Strategic Cost Managemsent

7/27/2019 Strategic Cost Managemsent

1/12

STRATEGIC COST MANAGEMENTBusiness Made Simple

Managers need to know

What do the customers want? What will they pay for it? What will it cost to provide it?

Costly mistakes can be avoided with this information.

Information is the Key to Success

To manage in the future, executives will need an information system integrated with

strategy, rather than individual tools that so far have been used largely to record the past

Information should answer the key questionWhat should I do?

- Not

What are the results of what Ive already done?

Information is the Key to Success

Must develop an integrated cost / quality / functionality measurement system

Traditional accounting information is not sufficientBackwards looking

Fails to measure important items

Much important information is not quantitative

Designed to meet reporting requirements, not management needs

Types of Information

Foundation information

Basic diagnosticsMay indicate something is wrong, but not why

Basic financial ratios

Benchmarked

Productivity information


2/12

Productivity of key resourcesConcern should be for total productivity

Benchmarked

Types of information

Competence information

Indicates where a business has a leadership advantage

Innovation is the most important core competence

To win, you have to be the best at somethingResource allocation information

How to best use the resources available

What if it fails to produce the intended results?

What if it is more successful than we imagined?

Effective Cost Management

Cost management is most effective at the development stage

About 85% of costs are committed to at the development stageIt is too late to effectively manage costs at the production stage

All links in the value chain must be managed

Suppliers you customersCost Commitment and Incurrence

Return on Management

Management effort is a vital resource

Return on management

Organizational productivity

Management time and attention invested

Stay focused on strategyDo not diffuse talent over too many opportunities



3/12

Channel energies into the correct projectsDetrimental capital budgeting

Pick important measuresShould reflect critical success factors

Avoid measures that are interesting but not useful

Can managers recall their key measures?Maximum of seven measures


Does everyone watch what the boss watches?Are there common goals within the organization?

Conflicting goals may be beneficialStretch goals with adequate resources

Stimulate creativity

Reduce paperwork and the processes that tie managers downDistinguish between useful and interesting information

STRATEGIC COST MANAGEMENT

Introduction

Imperative for business concerns engaged in Services or production of goods to reduce costs and

enhance quality of goods and services to provide better INTRINSIC VALUE to the customer.

Entities providing better value & enhancing Customer satisfaction can hope to increase market share


Introduction

Today emphasis of industry is on reduction in COSTS while improving internal efficiencies & product

quality. Strategies should be adopted to indulge in Cost reduction and maintain/ increase level of

excellence in production and services.

Quality and Costs are not INVERSELY RELATED. Strategy is to MINIMIZE COST for GIVEN QUALITY or

OPTIMIZE QUALITY for GIVEN COSTS.


Introduction


4/12

SCM has gained because of spiraling costs of manufacturing, marketing, selling and other related

functions. It is difficult for industry to survive and thrive unless costs are CORRECTLY ACCOUNTED

FOR, CONTROLLED AND REDUCED so as to remain solvent.


Strategic Cost management consists of :-

Strategic Analysis of the business is to identify unprofitable products, customers, marketing and

distribution channels etc.

An evaluation of the business from a value chain perspective

It is optimisation of business processes and activities instead of functions and evaluation of decisions

It is implementation of continuous cost improvement programmes instead of comparisons with

standard costing approaches

The use of performance measurement systems that are early indicators of Corporate success in

critical areas like time, quality and cost.


Improvements in activities that add value while value-destroying activities are identified and

eliminated

Elimination of constraints

Helps in implementation of Productivity Management programmes.

Value Engineering and Value Analysis are used as important tools to restructure costs.

Helps in thorough understanding of Costs behavior and Cost drivers


STRATEGIC DECISION REGARDING MANAGEMENT OF COST

HOW MUCH COST TO ALLOCATE TO EACH ACTIVITY

NO FIRM DECISIONS GIVEN/TAKEN

A SUBJECTIVE EVALUATION OF BUSINESS CLIMATE AND ALLOCATION OF COSTS ACCORDINGLY

WHY STRATEGIC COST MANAGEMENT ?

THE PREVAILING COST ACCOUNTING SYSTEM AND PRACTICES DO NOT GIVE TIMELY AND ADEQUATE

INSIGHT INTO THE RAPIDLY EVOLVING BUSINESS CLIMATE FOR EFFECTIVE DECISION MAKING.



5/12

CURRENT ACCOUNTING PRACTICES, PRIMARILY THE BALANCE SHEET AND PROFIT AND LOSS

STATEMENT TELL WHAT HAS HAPPENED IN THE COMPANY IN THE PAST (AND EVEN THAT CAN BE

SUCCESSFULLY PADDED UP TO REFLECT THE DESIRED RESULT) BUT GIVE NO CLUE ABOUT WHY IT

HAPPENED. MORE IMPORTANTLY, IT GIVES NO CLUE AS TO WHAT CAN BE EXPECTED IN THE NEAR

FUTURE.


FINAL COST OF THE PRODUCT INCLUDES RAW MATERIAL COSTS, PRODUCTION COSTS, ADMIN

OVERHEADS, DEVELOPMENT COSTS, ADVERTISING /MARKETING COSTS, COST OF CAPITAL, ETC.

HOW MUCH COST TO INCUR ON WHICH HEAD LARGELY DEPENDS ON THE NATURE OF PRODUCT,

MARKET CONDITIONS, COMPETITION, ETC.


EG COST OF BOOST HOW DO YOU ALLOCATE PROFITS TO MAREKETING TEAM EFFORTS OR TO

SACHIN TENDULKAR OR RECEIVABLES OR PAYMENT CYCLE ENSURED BY SALES TEAM



ANY PRODUCT TO SURVIVE IN THE MARKET MUST HAVE ONE OF THE FOLLOWING

ATTRIBUTES :-

- COST (TOPAZ VS GILLETE BLADES)

- FUNCTIONALITY (GILLETE VS TOPAZ BLADE)

- QUALITY (ROLEX VS OTHER WATCH BRANDS)

- VALUE (PERCIEVED VALUE OF A LIFESTYLE PRODUCT VS COMMODITY PRODUCT)

CLASSIFICATION OF COSTS

Costs may be classified as follows :-

(a) By Nature Material. Labour, Expenses

(b) In relation to Cost Centre Direct material, Direct labour, Indirect material, Indirect labour


6/12

(c) By Function/Activities Production, Admin, Selling, Distribution Cost

(d) By Time Historical Cost, Pre-determined Cost, Standard Cost

CLASSIFICATION OF COSTS

(e) For Management Decision Making Marginal Cost, Opportunity Cost, Replacement Cost

(f) By Nature of Production Process Batch Cost, Process Cost, Operating Cost

(g) By Behaviour Fixed, Variable and

Semi-Variable Cost

TARGET COSTING

It is a system where-in the cost of the final product is fixed before putting the product on the

drawing board. Thereafter, the raw material, production processes, functionality (Features), quality,

etc are selected to meet the cost objective. This system is relevant for products made for extremely

price sensitive segment. It is also used as a market penetration strategy by the new entrants in a

matured products market.

TARGET COSTING

As companies begin to realize that the majority of a product's costs are committed based

on decisions made during the development of a product, the focus shifts to actions that can be

taken during the product development phase.

TARGET COSTING

Until recently, engineers have focused on satisfying a customer's requirements. Most

development personnel have viewed a product's cost as a dependent variable that is the result ofthe decisions made about a products functions, features and performance capabilities. Because a

product's costs are often not assessed until later in the development cycle, it is common for

product costs to be higher than desired

TARGET COSTING


7/12

TARGET COSTING

TC is based on three premises: -

- Orienting products to customer affordability or market-driven pricing- Treating product cost as an independent variable during the definition of a product's

requirements

- Proactively working to achieve target cost during product and process development.TARGET COSTING


8/12

TARGET COSTING

Target costing builds upon a design-to-cost (DTC) approach with the focus on market-

driven target prices as a basis for establishing target costs. Following steps required to required to

install a comprehensive target costing approach within an organization :-

a. Re-orient culture and attitudes

b. Establish a market-driven target price

c. Establish a market-driven target price

TARGET COSTING

d. Balance target cost with requirements

e. Establish a target costing process and a team-based organization

f. Brainstorm and analyze alternatives

g. Establish product cost models to support decision-making

h. Use tools to reduce costs

i. Reduce indirect cost application


9/12

j. Measure results and maintain management focus

PRODUCTIVITY CONCEPTS

Productivity is defined as ratio between Output of Work and Input of Work used in process of

creating wealth.

Productivity = Output

---------------

Input


Productivity is simply the ratio between amount produced & amount used in course of production

These resources can be :-

(a) Land (Area)

(b) Material (Metric Ton)

(c) Plant & Machinery (Machine Hours)

(d) People (Man Hour)

(e) Capital (Rupees)


Productivity is different from Performance

Productivity = Output = Performance Achieved

Input Resources Consumed

Performance = Actual Work done

Ideal or Standard expected work


Partial Productivity = Ratio of output to one class

of input. At one time it considers only one input

and ignores all other inputs. It tells us utilization

of one resource.

Labour Productivity is measured using utilization of


10/12

Labour hours whereas Capital Productivity is measured in Rupees.


Total Productivity Factor = Ratio of output to two input factors labour and capital

Eg When a firm installs a new machine, productivity of labour goes up whereas capital

productivity decreases

Eg Production worth Rs 1000 was manufactured

And it consumed Rs 200 worth labour hours and

Rs 550 worth capital so

TPF = 1000 = 1 .33

200 + 550


Total Productivity Model developed in 1979

by David J Sumanth. This considers 05 inputs

like Human, Material, Capital, Energy and an

item called Other Expenses. It is applied in

Service and Manufacturing organisations.

Total Productivity = Total Tangible Output

Total Tangible Input


Hard and Soft Factors of an Organization. Hard Factors such as costs, quality and availability of

resources and raw materials are part of traditional organisations evaluation and are reasonably

quantifiable. Soft factors include issues like political and social issues( anti-growth movements,

environmental restrictions, labour laws) and factors like Job satisfaction, Incentives, Recognition,

Job Morale, Safety etc


Hard and Soft Factors of an Organization. Hard Factors in Productivity are concerned with physical

comforts and other quantifiable elements desired by employees like :-

(a) Plant conditions


11/12

(b) Ergonomics

(c) Transportation and Canteen Facilities

(d) elimination of hazard


Hard and Soft Factors of an Organization. Improving Soft Factors will lead to higher morale and

improved Productivity in a firm. A manager can do the following :-

(a) involve workers in development of new methods of working

(b) Asking for suggestions from workers

(c) Understanding employees through Maslows Hierarchy of Needs

TOTAL QUALITY MANAGEMENT

Total Quality Management (TQM) is defined as an integrated

approach in delighting the Customer (both internal and external) by meeting their

expectations on continuous basis, through everyone involved with the organisation, working on

continuous improvement alongwith proper problem solving methodology.

The term Customer refers to all those whom we supply products, service etc. Apart from ultimate

users, retailers, stockists etc are external customers wheras departments within the company areinternal customers to each other.

Eg Production department is customer to Purchase department and supplier to Sales and

Dispatch department.


Quality is defined as :-

1. Quality is fitness for use Lays emphasis on Customer. Customers may put product or

service to multiple use which manufacturer may not have intended.

2. Quality is establishing Standards and Specifications Laying down standards and

specifications for products and services offered is very important.

3. Quality is conformance to standards Standards laid down have to be conformed to


Customer satisfaction is unique. Conformance to 99.9% standards maintained in the product

may not rise customer satisfaction to 99.9% proportionately. Only when Conformance reaches to


12/12

100%, customer satisfaction jumps to 100%. Customer DELIGHT means gaining Customer

satisfaction to 100%.

TQM means Meeting the agreed requirements of the Customer at the LOWEST COST, FIRST

TIME AND EVERY TIME. First time and every time means without rework or rejection. TQM is not

a ONE TIME ACTIVITY but has to be pursued by all the employees of the organisation continuously.


A customer needs three things Quality, Price and Delivery (QCD). There need not be a tradeoff

between Quality and Cost. Costs go up when one blindly raises the standards and specifications of

the products without analyzing whether it is adding proportional value to the product in eyes of

the Customer. Eg Gold car.

QFD Matrix helps in designing the product that is oriented towards customer requirements.


QUALITY FUNCTION DEPLOYMENT. It is a technique to assure that the product is designed and

manufactured to exceed the customer expectations. It utilizes customer requirements,

engineering capabilities and competitive analysis from customer and technical view point. It

integrates product requirement with product development. It shows interrelation between

engineering requirements and market tests. Helps tell design team on all issues it should focus on.


QUALITY FUNCTION DEPLOYMENT. All the information is summarized in a matrix called House of

Quality. It consists of :-

(a) WHAT Specifies voice of customer in terms of requirements to be satisfied. These are

termed as Primary, Secondary and Tertiary and ranked as per relative importance.

(b) HOW Answers as to HOW customer requirements will be fulfilled.

(c) RELATIONSHIP MATRIX - Joins WHAT and HOW rooms. It gives relationship between

engineering design and voice of the customer

Strategic Cost Managemsent

Documents

Transcript of Strategic Cost Managemsent