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Questions and Answers
What is the main difference between traditional cost management and strategic cost management?
Traditional cost management focuses on short-term cost control while strategic cost management focuses on long-term cost leadership or product differentiation.
What are the components of strategic cost management?
Strategic positioning analysis, cost driver analysis, and value chain analysis.
The primary objective of traditional cost management is _______.
cost reduction
The primary objective of strategic cost management is _______.
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Which of the following is a characteristic of strategic cost management?
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Traditional cost management ignores external factors such as competition.
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What is value chain analysis?
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What process is used in traditional cost management to compare actual results with standard expectations?
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What does a traditional cost management system suffer from?
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What is the primary objective of traditional cost management?
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What distinguishes strategic cost management from traditional cost management in terms of time span?
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Which of the following is a primary focus of strategic cost management?
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The primary objective of strategic cost management is cost containment.
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What is a limitation of traditional cost management?
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What is a key limitation of traditional cost management regarding customer perception?
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Which concept does strategic cost management primarily relate to?
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What is the focus of traditional cost management in terms of costs?
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What term describes the analysis of deviations from standard costs in traditional cost management?
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Strategic cost management analyzes _____ and _____ costs.
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Study Notes
Learning Objectives
- Differentiate between traditional and strategic cost management.
- Identify components of strategic cost management.
- Analyze relevant factors in strategic positioning analysis.
- Distinguish structural costs from executional costs.
- Define value chain and recognize primary and support activities.
- Understand application of value chain analysis through three frameworks: industry structure analysis, core competency analysis, and segmentation analysis.
- Recognize the management accountant's contribution to strategic management.
- Define product life cycle and apply life cycle costing concepts.
Traditional vs. Strategic Cost Management
- Time Span: Traditional cost management emphasizes short-term strategies, while strategic cost management focuses on the long-term perspective.
- Focus: Traditional cost management is primarily internal; strategic cost management incorporates both internal and external elements.
- Cost Driver Concept: Traditional management bases costs on product volume; strategic management assigns separate cost drivers to each value activity based on manufacturing activities.
- Objective: Traditional aims for cost reduction and scorekeeping; strategic focuses on either cost leadership or product differentiation along with value improvement.
- Approach: Traditional management is risk-averse, while strategic management encourages risk-taking and adaptability to changes.
Traditional Cost Management Limitations
- Excessive Cost Focus: A narrow focus on cost reduction can harm product and service quality, negatively affecting customer retention and profit.
- Neglecting Market Dynamics: Traditional systems overlook external factors like competition and customer needs, relying heavily on potentially misleading accounting data.
- Limited Review Focus: There is an inadequate emphasis on reviewing and improving processes and strategies.
Components of Strategic Cost Management
- Strategic Positioning Analysis: Evaluates how a business positions itself in the market against competitors.
- Cost Driver Analysis: Identifies factors that influence the costs associated with products or services.
- Value Chain Analysis: Assesses activities within the organization that create value, identifying both primary and support activities for optimization.
Value Chain
- Definition: A framework for analyzing the specific activities through which firms can create value and competitive advantage.
- Primary Activities: Involves direct actions related to the creation, sale, maintenance, and support of a product.
- Support Activities: Encompasses organizational functions that support primary activities, enhancing overall efficiency.
The Role of the Management Accountant
- Integral in aligning cost management with strategic goals, providing insights for decision-making, and steering cost reduction efforts while ensuring quality and value delivery.
Product Life Cycle
- Definition: The stages a product goes through from introduction to decline, influencing marketing and financial strategies.
- Phases: Includes introduction, growth, maturity, and decline, each requiring different management approaches.
- Costing Characteristics: Recognizes the need for adaptive costing strategies throughout the product's life cycle to optimize profitability.
Learning Objectives
- Differentiate between traditional and strategic cost management.
- Identify components of strategic cost management.
- Analyze relevant factors in strategic positioning analysis.
- Distinguish structural costs from executional costs.
- Define value chain and recognize primary and support activities.
- Understand application of value chain analysis through three frameworks: industry structure analysis, core competency analysis, and segmentation analysis.
- Recognize the management accountant's contribution to strategic management.
- Define product life cycle and apply life cycle costing concepts.
Traditional vs. Strategic Cost Management
- Time Span: Traditional cost management emphasizes short-term strategies, while strategic cost management focuses on the long-term perspective.
- Focus: Traditional cost management is primarily internal; strategic cost management incorporates both internal and external elements.
- Cost Driver Concept: Traditional management bases costs on product volume; strategic management assigns separate cost drivers to each value activity based on manufacturing activities.
- Objective: Traditional aims for cost reduction and scorekeeping; strategic focuses on either cost leadership or product differentiation along with value improvement.
- Approach: Traditional management is risk-averse, while strategic management encourages risk-taking and adaptability to changes.
Traditional Cost Management Limitations
- Excessive Cost Focus: A narrow focus on cost reduction can harm product and service quality, negatively affecting customer retention and profit.
- Neglecting Market Dynamics: Traditional systems overlook external factors like competition and customer needs, relying heavily on potentially misleading accounting data.
- Limited Review Focus: There is an inadequate emphasis on reviewing and improving processes and strategies.
Components of Strategic Cost Management
- Strategic Positioning Analysis: Evaluates how a business positions itself in the market against competitors.
- Cost Driver Analysis: Identifies factors that influence the costs associated with products or services.
- Value Chain Analysis: Assesses activities within the organization that create value, identifying both primary and support activities for optimization.
Value Chain
- Definition: A framework for analyzing the specific activities through which firms can create value and competitive advantage.
- Primary Activities: Involves direct actions related to the creation, sale, maintenance, and support of a product.
- Support Activities: Encompasses organizational functions that support primary activities, enhancing overall efficiency.
The Role of the Management Accountant
- Integral in aligning cost management with strategic goals, providing insights for decision-making, and steering cost reduction efforts while ensuring quality and value delivery.
Product Life Cycle
- Definition: The stages a product goes through from introduction to decline, influencing marketing and financial strategies.
- Phases: Includes introduction, growth, maturity, and decline, each requiring different management approaches.
- Costing Characteristics: Recognizes the need for adaptive costing strategies throughout the product's life cycle to optimize profitability.
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Description
This quiz covers the fundamentals of strategic cost management as introduced in unit AE 313. You will learn to differentiate between traditional and strategic cost management, and identify the key components and relevant factors involved. Test your understanding and knowledge of cost management strategies.
