INTRODUCTION TO SCM:

Definitions

Strategy

- set of policies, procedures and approaches to business that produce a long-term success.

Strategic Management

- is the ongoing planning, monitoring, analysis and assessment of all necessities an organization
needs to meet its goals and objectives.

Strategic Cost Management

- It is the process of identifying, accumulating, measuring, analyzing, interpreting, and reporting

cost information useful to both internal and external groups concerned with the way in which an
organization uses its resources to meet its objectives

Cost Management Information

- includes financial and non-financial information about of the organization that managers
needed to effectively manage the firm.

Cost Management

- practice of accounting in which accountant develops and uses cost management information.

Uses of Cost Management Information

1) Strategic Management

– making decisions as to the choice of products, manufacturing methods, marketing

techniques and channels and other long-term issues.

2) Planning and Decisions Making

– for recurring decisions (ex, repair or replace). This involves budgeting and profit

planning.

3) Management and Operational Control

– by providing a fair and effective basis for identifying inefficient operations and to

reward and motivate the most effective managers.

4) Reportorial and Compliance to Legal Requirements

– by providing the information necessary in financial statements preparation.

“Cost Management Role and its Environment”

1) Managerial vs. Financial Accounting

2) Management Accountants

3) Roles of Management Accountants

4) Ethical Standards for Management Accountants

Managerial versus Financial Accounting

Management Accountants

- Management accountants have titles as controller, treasure, budget analyst, cost analyst, and
accountant, among others. Their function in the organization is usually “staff”, with
responsibility for providing line managers and also other staff managers, with specialized
services.

Role of Management Accountants

• Tailors the application of the process to the organization to achieve the organization’s objectives
effectively

• Provides variety of reports to managers who direct and control the operations.

• Scorekeeping or data accumulation – for evaluation of organizational performance and position.

• Interpreting and Reporting of Information – to assist managers to focus on operating problems,

opportunities as well as inefficiencies

• Problem Solving – associated with non-recurring decisions.

Ethical Standards for Management Accountants

- Concerns have been raised regarding ethical behavior in business and public life. Allegations and
scandals of unethical conduct have been directed towards managers in virtually segment of
society, including government, business, charitable organizations, and even religion.

First part of the Standards:

- Four Broad Areas of Ethical Responsibility of Management Accountant

- 1. To maintain high level of professional competence,

- 2. To treat sensitive matters with confidentiality

- 3. To maintain personal integrity

- 4. To be objective in all disclosing.

Second part of the Standards

- Specific guidance concerning what should be done if an individual finds evidence of ethical
misconduct within an organization.

- As the former president of CMA emphasizes the importance of ethics in business.

- “Employees like to work for a company that they can trust. Customers like to deal with an
ethically reliable business. Suppliers like to sell to firms which they can have a real partnership.
Communities are more likely to cooperate with organizations that deal honestly and fairly with
them. If the business community is to function effectively, all of the players need to act
ethically.”

Typical Ethical Challenges

Scenario 1

- Employees could not be trusted with confidential information.

Scenario 2

- Employees accept bribes from suppliers

Scenario 3

- The Company President routinely lied their annual reports to shareholders and grossly distorted
financial statements

“Contemporary Business Environment”

 1) Changes in Business Environment

2) Comparison of Prior and Contemporary Business Environments

Business environment in recent years has been characterized by increasing competition and relentless
drive for improvement.

Changes in Business Environment

1. Increase in global competition

2. Advances in Manufacturing Technologies – deliver the product faster than competition (speed-
to-market)

3. Advances in Information Technologies, The Internet and E-Commerce – the most fundamental
of all business changes in the recent years

4. A Greater focus on Customers – shift to low-cost production of large quantities to quality,

service, faster delivery and the ability to respond to customer’s desire for specific feature.

5. Changes in Social, Political and Cultural Environment of Business – more ethically, racially
diverse workforce.

6. New Forms of Management Organization – changed in response to the changes in marketing

and manufacturing.

Comparison of Prior and Contemporary Business Environments

MODULE 2
 STRATEGIC COST MANAGEMENT CONCEPTS AND TECHNIQUES

Planning & Controlling

Planning and controlling are functions which are interrelated.

- Planning sets the goals for the organization and controlling ensures their accomplishment.

* The relationship between planning and control can be explained as follows,

1) Planning Originates Controlling

- In planning the objectives or targets are set in order to achieve these targets control

process is needed. So, planning precedes control.

2) Controlling Sustains Planning:

- Controlling directs the course of planning. Controlling spots the areas where planning is

required.

3) Controlling Provides Information for Planning:

- In controlling the actual performance is compared to the standards set and records the

deviations, if any. The information collected for exercising control is used for planning

also.

4) Planning and Controlling are Interrelated:

- Planning is the first function of management. The other functions like organizing, staffing,

directing etc. are organized for implementing plans.

- Control records the actual performance and compares it with standards set. In case the

performance is less than that of standards set then deviations are ascertained. Proper

corrective measures are taken to improve the performance in future.

- Planning is the first function and control is the last one. Both are dependent upon each

other.

5) Planning and Control are Forward Looking:

 - Planning and control are concerned with the future activities of the business.

- Planning is always for future and control is also forward looking. No one can control the

past, it is the future which can be controlled.

- Planning and controlling are concerned with the achievement of business goals. Their

combined efforts are to reach maximum output with minimum of cost. Both systematic

planning and organized controls are essential to achieve the organizational goals

“Financial Planning & Analysis Techniques”

Financial planning and analysis (FP&A) is a decision-making platform that includes reporting and
analysis, planning and budgeting, forecasting, and financial modeling.

Techniques used in Financial Planning & Analysis

1) Financial Statement Analysis - Module 4

- this is the process of analyzing a company's financial statements for decision-making

purposes. External stakeholders use it to understand the overall health of an organization

as well as to evaluate financial performance and business value.

2) Cost-volume-profit (CVP) analysis – Module 5

- is used to determine how changes in costs and volume affect a company's operating

income and net income.

- In performing this analysis, there are several assumptions made,

1) Sales price per unit is constant.

2) Variable costs per unit are constant.

3) Total fixed costs are constant.

3) Activity-based costing (ABC) – discussed in Cost Accounting & Control

 - is a costing method that assigns overhead and indirect costs to related products and

services.

- is mostly used in the manufacturing industry since it enhances the reliability of cost data,

hence producing nearly true costs and better classifying the costs incurred by the

company during its production process.

3) Just in time (JIT) manufacturing – discussed in Cost Accounting & Control

- is a workflow methodology aimed at reducing flow times within production systems, as

well as response times from suppliers and to customers.

- the success of the JIT production process relies on steady production, high-quality

workmanship, no machine breakdowns, and reliable suppliers.

5) Capital budgeting – will be discussed in Financial Management

- is the process that a business uses to determine which proposed fixed asset purchases it

should accept, and which should be declined.

- this process is used to create a quantitative view of each proposed fixed asset investment,

thereby giving a rational basis for making a judgment.

- Methods used in decision making are:

1)Payback Period;

2) Net Present Value;

3) Internal Rate of Return

4) Profitability Index.

6) Differential analysis – Module 6

- involves analyzing the different costs and benefits that would arise from alternative

solutions to a particular problem.

- Managers often use differential analysis to determine whether to keep or drop a product

line, make or buy a component of the product, accepting special orders among others.

7) Pricing – Module 7
 - is the process whereby a business sets the price at which it will sell its products and

services, and may be part of the business's marketing plan.

- The three most common pricing strategies are:

1) Value based pricing - Price based on its perceived worth

2) Competitor based pricing - Price based on competitors pricing

3) Cost plus pricing - Price based on cost of goods or services plus a markup

8) Budgetary Planning and Control – Module 8

- financial plan of the resources needed to carry out tasks and meet financial goals. It is a

quantitative expression of the goals the organization wishes to achieve and the cost if

attaining these goals.

- It makes decision process more effective by helping managers meet uncertainties and it

should not be an expression of wishful thinking but rather descriptions of attainable goals.

9) Standard Costing – Module 11

- Standard costing allows comparison between actual costs incurred and budgeted costs

based on standards.

- A standard cost is described as a predetermined cost, an estimated future cost, an

expected cost, a budgeted unit cost, a forecast cost, or as the "should be" cost.

10) Variable and Absorption Costing

- Before looking at absorption versus variable costing, it will be important to understand the

difference between direct and indirect costs on the income statement.

- Direct costs are usually associated with COGS, which affects a company’s gross profit and

gross profit margin.

- Indirect costs are associated with the operating expenses of a company and will heavily

influence operating profit and the operating profit margin.

PRODUCT COSTING
 (Absorption & Variable)

Absorption Costing

- is also known as full costing.

- is a costing method that includes all manufacturing costs in the cost a unit of product.

All Manufacturing costs:

1) Direct Materials (DM)

2) Direct Labor (DL)

3) Variable (VFOH) and Fixed Factory Overhead (FFOH)

- it treats Fixed Factory Overhead (FFOH) as a product cost.

Variable Costing

- is also known as direct costing.

- is a costing method that includes only variable manufacturing costs in the cost a unit of a

product.

Variable Manufacturing costs:

1) Direct Materials (DM)

2) Direct Labor (DL)

3) Variable Factory Overhead (VFOH)

- it treats Fixed Factory Overhead (FFOH) as a period cost.

Product Cost

- a product cost is an inventoriable cost that is subject to allocation between sold and unsold

units.

- current income is reduced only by the amount allocated to the sold units.

UNSOLD UNITS
Assets as Inventory
PRODUCT COST

SOLD UNITS
Period Cost
Expense as COGS
- is a cost that is charged as expense against income, regardless of the sales performance.

- no allocation is necessary.

- current income is reduced by the full amount of the period cost.

PERIOD COST FULLY EXPENSED in the current

period, regardless of sales
ABSORPTION vs VARIABLE:

ABSORPTION VARIABLE
1) Product Costs DM DM

Manufacturing Costs DL DL

VFOH VFOH

FFOH

2) Period VAS FFOH

Costs VAS
FAS
FAS
Reconciliation of Income

Pattern 1:

When production equals sales, there is no change in inventory.

FFOH expensed under AC = FFOH expensed in VC

PRODUCTION = SALES INCOME (Ay) = INCOME (Vy)

Pattern 2:

When production is greater than sales, there is an increase in inventory.

FFOH expensed under AC < FFOH expensed in VC

PRODUCTION > SALES INCOME (Ay) > INCOME (Vy)

Pattern 3:

When production is less than sales, there is a decrease in inventory.

FFOH expensed under AC < FFOH expensed in VC

PRODUCTION < SALES INCOME (Ay) < INCOME

(Vy)

Reconciliation of Income

Summary:

P=S A=V
P>S A>V
Reconciliation of Income

Basic Formula: Δ Income = Δ

Inventory x FFOH/u

Where:

Δ Inventory = Ending Inventory – Beginning Inventory

Δ Inventory = Units Produced – Units Sold

Alternative Formula:

Income, Absorption Costing (Ay) xx

+ FFOH in Beginning Inventory (xx)

Total xx

- FFOH in Ending Inventory (xx)

Income, Variable Costing (Vy) xx

Merit & Limitations of Variable Costing

Merit:

* This method highlights the relationship between sales and variable production costs.

* May be easier for members of management who are not formally trained in accounting.

Limitations:

* Variable costing is not a generally accepted method of inventory costing for external purposes because
total costs are not matched with sales revenue and does not include fixed factory overhead in the work
in process and finished goods inventories.