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1
The Role of Cost Management
Finding Opportunity & Leading
Change
Student Tutorial
The McGraw-Hill Companies, Inc., 2000
Irwin/McGraw-Hill
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The Past
Cost Accounting
Focused On
Recording
Data
Measured
And
Reported Costs

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The Future
Cost Management
Will Provide Information for Decisions
Related To:

? ?
?
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The Future
Cost Management
Will Provide Information for Decisions Related
To:
Improving
Improving
Products,
Products,
Services,
Services,
andUse
and Use of
Resources
Resources
of ?
?
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The Future
Cost Management
Will Provide Information for Decisions Related
To:

? ?
Supporting
Supporting
Strategies
Strategies

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The Future
Cost Management
Will Provide Information for Decisions Related
To:

? Systematically
Systematically
Reducing
Reducing
Costs
Costs

?
Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000
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Who Are Cost Managers?

They serve as
communicators of
company values to
employees.
They have diverse
educational
backgrounds.
They need broad Competence is a
knowledge of the given!
organization.
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Who Are Cost Managers?

CREATIVITY AWARENESS

They
exhibit
attributes
of
DILIGENCE HONESTY

OPENNESS

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Team Focus
A Few Years Ago At
PURSUIT.COM . . .
Management
responsibilities were
defined by their
FUNCTIONAL ROLES

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Team Focus
A Few Years Ago At Narrowly
Narrowly Defined
Defined
PURSUIT.COM . . . Jobs
Jobs That
ThatFocus
Focus On
On
Specific
SpecificActivities
Activities
Management
responsibilities were
defined by their
FUNCTIONAL ROLES

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Team Focus
Today at
PURSUIT.COM . . .
Decisions are made
by CROSS-
FUNCTIONAL
MANAGEMENT
TEAMS

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Team Focus
Today at
PURSUIT.COM . . .
Involves bringing
Decisions are made together individuals
by CROSS- from diverse functions
FUNCTIONAL and backgrounds to
MANAGEMENT generate innovative
TEAMS solutions to problems.

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Team Focus
Also,
PURSUIT.COM
Uses. . .

ENTREPRENEURIAL
DECISON MAKING

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Team Focus
Also,
PURSUIT.COM
Uses. . .
Focuses On
Finding New
ENTREPRENEURIAL Opportunities;
DECISON MAKING Informed of, But
Not Restricted
By The Past

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Simultaneous Decisions
Cost Management Information Is Used Daily To:
1.
1. Motivate
Motivateand
and evaluate
evaluateperformance
performanceof of individuals
individuals
and
andsubunits
subunits
Develop
Developincentive
incentiveprograms
programsandandmeasure
measure
improvement,
improvement,productivity,
productivity, quality,
quality,cycle
cycletime,
time, and
and
customer
customersatisfaction
satisfaction

2.
2. Communicate
Communicateplans
plansand
andresults
resultsto
toconstituents
constituents
Provide
Providefrequent
frequentand
and timely
timelycommunications
communicationsto tomatch
match
decision
decisionmaking
making

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Simultaneous Decisions
Cost Management Information Is Used Daily To

3.
3. Evaluate
Evaluatesuccess
successof ofdecision
decisionmaking
making and
andmaking
making
improvements
improvements
Explain
Explainand
andinterpret
interpretdifferences
differencesbetween
between
actual
actualoutcomes
outcomesand andplans
plans

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Efficient Companies . . .
. . . Provide
Products and
Services that
Customers
Want By . . .

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Efficient Companies . . .
. . . Provide
Products and . . . Using the
minimum amount of
Services that the organizations
Customers scarce resources . . .
Want By . . .

. . .While continuously
seeking to improve
value and costs.

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Choosing A Long Term Strategy

At Pursuit.Com
Identify The
Organizations
Source Of
Competitive
Advantage

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Choosing A Long Term Strategy

At Pursuit.Com
A competitive advantage is
Identify The anything the organization
Organizations can do better than its
competitors to provide
Source Of valued products and
Competitive services for which
Advantage customers will pay
higher prices.

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Choosing A Long Term Strategy

At Pursuit.Com
BENCHMARKING

Identify
Identify

Competitive
Competitive Threats
Threats
Advantage
Advantage

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Benchmarking
Comparing information about the organizations own
products, services, and operations and comparing
them to the best performers. This helps to identify an
organizations competitive advantage.
US East Accounting US East Cost Fortune 100 Best in
Procedure per Transaction Avg. Cost World
Accounts Receivable $15.20 $15.00 $4.60
General Ledger N/A N/A N/A
Accounts Payable $8.90 $7.00 $1.80
Payroll $7.30 $5.00 $1.72
Credit and Collections $12.00 $16.00 $5.60
Per Exhibit 1-2 in Text

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Benchmarking
Note that Canada East does as well as the Fortune 100
in its Accounts Receivable area, and actually is better
than the Fortune 100 in Credit & Collections. However,
they dont come close to the Best in World.
Canada East
Canada East Cost per Fortune 100 Best in
Accounting Procedure Transaction Avg. Cost World
Accounts Receivable $15.20 $15.00 $4.60
General Ledger N/A N/A N/A
Accounts Payable $8.90 $7.00 $1.80
Payroll $7.30 $5.00 $1.72
Credit and Collections $12.00 $16.00 $5.60
Per Exhibit 1-2 in Text

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Choosing Pursuit.Coms Scale

And Scope Of Operations
THE VALUE CHAIN
A set of linked operations or processes
that are involved in providing goods &
services to customers.
End by
providing
Begin by
goods &
obtaining
services that
resources.
the customers
want.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Choosing Pursuit.Coms Scale

And Scope Of Operations
THE VALUE CHAIN
A set of linked operations or processes
that are involved in providing goods &
services to customers.
End by
providing
Begin by
goods &
obtaining
Everything services that
resources. Everything in
in
between the customers
between is
isthe
the
Value want.
ValueChain
Chain

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What is a Process?
PROCESS
! Research and
A related set of tasks that development
transforms inputs into ! Design
identifiable outputs ! Supply
! Production
! Marketing
! Distribution
! Customer service
! Support services

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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The Value Chain

Define
Define scale
scale and
and scope
scopeof
of operation
operation

Physical
Physical Human
Human
resources
resources resources
resources

Support
Supportservices
services
Accounting
Accounting
Human
Humanresources
resources
Legal services
Legal services
Information
Informationsystems
systems
Telecommunications
Telecommunications

Value of
Research
and Distri- Customer products
Design Supply Production Marketing
Develop- bution service and
ment services

Primary processes

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Analyzing Alternative Value

Chain Configurations
This is a technique for identifying opportunities
for improvement and measuring the effects of
proposed improvement by comparing both
the cost and benefits of a proposal.

Cost
Cost benefit
benefit
analysis
analysis
QUANTITATIVE QUALITATIVE
INFORMATION INFORMATION

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Quantitative Information
Quantitative
Information can be
measured relatively
easily and is usually
expressed in dollars
or other quantities
relating to size,
frequency, etc.

Return
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Qualitative Information
Qualitative
Information is
descriptive and is
based on
characteristics or
perceptions, such as
relative desirability,
rather than
quantities.
Return
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Example: Should We Outsource

Accounts Receivable?
COSTS OF BENEFITS OF
OUTSOURCING OUTSOURCING
QUANTITATIVE QUANTITATIVE
" Contracted service " Personnel cost savings
# Contracted # Facilities cost savings
Administration $ Support cost savings
$ Total quantifiable costs

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Example: Should We Outsource

Accounts Receivable?
COSTS OF BENEFITS OF
OUTSOURCING OUTSOURCING
QUALITATIVE QUALITATIVE
" Loss of direct contact " Quality of service
with customers
# Adverse effects of
personnel reduction

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Opportunity Costs
This is the Largest Net Benefit Given Up By
Choosing One Action That Precludes Taking
Other Actions.

For
For example,
example, ifif aa student
student quits
quits aa $100
$100 per
per
week
week part-time
part-time job
job in
in order
order toto study
study more,
more,
the
the opportunity
opportunity costcost is
is the
the $100
$100 per
per week
week
given
given up.
up.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Study Question #1
Stallion Guns is considering cessation of its
consumer gun division due to rising litigation
cost, but this will put 400 people out of work.
Stallions President is concerned about the
morale of the other workers. Is this decision
quantitative or qualitative in nature?
A. Qualitative
B. Quantitative

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Study Question #1
Stallion Guns is considering cessation of its
consumer gun division due to rising litigation
cost, but this will put 400 people out of work.
Stallions President is concerned about the
morale of the other workers. Is this decision
quantitative or qualitative in nature?
A. Qualitative
B. Quantitative

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

 1-36

Study Question #1
Stallion Guns is considering cessation of its
consumer gun division due to rising litigation
cost, but this will put 400 people out of work.
Stallions President is concerned about the
morale of the other workers. Is this decision
quantitative or qualitative in nature?
A. Qualitative
B. Quantitative Nope! Gee, I
wonder which one
you will choose
next?

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Study Question #2
What is the style of management that puts
several people from different areas together
to generate innovative problem solutions?
A. Functional Role Management
B. Cross-Functional Team Decision Making
C. Entrepreneurial Decision Making

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Study Question #2
What is the style of management that puts
several people from different areas together
to generate innovative problem solutions?
A. Functional Role Management
B. Cross-Functional Team Decision Making
C. Entrepreneurial Decision Making

Uh, Uh. Try again.

Think about a group
from different areas.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Study Question #2
What is the style of management that puts
several people from different areas together
to generate innovative problem solutions?
A. Functional Role Management
B. Cross-Functional Team Decision Making
C. Entrepreneurial Decision Making

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

 1-40

Study Question #2
What is the style of management that puts
several people from different areas together
to generate innovative problem solutions?
A. Functional Role Management
B. Cross-Functional Team Decision Making
C. Entrepreneurial Decision Making

Try again. You are thinking

in the right direction, but
no cigar, yet.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Study Question #3
What
What isis the
the set
set of
of linked
linked operations
operations
that
that are
are involved
involved inin providing
providing goods
goods &&
services
services to to customers?
customers?
A. Production
A. Production Chain
Chain
B.
B. Value-Added
Value-Added Process
Process
C.
C. Value
Value Chain
Chain

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

 1-42

Study Question #3
What
What isis the
the set
set of
of linked
linked operations
operations
that
that are
are involved
involved inin providing
providing goods
goods &&
services
services to to customers?
customers?
A. Production
A. Production Chain
Chain Nope!
B.
B. Value-Added
Value-Added Process
Process Try
C.
C. Value
Value Chain
Chain again.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

 1-43

Study Question #3
What
What isis the
the set
set of
of linked
linked operations
operations
that
that are
are involved
involved inin providing
providing goods
goods &&
services
services to to customers?
customers?
A. Production
A. Production Chain
Chain Uh,Uh!
B.
B. Value-Added
Value-Added Process
Process Try
C.
C. Value
Value Chain
Chain again.

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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Study Question #3
What
What isis the
the set
set of
of linked
linked operations
operations
that
that are
are involved
involved inin providing
providing goods
goods &&
services
services to to customers?
customers?
A. Production
A. Production Chain
Chain
B.
B. Value-Added
Value-Added Process
Process
C.
C. Value
Value Chain
Chain

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000

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End of Chapter 1

Thats one
chapter down
. . . Only
about twenty
more to go!

Irwin/McGraw-Hill The McGraw-Hill Companies, Inc., 2000