Big Picture

Week 1&3:Unit Learning Outcomes (ULO): At the end of the unit, you are expected
to:
a. describe the concept and importance strategic cost management in the
business operation.
b. apply the concept and objective of activity based costing and management.
c. explain the concept of just in time and backflush accounting.

Big Picture in Focus: ULOa. Describe the concept and importance strategic cost
management in the business operation.

Metalanguage
Please proceed immediately to the “Essential Knowledge” part since this is first
lesson we have for this course.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first three
(3) weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to exclusively refer to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the university’s
library e.g. ebrary, search.proquest.com etc.

1. Cost management system (CMS) –is a formal methods to plan and control an
organization’s cost-generating activities that involves major challenges such as:
• achieving profitability in the short run
• maintaining a competitive position in the long run.

1.1. Strategic Cost Management - is the application of cost management

techniques that simultaneously improve the strategic position of the firm and it
reduces the costs. It can be applied in service manufacturing and not for profit
businesses.

1.2. Cost Management – is a method of reducing production costs and expenses

to produce more cost-effective products or services to customers. Moreover,
is a process that analyzes its production and streamlines its operations to keep
costs low and manage expenses within the future.

1.2.1. Objectives of Cost Management

The main objective of Cost Management is to reduce the costs spend by the
firm while strengthening its strategic position. Here are some of the objective of
cost management:
• Develop product costs
• Assess product/service life-cycle performance
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

• Improve understanding of processes and activities

• Control costs
• Measure performance
• Allow pursuit of organizational strategies

There are several ways on instituting cost management techniques in the business
operation to ensure the achievement of the firms goals and objectives. These cost
management systems won't only control costs but also intensify profit
consciousnessof the firm. This can help on the organization’s ability to serve its
customers because divisions will become increasingly more focused on operating
more efficiently.
Integrated Cost Management System

In achieving the long run objectives and the sustainability of the firmwill depend on
having the right inputs from right suppliers, delivering the right product mix to the right
consumers, and using the most suitable distribution channel. Indeed, these decision
require periodic information that is logically accurate. The information obtain from cost
management system should benefit all functional areas of the organization.

Thus, the system should integrate the area as shown in figure 1 and should “improve
the quality, content, relevance, and timing of cost information that managers use for
short-term and long-term decision making.”

2. Designing a Cost Management System

In designing a cost management system (CMS), managers and accountant must

consider the unique characteristic of their firm. Each firm want its cost management

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

system tailored to the current situation. However, some predominant factors are
important in designing a cost management system. These factors are depicted in
figure 2 and are described in this section.

The first thing to perform in designing the CMS is to conduct a thorough analysis of
the current condition of the firm. Its objectives is to gather relevant and sufficient
information that will enable the managers to adequately assess the current condition
and develop an appropriate solutions. This may involve examining various areas such
as:

• Organization form, structure and culture

To ensure the appropriateness of the cost management system the managers

will consider the appropriatenessof the organization’s form as it affects the
conduct of business operation specifically on the following areas:
▪ Cost of raising capital
▪ Cost of operating business
▪ Cost of litigating
▪ Statutory authority to make decisions

Once the form of business organization is selected, top managers are

responsible for crafting a structure that is best fitted to achieving the firm’s goals
and objectives. Organizational structure refers to how responsibility
andauthority for decision making are distributed in the firm. Top managers
make judgments about how to organize subunits and the extent to which
authority will be decentralized. The organizational structure will determine the
accountability for cost management and organizational control.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

An entity’s culture also plays an essential role in establishing its cost

management system. Organizational culture refers to the underlying set of
assumptions about the entity and the goals, processes, practices, and values
that are shared by its members.

• Organization mission and core competencies

Organization mission:
Provides a long- term
goal toward which the Organization mission provides a long- term goal toward which the organization
organization wishes to move. The business mission may includethe direction on how to deal
wishes to move with competition such as avoid competition, differentiation, cost leadership, or
confront competition.
business mission:
-direction on how to deal Clarification of mission can be served by identifying the organization’s core
with competition competencies, which are dimensions of operations that are key to an five critical competencies:
-such as avoid organization’s survival. Most organizations would consider timeliness, quality, 1. timeliness,
competition, 2. quality,
differentiation, cost customer ser- vice, efficiency and cost control, and responsiveness to change 3. customer ser- vice,
leadership, or as five critical competencies. Once managers have gained consensus on an 4. efficiency and cost control, and
confront competition entity’s core competencies, the cost management system can be designed to 5. responsiveness to change
(1) gather information related to measurement of those items and (2) generate
output about those competencies in forms that are useful to interested parties.

• Operations and competitive environment and strategies

The cost management implications of this shift in cost structure are significant.
This lead to various changes in the business environment that lead to
developing new business strategies that will complement the new trands in the
market.
✓ Fewer costs susceptible to short-run control
✓ Cost management efforts targeted toward
- the longer term
- capacity management
✓ Decreased flexibility when responding to a change in short-term
conditions

3. Elements of Cost Management System

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Let’s Check!
I. Questions:
1. Why does an effective cost management system necessarily have both
a short-term and long-term focus??
________________________________________________________
________________________________________________________
________________________________________________________

2. How does the choice of organizational form influence the design of a

firm’scost management system?
________________________________________________________
________________________________________________________
________________________________________________________

3. Which is most important in the design of a cost management system:

motivational elements, informational elements, or reporting elements?
Discuss the rationale for your answer.?
________________________________________________________
________________________________________________________
________________________________________________________

II. Multiple choice

Encircle the letter that correspond to your answer.
1. A cost management system should
a. identify and evaluate new activities.
b. determine whether the organization is effective and efficient.
c. identify the cost of consumed resources within the organization.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

d. all of the above.

2. A cost management system should provide information to

a. all functional areas of the organization.
b. only the accounting area of the organization.
c. only the production area of the organization.
d. organizational managers, but not to staff personnel.

3. Which of the following is not a primary goal of a cost management system?

a. use cost drivers to develop product costs
b. improve understanding of activities
c. develop organizational strategies
d. measure performance

4. A cost management system will provide the means to develop

a. the most accurate product or service costs.
b. a reasonably accurate product or service cost given cost-benefit analysis.
c. a product or service cost that does not include any non-value-added
overhead.
d. a costing system that traces all costs directly to individual products or
services.
5. Which of the following statements is true?
a. A good cost management system is a key consideration in determining an
organization's mission.
b. The organization's mission is a critical success factor in assessing how to
react to competition.
c. Knowledge of an organization's critical success factors help to clarify
organizational mission and develop a cost management system.
d. An organization must establish a position of cost leadership to compete in
a global business environment.

Let’s Analyze!

The following excerpt deals with Nordstrom’s cost-cutting efforts.

Nordstrom’s Inc., a retailing-industry laggard in profits, has been undergoing an effort
to cut costs. But can the department store chain do that while maintaining its famously
obsessive level of customer service?
“The biggest challenge is to keep the culture in the organization while mak- ing
the necessary changes for the new millennium,” says Jennifer Black, presi- dent
and analyst at Black & Co. in Portland, Oregon.
The good news is that Nordstrom’s lags so far behind the industry’s most efficient and
profitable department store operators that it can cut a lot of costs without gutting the
sales staff. “There is so much at this company that hasn’t been done,” Black says.
“They’ve only skimmed the surface.”

For instance, May Department Stores Co., based in St. Louis, boasts a 12.5%
operating margin, while Nordstrom’s was among retailing’s lowest, at 5.6% for 1998.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Nordstrom’s certainly has opportunity for improvement. Its sales per square foot of
store space, at $382 for 1998, are the envy of the industry. May’s sales per square
foot were just $201.

But inefficient operations have prevented Nordstrom’s from boosting its bot- tom line,
despite its higher sales. Becoming efficient requires Nordstrom’s fam- ily, which owns
a controlling 35 percent stake in the company, to embrace change at what has been
an insular operation. So far, the family is talking the talk. “Nothing is sacred,” says 36-
year-old William Nordstrom.

SOURCE: Calmetta Y. Coleman, “Nordstrom’s Tries to Cut Costs While Maintaining Service—
Retailer Consolidates Op- erations That Have Weighed on Its Bottom Line,” The Wall Street
Journal (April 8, 1999) p. B4. Permission conveyed through the Copyright Clearance Center.

Required:
I. What is Nordstrom’s strategy as implied by the discussion in the news article?
II. Given your answer to part (a), discuss how, as a paid consultant to Nordstrom’s,
you would go about developing a plan to recommend cost management
changes at the company.

In a Nutshell
The motivational elements of a cost management system are integral to the success
of cost management goals. It is understood that the stronger the individual incentive
to manage costs correctly, the greater is the likelihood that a given manager will act to
manage costs effectively.

Currently, many employers provide fringe benefits to their employees that may provide
a significant social benefit but that do not necessarily provide the strongest incentive
to effectively manage costs. A significant employee benefit of this type is employer-
provided health care. Discuss whether employers have an ethical responsibility to their
employees, and to society, to provide health coverage to their employees, given that
other forms of compensation that provide more powerful incentives could be offered
to employees instead of health coverage.

Q&A List
Do you have any question for clarification?
Questions/Issues Answers
1.
2.
3.
4.
5.

Keywords index
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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Cost management system Core competencies

Organizational form Organizational mission

Commented [d1]:
Self-help This part must be indicated after the lesson of a particular
ULO. Kindly do same to other ULOs.

You can also refer to the sources below to help you further understand the
lesson:
Cabrera, M. E. (2017). Management Accounting: Concepts and Application. Manila:
GIC Enterprises & Co., Inc.

De Leon, E.D., & De Leon N.D. (2016). Cost accounting. Manila: IC Enterprises &
Co., Inc.

Raiborn, C. A., & Kinney, M.R. (2014). Cost accounting (2014 second edition).
Philippines Hixes Press, Inc.