merchandising firms purchase goods for resale. Merchandisers that sell to other
merchandisers are called wholesalers, while those selling directly to consumers
are called retailers. Examples of merchandising firms include the large retailers,
such as Sears, Walmart, and Target. Merchandisers use cost management
information to control stocking, distribution, and customer service.
Manufacturing firms use raw materials, labor, and manufacturing facilities and
equipment to produce products. These products are sold to merchandising firms
or to other manufacturers as raw materials for additional products. Examples of
manufacturers include General Motors, IBM, and Samsung. These firms use
cost management information to control production costs.
Service firms provide a service to customers that offers convenience, freedom,
safety, or comfort. Common services include transportation, financial services
(banking, insurance, accounting), personal services (physical training, hair
styling), medical services, and legal services. These firms use cost management
information to identify profitable services and to control costs incurred in
providing services.
Governmental and not-for-profit organizations provide services, much like the
firms in service industries. However, the service provided by these organizations
is such that there is often no direct relationship between the amount paid and the
services provided. Instead, both the nature of the services to be provided and
the customers who receive the services are determined by government or
philanthropic organizations. These organizations use cost management
information to determine and control the costs of the services they provide.
1-9 The answers here can vary from large manufacturers such as Boeing to small
retail stores. If the class has trouble getting started, the instructor might use
some of the firms mentioned in question 1-1 or from the instructor’s own
experience and understanding. Again, if the students have a hard time, the
instructor might ask them to think of firms close to their homes, or to think of firms
in a given industry, etc.
1-10 For some firms, a popular web site can be an important differentiating factor.
Firms such as Amazon.com, Etrade, eBay and many retailers have achieved
powerful competitive advantage through their web sites, offering fast delivery and
enhanced customer service. Other firms such as Walmart use the Internet to
achieve cost advantage by using Internet based systems for transactions
processing, production scheduling, purchasing, employee recruiting, etc.
1-11 The management accountant is a full business partner with management in
Stage 4 of cost system development. At this stage, the highest level, the
management accountant has an integral role with management to implement the
organization’s strategy.
1-12 The factors in the contemporary business environment that affect business firms
and cost management are:
1-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
, Chapter 01 - Cost Management and Strategy
1. Increased global competition, which means an increasingly competitive
environment for all firms and thus the need for cost management information
to become more competitive; the need for competitive non-financial
information in addition to financial information in cost management reports;
2. Lean manufacturing, in which companies reduce costs by using flexible
manufacturing methods, statistical quality control, and many of the techniques
developed by Japanese manufacturers; lean manufacturers adopt lean
accounting to measure and sustain the improvements made from lean
manufacturing.
3. Use of information technology; cost management information is used to
facilitate the introduction of new manufacturing and product technologies
(e.g., determining which technologies will most contribute to profitability), to
develop new ways to manage customer and supplier relationships using the
Internet; and to use enterprise resource management to develop and report
cost management information in a lower cost, more comprehensive, and
timely way;
4. A focus on the customer, which requires cost management reports to include
critical information about customer satisfaction, changing customer
preferences, etc.;
5. Changes in management organizations which require new reporting practices
to recognize the new focus on cross-functional teams in which employees
from all areas of the firm work together to make the firm successful;
6. Changes in the social, political, and cultural environment of business, which
requires an expansion of cost management reporting to include critical
success factors related to the expectations of those beyond the ownership of
the firm including employees, local government officials, and community
leaders.
1-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
CHAPTER 1: COST MANAGEMENT AND STRATEGY
QUESTIONS
1-1 Firms Using Cost Management. Here are some examples; there are many
possible answers.
1. Walmart: to keep costs low by streamlining restocking and sales
2. Hewlett-Packard or Dell Computer: to keep costs low by improving
manufacturing performance and by using target costing and other management
techniques
3. Citicorp: to keep costs low by using activity analysis to identify key operations
and to find those that add little or no value
4. A municipality or public agency: to keep costs low in order to provide the best
possible service given available funds
5. Procter & Gamble or any similar large, diversified manufacturer: to assess the
profitability of its different products
6. A small machine shop: to determine whether it should repair or replace a
machine
7. A dance studio: to analyze and choose between different compensation plans
for its teachers; and to determine whether it should open a new studio
1-2 Firms that will likely use somewhat different types of cost management
information because of their unique competitive strategies include: :
1. Microsoft: here the focus is on forming strategic alliances, innovation and
competition; cost management is more important for other firms in the
information technology business, such as Hewlett-Packard, and Dell Computer
that compete in part on innovation but also on price
2. Versace: a high fashion firm competes on innovation and product leadership;
the development and communication of attractive new ideas is the key to
competitive success rather than cost management
3. Other firms in the fashion industry, such as Chanel, Coach, Gucci, and
Armani: for reasons similar to Versace
4. Major league sports: dependent primarily on the development of fan support,
good coaching and player acquisition
1-3 Cost management information is a broad concept. It is the information the
manager needs to implement the strategy of the firm or not-for-profit organization
-- both financial information about costs and revenues and relevant non-financial
information about productivity, quality, and other key success factors for the firm.
Typically, cost management is the responsibility of the Chief Financial Officer
(CFO) who often delegates much of this responsibility to the Controller.
1-4 In the private sector, the Financial Accounting Standards Board, an independent
organization, and the American Institute of Certified Public Accountants (AICPA)
supply guidance regarding financial reporting practices. The Sarbanes-Oxley Act
1-1
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
,Chapter 01 - Cost Management and Strategy
of 2002 also created the Public Company Accounting Oversight Board which
reports to the SEC to oversee auditing standards and practices. The AICPA also
provides educational opportunities. In the public sector, the Cost Accounting
Standards Board (CASB) sets cost accounting standards for those doing
business with the federal government, especially defense contractors. The
Institute of Management Accountants (IMA) is the principal organization devoted
primarily to management accountants in the United States. The IMA has
magazines, newsletters, research reports, management accounting practice
reports, professional development seminars, and monthly technical meetings that
serve the broad purpose of providing continuing educational opportunities for
management accountants. In Canada, the Society of Management Accountants
provides a similar role. Similar organizations are present in most other countries
around the world. The Financial Executives International (FEI) organization
provides services much like the IMA for financial managers, including controllers
and treasurers. Because of the nature of its membership, the FEI tends to focus
on management and operational control issues, and less on the product costing,
planning, and decision-making functions.
1-5 The Certificate in Management Accounting (CMA) is the most relevant
certification program for management accountants since it focuses on the types
of skills that are most in demand for management. Other relevant certificates
include the Certified Public Accountant (CPA) and the Chartered Global
Management Accountant (CGMA).
1-6 The four functions of management are:
1. Strategic Management -- information is needed by management to make
sound strategic decisions regarding choice of products, manufacturing methods,
marketing techniques and channels, and other long term issues.
2. Planning and Decision Making -- information is needed to support recurring
decisions regarding replacement of equipment, managing cash flow, budgeting
raw materials purchases, scheduling production, and pricing.
3. Management and Operational Control -- information is needed to provide a fair
and effective basis for identifying inefficient operations, and to reward and
support the most effective managers.
4. Preparation of Financial Statements -- information is needed to provide
accurate accounting for inventory and other assets, in compliance with reporting
requirements, for the preparation of financial reports and for use in the three
other management functions.
1-7 Strategic management is the most important management function since it most
directly relates to the overall success of the firm. In strategic management, top
managers determine how the firm is to compete and what specific goals it must
set and achieve to be successful. The determination of these strategies and
goals drives all other activities in the firm.
1-2
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
,Chapter 01 - Cost Management and Strategy
1-8 Merchandising firms purchase goods for resale. Merchandisers that sell to other
merchandisers are called wholesalers, while those selling directly to consumers
are called retailers. Examples of merchandising firms include the large retailers,
such as Sears, Walmart, and Target. Merchandisers use cost management
information to control stocking, distribution, and customer service.
Manufacturing firms use raw materials, labor, and manufacturing facilities and
equipment to produce products. These products are sold to merchandising firms
or to other manufacturers as raw materials for additional products. Examples of
manufacturers include General Motors, IBM, and Samsung. These firms use
cost management information to control production costs.
Service firms provide a service to customers that offers convenience, freedom,
safety, or comfort. Common services include transportation, financial services
(banking, insurance, accounting), personal services (physical training, hair
styling), medical services, and legal services. These firms use cost management
information to identify profitable services and to control costs incurred in
providing services.
Governmental and not-for-profit organizations provide services, much like the
firms in service industries. However, the service provided by these organizations
is such that there is often no direct relationship between the amount paid and the
services provided. Instead, both the nature of the services to be provided and
the customers who receive the services are determined by government or
philanthropic organizations. These organizations use cost management
information to determine and control the costs of the services they provide.
1-9 The answers here can vary from large manufacturers such as Boeing to small
retail stores. If the class has trouble getting started, the instructor might use
some of the firms mentioned in question 1-1 or from the instructor’s own
experience and understanding. Again, if the students have a hard time, the
instructor might ask them to think of firms close to their homes, or to think of firms
in a given industry, etc.
1-10 For some firms, a popular web site can be an important differentiating factor.
Firms such as Amazon.com, Etrade, eBay and many retailers have achieved
powerful competitive advantage through their web sites, offering fast delivery and
enhanced customer service. Other firms such as Walmart use the Internet to
achieve cost advantage by using Internet based systems for transactions
processing, production scheduling, purchasing, employee recruiting, etc.
1-11 The management accountant is a full business partner with management in
Stage 4 of cost system development. At this stage, the highest level, the
management accountant has an integral role with management to implement the
organization’s strategy.
1-12 The factors in the contemporary business environment that affect business firms
and cost management are:
1-3
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
, Chapter 01 - Cost Management and Strategy
1. Increased global competition, which means an increasingly competitive
environment for all firms and thus the need for cost management information
to become more competitive; the need for competitive non-financial
information in addition to financial information in cost management reports;
2. Lean manufacturing, in which companies reduce costs by using flexible
manufacturing methods, statistical quality control, and many of the techniques
developed by Japanese manufacturers; lean manufacturers adopt lean
accounting to measure and sustain the improvements made from lean
manufacturing.
3. Use of information technology; cost management information is used to
facilitate the introduction of new manufacturing and product technologies
(e.g., determining which technologies will most contribute to profitability), to
develop new ways to manage customer and supplier relationships using the
Internet; and to use enterprise resource management to develop and report
cost management information in a lower cost, more comprehensive, and
timely way;
4. A focus on the customer, which requires cost management reports to include
critical information about customer satisfaction, changing customer
preferences, etc.;
5. Changes in management organizations which require new reporting practices
to recognize the new focus on cross-functional teams in which employees
from all areas of the firm work together to make the firm successful;
6. Changes in the social, political, and cultural environment of business, which
requires an expansion of cost management reporting to include critical
success factors related to the expectations of those beyond the ownership of
the firm including employees, local government officials, and community
leaders.
1-4
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
