START COST - Strategic Cost Management PDF

Philippine Copyright, 2021 by MA. ELENITA BALATBAT CABRERA GILBERT ANTHONY B. CABRERA BERNADETTE ANN B. CABRERA Any copy of this book not bearing the signature of the author(s) shall be considered as proceeding from an illegal...

Philippine Copyright, 2021 by MA. ELENITA BALATBAT CABRERA GILBERT ANTHONY B. CABRERA BERNADETTE ANN B. CABRERA Any copy of this book not bearing the signature of the author(s) shall be considered as proceeding from an illegal source. The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate endorsement by the authors or GIC Enterprises & Co., Inc. and they do not guarantee the accuracy of information presented at these sites. ALL RIGHTS REVERVED ISBN 978-621-416-104-1 Published & Printed by: GIC ENTERPRISES & CO., INC. *National Book Development Board Registered 2017 C.M. Recto Avenue, Sampaloc, Manila, Philippines About the Authors MA. ELENITA B. CABRERA BBA MBA CPA CMA Dean Cabrera graduated Magna Cum Laude from the University of the East with a degree of Bachelor of Business Administration, major in Accounting and was one of the topnotchers when she passed the CPA Licensure Board Examination. She earned her Master Business Administration major in Financial Management from the University of the Philippines and is a candidate for Doctor of Education at the University of the East. She is a holder of a Certificate in Management Accounting from the Institute of Certified Management Accountants of Victoria, Australia Dean Cabrera worked with SGV & Co. as Staff Auditor. She taught Financial Accounting, Financial Management, Management Advisory Services, Auditing Theory and Practice in various colleges and universities and authored books in these subjects. She previously held the position of Dean of the College of Business Administration at the Lyceum of the Philippines University. A former Vice Chairman of the Professional Regulatory Board of Accountancy, she was the BOA representative to the Financial Reporting Standards Council (FRSC), Philippine Interpretations Committee (PIC) and Auditing and Assurance Standards Council (AASC). She served as the Chairman of the PRC CPE Council of Accountancy and Chairman of the CHED Technical Committee for Accountancy Education. She was a World Bank Project Philippine Institute of Certified Public Accountants (PICPA) awards as Outstanding CPA in Education, Honorary Life Membership, Distinguished Accountancy Author and 2018 Accountancy Hall of Fame. GILBERT ANTHONY B. CABRERA BBA MBA CPA Gilbert received his bachelor’s degree in Accountancy from the University of East, Cum Laude. He obtained a Master in Business Administration degree with concentrations on International Finance and Accounting from the University of Maryland, College Park, Robert H. Smith School of Business. A certified public accountant, he has public accounting experience with SGV & Co. (Ernst and Young Member Firm) and teaching experience with the University of the East, Manila and University of Maryland, Robert H. Smith School of Business. Presently, he is a Senior Vice-President, Risk and Finance of Global Insurance Brokerage in California, USA, An active member of the Association of Filipino Finance Managers in California, he is also a former Board Member of Bay Are Red Cross BERNADETTE ANN B. CABRERA BBA MBA CPA Bernadette received her bachelor’s degree in Accountancy from De Lasalle University. She obtained a Master in Business Administration degree from Vanderbilt University, Owen Graduate School of Management. A certified public accountant, she has public accounting experiebce with SGV & Co. (Ernst and Young Member Firm). She spent majority of her career in the USA as a management consultant for Ernst & Young, New York, specializing in Strategy Risk anf Operational Management, and People and Organizational Change Presently, she runs her own Executive Coaching business where she coaches CEOs and the other executives on Personal Leadership and High Perfoming Teams.  I Preface The central focus of this 2021 Edition of Stategic Cost Management is how management accounting helps managers better plan, control and decide for their companies. This book can be immediately after the student has had an introductory course in Cost Accounting and Control. The pace of change in organizations continues to be rapid. This book reflects changes occurring, the challenges managers of business concerns face and how-to-best deal with these challenges using financial and non financial information. Examples of key additons and changes in topic areas are  Growing significance of the global economy.  Increased coverage if strategy and strategic users of cost information,  Increased discussion of decision users of cost management information occurring such as areas as quality management, cost estimation and performance measurements.  Systematic incorporation of new evolving management thinking including supply chain analysis, enterprise resource planning systems, balanced scorecard, managing productivity and marketing effectiveness.  Increased attention to behavioral issues such as motivation managers and employees, effect of management control and transfer pricing on manager’s behavior and earnings management. A primary concern in the organization and content of this book is the flexibility in meeting the needs of Strategic Cost Management courses varying in length, content, and student profile. To aid the student, each chapter begins with measurable learning outcomes that focus on important areas of coverage. Sufficient text material is available to permit the reader of this textbook to choose topics and depth of coverage as desired. A modular, flexible organization adopted in this book would facilitate diverse approaches to teaching and learning. In recognition of the widespread application of strategic cost management concepts, many examples and problems in the book deal with sevice, not for profit, trading organizations as well as with manufacturing operations. Students gain an understanding of technical information and learn how to apply that information in appropriate situations. To enhance understanding, relevant examples on how the concepts apply to the global business environment hace also been included. The mix of assignment material include questions that review concepts and procedures, exercises that review the direct application of the basic concepts, problems of varying difficulty that enhance the learning process and cover the concept in greater depth. Some problems do not have a single correct answer. Rather they contain multiplt dimensions demanding a broad managerial perspective. Other problems do not just focus exclusively on computation but may require drawing from one’s knowledge in marketing, finance economies, economies, quantitative techniques and human resources aspects. Students are therefore challenged to critically analyze multidimensional issues while still numerical problem-solving skills. A special note of gratitude goes to  Our family fir the love and patience,  Our colleagues in the academe for their ideas, encouragement and support  Contents in Brief Preface Unit 1 Introduction to Strategic Cost Management 1 Chapter 1 Overview of Cost Management and Strategy 2 2 The Professional Environment of Cost 20 Management 3 Contemporary Business Environment and Strategic Focus 54 of Cost Management 4 Developing a Competitive Strategy and Contemporary Contemporary Cost Management Techniques 69 Unit II Strategic Cost Management Concepts and Techniques for Planning Control 97 98 Chapter 5 Strategy and the Master Budget 6 Organizational Innovations: Totally Quality Management; Just-in-Time 144 Production System 7 The Balanced Scoreboard: 179 A Tool to Implement Strategy 8 Cost Planning for Product Life Cycle: 204 Life-Cycle Costing and Long-Term Pricing; Target Costing and Theory of Constraints 9 Decentralized Operations and Segment 238 Reporting 10 Variable Costing: A Tool for Evaluating Management Performance 253 dd Unit III Cost Management Concepts and Tools for Decision Making 278 Chapter 11 Relevant Costs for Non- Routine 279 Decision Making 335 12 Quantitative Techniques for Decision Making 13 Capital Investment Decision 413 Unit IV Cost Management Concepts and Techniques for Control and Strategic 470 Performance Measurement Chapter 14 Management Control and Strategic Performance Measurement; Strategic 471 Investment Units and Transfer Pricing 15 Financial and Non- Financial Performance 529 Measures 16 Managing Productivity and Marketing Effectiveness 557 17 Executive Performance Measures and Compensation 583 Glossary 599 Appendix Time Value Money Concepts 615 References 629  Contents in Brief Preface Unit I Introduction To Strategic Cost Management 1 Chapter 1 Overview of Cost Management and Strategy 2 2 The Professional Environment of Cost Management 20 3 Contemporary Business Environment and Strategic Focus of Cost Management 54 4 Developing a Competitive Strategy and Contemporary Cost Management Techniques 69 Unit II Strategic Cost Management Concepts and Techniques for Planning and Control 97 Chapter 5 Strategy and the Master Budget 98 6 Organizational Innovations: Total Quality Management; Just-in-Time Production System 144 7 The Balanced Scorecard: A Tool to Implement Strategy 179 8 Cost Planning for Product Life Cycle: Life-Cycle Costing and Long-Term Pricing; Target Costing and Theory of Constraints 204 9 Decentralized Operations and Segment Reporting 238 10 Variable Costing: A Tool for Evaluating Management Performance 253  Unit III Cost Management Concepts and Tools for Decision Making 278 Chapter 11 Relevant Costs for Non-Routine Decision Making 279 12 Quantitative Techniques for Decision Making 335 13 Capital Investment Decision 413 Unit IV Cost Management Concepts and Techniques for Control and Strategic Performance Measurement 470 Chapter 14 Management Control and Strategic Performance Measurement; Strategic Investment Units and Transfer Pricing 471 15 Financial and Non-Financial Performance Measures 529 16 Managing Productivity and Marketing Effectiveness 557 17 Executive Performance Measures and Compensation 583 Glossary 599 Appendix Time Value of Money Concepts 615 References 629  Contents Preface Unit I Introduction To Strategic Cost Management 1 Chapter 1 OVERVIEW OF COST MANAGEMENT AND STRATEGY 2 Expected Learning Outcomes 2 Introduction 3 Users of Cost Management Information 4 Uses of Cost Management Information 5 Management Accountants Role in Strategic Cost Management 7 Relationship Between Cost Accounting and Cost Management 12 Strategic Decision Making and the Cost Management Accountant 12 Basic Cost Management Perspectives 12 Review Questions and Problems 13 2 THE PROFESSIONAL ENVIRONMENT OF COST MANAGEMENT 20 Expected Learning Outcomes 20 Organization Structure and The Management Accountant 21 The Chief Financial Officer and the Controller 22 The Controller as the Top Management Accountant 23 Basic Functions of Controllership 25 Qualifications of the Controller 26 The Chief Financial Officer and the Treasurer Treasurership 27 Ethical Standards for Management Accountants 28 Code of Conduct for Management Accountants 28 Company Code of Conduct 32 Typical Ethical Challenges 33 Code of Conduct on the International Level International 34 Certification 34 Institute of Management Accountants (IMA) 35 Philippine Association of Management Accountants (PAMA) 36 Review Questions and Problems 37 3 CONTEMPORARY BUSINESS ENVIRONMENT AND STRATEGIC FOCUS OF COST MANAGEMENT 54 Expected Learning Outcomes 54 Contemporary Business Environment 55 The Global Business Environment 56 Advances in Manufacturing Technologies 56 Advances in Information technologies, The Internet and E-Commerce 56 A Greater Focus on Customers 57 New Forms of management Organization 58 Changes in the Social, Political and Cultural Environment of Business 59 Strategic Focus of Cost Management 60 Cost Management and Accounting Systems 61 When Should the Internal Accounting System be Changed? 61 Integrative Framework 63 Review Questions and Problems 66 4 THE PROFESSIONAL ENVIRONMENT OF COST MANAGEMENT 69 Expected Learning Outcomes 69 Developing a Competitive Strategy 70 Strategic Measures of Success 71 Competitive Strategies 74 Distinctive Aspects of the Two Competitive Strategies 74 Contemporary Cost Management Techniques 76 Review Questions and Problems 143 Unit II Strategic Cost Management Concepts and 97 Techniques for Planning and Control 5 STRATEGY AND THE MASTER BUDGET 98 Expected Learning Outcomes 99 Role of a Budget 99 Importance of Strategy in Budgeting 100 Formulation of Strategy 100 Strategic Goals and Long-term Objectives 102 Long Range Planning 102 Short-Term Objectives and the Master Budget 102 The Management Process of Preparing the Master Budget 104 Organization for Budget Preparation 104 Budget Guidelines 105 The Budget Period 105 The Initial Budget Proposal 106 Budget Negotiation, Review and Approval, Revisions 106 The Master Budget 107 Steps in Developing as Master Budget 108 Preparation of Comprehensive Master Budget Illustrated 108 Budgeting in Service Industries 118 Budgeting in Not-for-Profit Organization 118 Budgeting in International Setting 119 Alternative Approaches in Budgeting 119 Ethical Issues in Budgeting 120 Review Questions and Problems 123 6 ORGANIZATIONAL INNOVATIONS: TOTAL QUALITY MANAGEMENT; JUST-IN-TIME PRODUCTION SYSTEM 144 Expected Learning Outcomes 144 Introduction 145 Total Quality Management 145 Core Principles of TQM 145 TQM Implementation Guidelines 148 Types of Conformance 149 Costs of Quality 150 Just-in-Time Production System 157 Key Features 157 Financial Benefits of JIT 159  Performance Measures and Control in JIT Production 160 JIT Effects on Costing System 161 Review Questions and Problems 162 7 THE BALANCED SCORECARD: A TOOL TO IMPLEMENT STRATEGY 179 Expected Learning Outcomes 179 The Balanced Scorecard 180 Four Perspectives of the Balanced Scorecard 182 Features of a Good Balanced Scorecard 185 Pitfalls in Implementing a Balanced Scorecard 186 Evaluating the Success of a Strategy 187 The Price-Recovery Component 193 The Productivity Component 194 Internal Business Process Performance 196 Review Questions and Problems 199 8 COST PLANNING FOR PRODUCT LIFE CYCLE: LIFE CYCLE COSTING AND LONG-TERM PRICING; TARGET COSTING AND THEORY OF CONSTRAINTS 204 Expected Learning Outcomes 204 Cost Management for Product Life Cycle 206 Why Design is Important 207 Common Design Models 208 Cost Management over the Sales Life Cycle 211 Phases of the Sales Life Cycle 211 Target Costing 216 How to Reduce Costs to a Target Cost Level 216 Steps in Implementing a Target Cost Approach 217 Theory of Constraints 221 Steps in Theory of Constraints Analysis 222 Review Questions and Problems 227 9 DECENTRALIZED OPERATIONS AND SEGMENT REPORTING 238 Expected Learning Outcomes 238 Decentralized Operations 239 Underlying Concepts of Decentralized Operations 239 Advantage of Decentralization 240 Limitations of Decentralization 241 Segment Reporting 242 Levels of Segmented Statement 243 Sales and Contribution Margin 246 Traceable and Common Fixed Costs 245 Problems Related to Proper Cost Assignment 246 Omission of Costs 246 Inappropriate Methods for Allocating Costs Among Segments 246 Arbitrarily Dividing Common Costs Among Segments 247 Review Questions and Problems 248 10 VARIABLE COSTING: A TOOL FOR EVALUATING MANAGEMENT PERFORMANCE 253 Expected Learning Outcomes 253 Inventory Costing and Capacity Analysis 254 Absorption Costing 254 Variable Costing 254 Underlying Concept of Variable Costing 255 Advantages of Using Variable Costing Disadvantages of 255 Using Variable Costing 255 Comparison between Variable Costing and Absorption Costing 256 Reconciliation of Net Income under Variable Costing with Net Income under Absorption Costing 257 Why Managers Prefer Direct Costing to Absorption Costing 262 Variable Costing and Performance Evaluation of Managers 263 Variable Costing and Segmented Reporting 263 Segmented Reporting: Variable-Costing Basis 264 Variable Costing for Planning and Control 266 Review Questions and Problems 263 Unit III Cost Management Concepts and Tools for 278 Decision Making 11 RELEVANT COSTS FOR NON-ROUTINE DECISION MAKING 278 Expected Learning Outcomes 279 The Decision Making Process 280 Identifying Relevant Costs 281 Approaches in Analyzing Alternatives in Nonroutine Decision Making 284 Short Run Vs. Long Run: Other Factors to Consider 286 Types of Decisions 286 Make or Buy Decision 286 Adding or Dropping Products/Segments 288 Sell Now or Process Further 290 Special Sales Pricing 292 Utilization of Scarce Resources 293 Shutdown or Continue Operations 295 Pricing Products and Services 298 Review Questions and Problems 302 12 QUANTITATIVE TECHNIQUES FOR DECISION MAKING 335 Expected Learning Outcomes 335 Rationale in Using Quantitative Techniques 336 Probability 337 Decision Making under Certainty 337 Decision Making under Uncertainty 338 Assigning Probabilities 338 Types of Probabilities 339 Basic Terms Used with Probability 339 Rules in Combining Probabilities 339 Probability Distributions 341 Payoff (Decision) Tables 344 Expected Value of Perfect Information 345 Decision Tree 346 Underlying Concept 346 Advantages of Decision Tree Analysis 346 Limitations of Decision Tree Analysis 347 Steps in Making a Decision Tree 247 Illustrative Problem: Preparation of a Decision Tree 348 Learning Curve 351 Simulation Techniques 352 Advantages and Limitations of Simulation 354 Monte Carlo Technique 355 Sensitivity Analysis 355 Queuing 356 Linear Programming 357 Nature and Applications 357 Steps in the Formulation of a Linear Program 357 Computational Methods of Linear Programming 358 Graphic Method 358 Algebraic Method 362 Simplex Method 362 Shadow Prices 365 Program Evaluation and Review Techniques (PERT) 368 Basic Underlying Concept 368 Expected Activity Time 369 Concept of Critical Path 370 Cost Estimating 370 Crashing the Network 372 PERT-Cost Network 372 Variation in Activity Time 375 Variation Along a Path 378 Accountant's Role in PERT 379 Benefits and Limitations of PERT 379 Gantt Chart 380 Steps in Preparing a Gantt Chart 380 Illustration of Gantt Chart 381 Advantages of Gantt Chart 381 Inventory Modeling 382 Inventory cost 382 EOQ model 383 Reorder Point 385 Safety Stock 386 Review Questions and Problems  13 CAPITAL INVESTMENT DECISION Expected Learning Outcomes 413 Capital Budgeting Defined 414 Characteristics of a Capital Investment Decision 414 Categories of Capital Investments Elements of Capital 415 Budgeting 416 Net Initial Investment or Project Cost 416 Net Cash Returns 417 Minimum or Lowest Acceptable Rate of Return 419 Process of Capital Budgeting 422 Categories of Project Cash Flows 423 Screening Capital Investment Proposals 425 Payback period 425 Bail-out period 427 Accounting Rate of Return 428 Discounted Cash Flow Techniques 430 Net Present Value 431 Discounted Rate of Return 434 Payback Reciprocal 437 Profitability Index 437 Discounted Payback period 439 Preference Decisions - The Ranking of Investment Projects 440 Comparing Preference Rates 441 Comparing Projects with Unequal Lives 441 Replacement Chain (Common Life) Approach 441 Equivalent Annual Annuity (EAA) Approach 443 Inflation and Capital Budgeting 445 Review Questions and Problems 447 Unit IV Cost Management Concepts and techniques for Control and Strategic Performance Measurement 470 14 MANAGEMENT CONTROL AND STRATEGIC PERFORMANCE MEASUREMENT; STRATEGIC INVESTMENT UNITS AND TRANSFER PRICING 471 Expected Learning Outcomes 471 Performance Evaluation and Control 472 Strategic Performance Measurement 473 Basic Concepts 473 Decentralization and Segment Reporting 473  Prerequisites to the Initiation and Maintenance of an Effective Strategic Performance Measurement or Responsibility Accounting 474 Strategic Business Units (SBUs) and their Evaluation 475 Cost SBU 476 Profit SBU 479 Investment SBU 482 Revenue SBU 488 Transfer Pricing 491 The Need for Transfer Price 491 Alternative Transfer Pricing Schemes 492 Minimum Transfer Price 492 Market-based Transfer Price 493 Cost-based Transfer Price 494 Negotiated Transfer Price 496 Distress Prices 497 Transfer Price for Services 497 Multinational Transfer Pricing 498 Review Questions and Problems 505 15 FINANCIAL AND NON-FINANCIAL PERFORMANCE MEASURES 529 Expected Learning Outcomes 529 Financial and Nonfinancial Performance Measures 530 Steps in Designing Accounting-based Performance Measures 531 Step 1: Choosing among Different Performance Measures 631 Step 2: Choosing the Time Horizon of the Performance Means 532 Step 3: Choosing Alternative Definitions for Performance Measures 532 Step 4: Choosing Measurement Alternatives for Performance Measures 533 Long-term Assets: Gross or Net Book Values 534 Step 5: Choosing Target Levels of Performance 534 Step 6: Choosing the Timing of Feedback 535 Performance Measurement in Multinational 539 Companies Computation of Foreign Division's ROI in the Foreign 540 Currency Distinguishing Performance of Managers from 541 Performance of Organization Units Intensity of Incentives, Financial and Nonfinancial 542 Incentives 543 Review Questions and Problems  16 MANAGING PRODUCTIVITY AND MARKETING EFFECTIVENESS 557 Expected Learning Outcomes 557 Managing Productivity 558 Measuring Productivity 558 Partial Productivity 560 Partial Operational Productivity 562 Partial Financial Productivity 563 Advantages of Partial Productivity Measures 563 Limitations of Partial Productivity Analysis 563 Total Productivity 564 Benefits and Limitations of Total Productivity Measures 565 Managing Marketing Effectiveness 565 Summary of Variance Analysis to Assess Marketing Effectiveness 567 Review Questions and Problems 562 17 EXECUTIVE PERFORMANCE MEASURES AND COMPENSATION 583 Expected Learning Outcomes 583 Objectives of Management Compensation 584 Executive Performance Measures and Compensation 584 Cash Compensation 585 Noncash Compensation 585 Bonus Plans 586 Bases for Bonus Compensation 586 Bonus Compensation Pools 587 Bonus Payment Options 588 Performance Measures at the Individual Activity Level 590 Performing Tasks 590 Team-based Compensation Arrangements 590 Environment and Ethical Responsibilities 591 Review Questions and Problems 592 Glossary 599 Appendix Time Value of Money Concepts 615 References 629 CHAPTER  1 OVERVIEW OF COST MANAGEMENT AND STRATEGY EXPECTED LEARNING OUTCOMES After studying the chapter, you should be able to... 1. Explain what strategy is. 2. Relate strategic management. cost management to strategic 3. Describe the nature of cost management information and how they are developed. 4. Explain the objective, scope and benefits derived from proper cost management 5. Enumerate and describe the various users of cost management information 6. Explain how cost management information is used for the following management functions  Strategic Management  Planning and Decision-Making  Management and Operational Control  Reportorial and compliance to legal and various regulatory requirements 7. Understand the cost management accountant's role in strategic cost management 8. Describe the role of the cost management accountant in the development and implementation of strategic decision for the business firm 9. Enumerate and explain the basic cost management perspectives 1863 CHAPTER 1 OVERVIEW OF COST MANAGEMENT AND STRATEGY INTRODUCTION The growing pressures of global competition, trade wars among countries, technological innovation and changes in business processes have made cost management much more important, critical and dynamic than ever before. Business managers must think and act competitively and doing so requires a strategy. Strategy is a set of policies, procedures and approaches to business that produce long-term success while strategic management involves the development of a sustainable competitive position. Strategic cost management involves the development of cost management information to facilitate the principal management function which is strategic management. In today's business environment, the development and use of information especially cost management information is a critical factor in the effective management of a firm or organization. Cost management information is the information that the manager needs to effectively manage the firm, profit-oriented as well as not-for-profit organization. This includes both financial information about cost and revenues as well as relevant nonfinancial information about productivity, quality and other key success factors for the firm. Cost management is the practice of accounting in which the accountant develops and uses cost management information. For competitive success, it is not enough to emphasize only on financial information. This could lead manager to stress cost reduction (a financial measure) while ignoring or even lowering quality standards (a nonfinancial measure). This decision could be a critical mistake which could lead to the loss of customers and market share in the long run. If a firm is to compete successfully, importance should be given to nonfinancial and long-term measures of operating performance such as product and manufacturing advances, product quality and customer loyalty. Cost management information, is thus a value-added concept. It adds value by helping a firm be more competitive. Effective strategic management is very important to the success of organization and is thus the pervasive theme of this book. every firm or Strategic thinking involves anticipating changes. Products and production Flexibility is important. The ability to make fast changes is critical as a result of processes are designed to accommodate expected changes in customer-demands. the demand of the new management concepts of e-commerce, speed to market, and flexible manufacturing. Product life cycle - the time from the introduction of a shorter. Success in the recent past days or months is no longer a measure of new product to its removal from the market is expected to become shorter and ultimate success; the manager must be "driving" the firm by using the windshield, not the rear- view mirror. The strategic emphasis also requires creative and integrative thinking, that is, the ability to identify and solve problems from a cross-functional view. The business functions are often identified as marketing, production, finance, and accounting/ controllership. Instead of viewing a problem as a production problem, a marketing problem, or a finance and accounting problem, cross-functional teams view it from an integrative approach that combines skills from all functions simultaneously The integrative approach is necessary in a dynamic and competitive environment. The firm's attentions is focused on satisfying the customers' needs; all of the firm's resources, from all functions, are directed to that goal. USERS OF COST MANAGEMENT INFORMATION Cost management information is useful in all organizations: business firms, governmental units, and not-for-profit organizations. Business firms are usually categorized by industry, the main categories being merchandising, manufacturing, and service. Merchandising firms purchase goods for resale. Merchandisers that sell to other merchandisers are called wholesalers; those selling directly to consumers are retailers. Governmental and not-for-profit organization provide services, much like the firms in service industries. However, these organizations provide the services for which no direct relationship exists between the amount paid and the services provided. Instead, both the nature of these services and the customers to receive them are determined by government or philanthropic organizations. The resources are provided by governmental units and/or charities. The services provided by these organizations are often called public goods to indicate that no typical market exists for them. Public goods have a number of unique characteristics, such as the impractically of limiting consumption to a single customer (clean water and police and fire protection are provided for all residents). USES OF COST MANAGEMENT INFORMATION Cost management information is needed for each of the following management functions, namely: 1. Strategic Management Strategic management involves the development of a sustainable competitive position in which the firm's competitive advantage spells continued success. A strategy is a set of goals and specific action plans that if achieved, provide the desired competitive advantage. Strategic management involves identifying and implementing these goals and action. plans. Management must make sound strategic decisions regarding the choice of products, manufacturing methods, marketing techniques and channels and other long-term issues. The strategic emphasis requires an integrative approach which combines skills from all business function, namely, marketing, production, finance and accounting/controllership, is necessary in a dynamic and competitive environment. Due to increasing strategic issues, cost management has moved from a traditional role of product costing and operational control to a broader strategic focus: strategic cost management. Strategic cost management is the development of cost management information to facilitate the principal management function, strategic management. Involves the development of sustainable competitive position. 2. Planning and Decision-making Cost management information is needed to support recurring decision such as replacing and maintaining equipment, managing cash flows, budgeting raw materials purchases, scheduling production, pricing and managing distribution of products to customers, and so forth Planning and decision-making involves budgeting and profit planning, cash flow management and other decision related to the firm's operation such as deciding whether to lease or buy a facility, whether to replace or just repair as equipment, when to change a marketing plan or when to begin new product development. 3. Management and Operational Control Operational Control Mid-level monitors Cost management information is needed to provide a fair and effective basis for identifying Operating Level Managers inefficient operations and to reward and motivate the most effective manages. Management Control Upper-level monitors Mid- level Managers Operational Control takes place when mid-level manages (e.g., product managers, regional managers) monitors the activities of operating-level managers and employers (e.g., production supervisions, department heads). Management control on the other hand, is the evaluation of mid- level manager by upper-level manager (e.g., Controller or the Chief Financial Officer (CFO)). 4. Reportorial and Compliance to Legal Requirements Reportorial and compliance responsibilities require management to comply with the financial reporting requirements to regulatory agencies such as the Securities and Exchange Commission (SEC) Bureau of Internal revenue (BIR), and other relevant government authorities and agencies. The financial statement preparation role has recently received a renewed new focus and interest as accounting scandals have shown how crucial and important accurate financial information is for investors. The financial statement information also serves the other three management functions as this information is often an important part planning and decision making, control and strategic management. MANAGEMENT ACCOUNTANT'S ROLE IN STRATEGIC COST MANAGEMENT Cost Management is the practice of accounting in which the accountant develops and uses cost management information. This area of accountancy practice is performed by management accountants. Management accountants are the accounting professionals who develop and analyze cost management information and other accounting information. Management Accounting involves the application of appropriate techniques and concepts to economic data so as to assist management in establishing plans for reasonable economic objectives and in the making of rational decisions with a view toward achieving these objectives. It is the process of identification, measurement, accumulation, analysis, preparation, interpretation, and communication of financial information, which is used by management to plan, evaluate and control activities within an organization. It also comprises the preparation of financial reports for non-management groups such as shareholders, creditors, regulatory agencies and tax authorities. Management accountants (including cost accountants) are concerned with providing information to managers, that is, people inside an organization who direct and control the operations. They provide a variety of reports. Some reports focus on how well managers and business units have performed while other reports provide timely and frequent updates on key indicators, analysis of business situation or opportunity and analytical reports that are needed to investigate specific problems. Management accountants at appropriate levels are involved actively in the process of managing the entity. The process includes making strategic, tactical and operating decisions and helping to coordinate the efforts of the entire organization. The management accountant participates, as part of management, in assuring that the organization operates as a unified whole in its long-run intermediate and short-run best interests. Management accounting is concerned primarily with providing information to internal managers who are charged with planning and controlling the operations of the firm and making a variety of management decisions. Generally, management accountants do the following tasks: (a) Scorekeeping or data accumulation which enables both internal and external parties to evaluate organizational performance and position.  (b) Interpreting and reporting of information that helps manager to focus on operating problems, opportunities as well as inefficiencies. This is commonly associated with current planning and control and the analysis and investigations of recurring routine internal accounting reports to signal situations in which management action may be required. (c) Problem-solving or quantification of the relative merits of possible courses of action as well as recommendations as to the best procedure. This is Is a decision that is made response to a unique commonly associated with non-recurring decisions. situation that is nigh expected to happen regularly Three important guidelines help management accountants provide the most value when scorekeeping provide the most value when scorekeeping, problem-solving and attention directing (interpreting and reporting). These are 1. Employ a cost-benefit approach 2. Recognize behavioral as well as technical considerations and 3. Use appropriate cost concepts for different purpose Management accountants continually face resource-allocation decisions, such as whether to purchase a new software package or hire a new employee. The cost- benefit approach should be used in making these decisions: Resources should be spent if they are expected to better attain company goals in relation to the expected costs of those resources. The expected benefits from spending should exceed the expected costs. The expected benefits and costs may not be easy to quantify. Nevertheless, the cost-benefit approach is useful for making resource-allocation decisions. Specifically, the management accountant provides a system which allows management to receive the necessary information used in performing its administrative functions of: (a) planning which involves setting of goals for the firm, evaluating the various ways to meet the goals and picking out what appears to be the best way to meet the goals; (b) controlling which involves the evaluation of whether actual performance conforms with planned goals; and (c) decision making which involves determination of predictive information (e.g. relevant costs) for making important business decisions. Planning A key activity for all companies is planning. Planning involves identifying alternatives and selecting a course of action and specifying how the action will be implemented to further the organization's objectives. The plan communicates a company's goals to employees and specifies the resources needed to achieve them. The plans of management are often expressed formally in budgets. Cash budgets, capital budgets, and projected statements of financial position are examples of contributions which accounting can make in resource planning while break-even analysis, projected income statements are examples of useful tools in profit planning. Control Control of organizations is achieved by evaluating the performance of managers and the operations for which they are responsible. The distinction between evaluating managers and evaluating the operations they control is important. Managers are evaluated to determine how their performance should be rewarded or punished, which in turn motivates them to perform at a high level. Based on an evaluation indicating good performance, a manager might receive substantial bonus compensation. An evaluation indicating a manager performed poorly might lead to the manager being fired. In part because evaluations of managers are typically tied to compensation and promotion opportunities, managers work hard to ensure that they will receive favorable evaluations. Cost variance analysis, financial statements analysis, gross profit variance analysis are some of the accounting control reports used to inform managers when activities which are part of their responsibility are deviating from the plan. The reports used evaluate the performance of managers and the operations they control are referred to as performance reports. Although there is no generally accepted method of preparing a performance report, such reports frequently involve a comparison of current period performance with performance in a prior period or with planned (budgeted) performance. Performance reports may not provide definitive answers, but they are still extremely useful. Managers can use them to "flag" areas that need closer attention and to avoid areas that are under control. It would not seem necessary, for example, to investigate labor, rent, depreciation, or other costs, because these costs are either equal to or relatively close to the planned level of cost. Typically, managers follow the principle of management by exception when using performance reports. This means that managers investigate departures from the plan that appear to be exceptional; they do not investigate minor departures from the plan. Operations are evaluated to provide information as to whether or not they should be changed (i.e., expanded, contracted, or modified in some way). An evaluation of an operation can be negative even when the evaluation of the manager responsible for the operation is basically positive. Company plans often play an important role in the control process. Managers can compare actual results with planned results and decide if corrective action is necessary. If actual results differ from the plan, the plan may not have been followed properly, the plan may have not been well thought out, or changing circumstances may have made the plan out of date. Figure 1-1 presents the major steps in the planning and control process. Once a plan has been made, actions are taken to implement it. These actions lead to results, which are compared with the original plan. Based on this evaluation, managers are rewarded (e.g., given substantial bonuses or promoted if performance is judged to be good) or punished (e.g., given only a small bonus, given no bonus, or even fired if performance is judged to be poor). Also, based on the evaluation process, operations may be changed. Changes may consist of expanding (e.g adding a second shift), contracting (e.g., closing a production plant), or improving operations (e.g., training employees to do a better job answering customer product inquiries). Changes may also consist of revising an unrealistic plan. Figure 1-1: Planning and Control Process Plan Decisions to change operations Action taken to Or reverse implement plan Results Decisions to reward or punish Comparison of planned managers and actual results Evaluation Thus, accounting serves management at all stages of the management process, from the formulation of objectives and so on up to the feedback of performance information which in turn helps in the reformulation of objectives. Decision Making As indicated in Figure 1-1, decision making is an integral part of the planning and control process - decisions are made to reward or punish managers, and decisions are made to change operations or revise plans. Should a firm add a new product? Should it drop an existing product? Should it manufacture a component used in assembling its major product or contract with another company to produce the component? What price should a firm charge for a new product? These questions indicate just a few of the key decisions that confront companies. And how well they make these decisions will determine future profitability and, possibly, the survival of the company. Recognizing the importance of making good decisions, we will devote all of Chapter 11 to the topic. In summary, the management accountant develops cost management information for the Chief Financial Officer, other managers and employee teams to use to management the firm and make the firm more competitive and successful. RELATIONSHIP BETWEEN COST ACCOUNTING AND COST MANAGEMENT Cost accounting is a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs. Cost management needs the output of cost accounting. Its purpose is to provide managers with information which aids decision. There are no generally accepted principles which specify how management accounting information is to be reported. While systems such as direct costing and standard costing exist in management accounting, each accounting report should be tailored to the needs of the decision and the decision maker. The most effective systems result when the manager-decision maker and the accountant work together until the accountant understands the decision to be made and the manager understands the source of information that the accountant will report. Managers use cost management information to choose strategy, to communicate it and to determine how best to implement it. They use this information to coordinate their decisions about designing, producing and marketing a product or service. STRATEGIC DECISION MAKING AND THE COST MANAGEMENT ACCOUNTANT Basic Cost Management Perspectives For cost management process to succeed, it is necessary that managers must complement their measurement skills with basic management perspectives that "go beyond the numbers". This will enable them to make intelligent planning, control, and decision making for the enterprise. These are: a.A Strategic Management Perspective b. An Enterprise Risk Management Perspective c. A Corporate Social Responsibility Perspective d. A Process Management Perspective e.A Leadership Perspective f. An Ethical Perspective A. A Strategic Management Perspective An enterprise generates profit by attracting customers willing to pay for the goods and services it offers. Customers usually compare the goods and services offered by a company to the same goods and services offered by other companies. The key to a company's success is creating value for customers while differentiating itself from its competitors. Identifying how a company will do this is what strategy is all about. However, a chosen strategy is only as good as how effectively it is implemented. The management accountant provides input that aids in developing strategy, building resources and capabilities, and implementing strategy. A strategy is a "game plan" that enables the company to attract customers by distinguishing itself from competitors. The focal point of a company's strategy should be its target customers. A company can only succeed if it creates a reason for its target customers to choose it over a competitor. These reasons or what are more formally called customer value propositions are the essence of strategy. Customer value premises tend to fall into three broad categories, namely, customer intimacy, operational excellence, and product leadership. Customer Intimacy Strategy Companies that adopt a customer intimacy strategy are in essence saying... "You should choose us because we can customize our products and services to meet your individual needs better than our competitors." Operational Excellence Companies that pursue the second customer value premise called operational excellence are saying to their target customers... "You should choose use because we deliver products and service faster, more conveniently, and at a lower price than our competitors". Product Leadership Companies pursuing the third customer value premise are saying to their target customers... "You should choose us because we offer higher quality products than our competitors". B. An Enterprise Risk Management Perspective A simplified framework for an Enterprise-wide Risk Management Process follows: A risk management system in strategic cost management (SCM) is a structured framework or approach used to identify, assess, mitigate, and monitor risks that may impact cost management strategies, ensuring the organization achieves its financial and strategic objectives. This system is essential for managing uncertainties and optimizing resource allocation while maintaining a balance between cost efficiency and value creation. Risk Management System Top Management’s Involvement Oversight Activites: Establish goals and objectives, Set management policy, establish roles and responsibilities, context, set limits and tolerance, common language, and oversight etc. structure Risk Management Process: Step 1: Assess Risks Identify source, Ensure that process captures all measure RISK IDENTIFICATION business risks Step 2: Develop/Design Action Ensure that all available tools Plans: Reduce, avoid, retain, and methodologies are used transfer, exploit Step 3: Implement Action Plans Review effectiveness of plans, Check capabilities Step 4: Monitor and report risk Review and evaluate regular management performance reports on performance Step 5: Continuously improve risk Evaluate recommendations for management capabilities improvement Every business manager should recognize the fact that every strategy, plan and decision involves risks. Enterprise risk management is a process used by an entity to identify those risks and develop responses to them that enable it to be assured of meeting its goals. Examples of Business Risks Examples of Controls to Reduce Business Risk 1. Losing market share due to the Develop an approach for legally gathering unforeseen actions of competitors information about competitors' plans and practices 2. Products harming customers Develop a formal and rigorous new product testing program 3. Intellectual assets being stolen from Create Create firewalls that prohibit computer hackers firewalls that prohibit computer from corrupting or stealing intellectual property computer files 4. A website malfunctioning Thoroughly test the website before going “live” on the internet 5. A supplier strike halting the flow of Establish Establish a relationship with two companies raw materials capable of providing needed raw materials 6. Poor weather conditions shutting down Develop contingency plans for overcoming operations weather-related disruptions 7. A poorly designed incentive system causing Create a balanced set of performance measures compensation employees to make bad decisions that motivates the desired behaviour 8. Inaccurate budget estimates causing excessive Implement a rigorous budget review process or insufficient production 9. Poor environmental stewardship causing Create a reporting system that tracks key reputational and financial damage environmental performance indicators 10. Failing to comply with equal employment Create a report that tracks key metrics related to opportunity laws compliance with the laws The following schedule shows examples of business risks that companies face and the corresponding example of a control that could be implemented to help reduce each the risks mentioned: Although these types of controls cannot completely eliminate risks, they enable companies to proactively manage their risks rather than passively reacting to unfortunate events that have already occurred. C. A Corporate Social Responsibility Perspective Corporate social responsibility (CSR) is a concept where business organizations consider the needs of all stakeholders when making decisions. They are responsible not only for creating strategies that produce financial results that satisfy shareholders but also to serve other customers, suppliers, communities and stakeholders such as environmental and human rights advocate whose interests are tied to the company's performance. Examples of corporate social responsibilities that are of interest to the stockholders groups follow. Companies should 1. Provide its customers with: Safe, high-quality products that are fairly priced. b. Easy-to-use information systems for shopping and tracking orders. c. Competent, courteous, and rapid delivery of products and services. d. Easy-to-use information systems for shopping and tracking orders. II. Provide suppliers with: a. Hassle-free acceptance of timely and complete deliveries. b. Fair contract terms and prompt payments. c. Reasonable time to prepare orders. d. Cooperative rather than unilateral actions. III. Provide stockholders with: Competent management refers to the ability of managers to effectively lead, organize, and oversee organizational a. Competent management. activities and resources to achieve desired goals and objectives. It involves having the necessary skills, knowledge, experience, and personal qualities to make informed decisions, solve problems, and drive success in an organization. b. Full disclosure of enterprise risks. c. Easy access to complete and accurate financial information. d. Honest answers to knowledgeable questions. IV. Provide its employees with: a. Fair compensation. b. Safe and humane working conditions. c. Non-discriminatory treatment and the right to organize and file grievances. d. Opportunities for training, promotion, development. and personal V. Provide the communities with: a. Payment of fair taxes. b. Resources that support charities, schools, and civic activities. c. Honest information about plans such as plant closings. d. Reasonable access to media: sources. VI. Provide environmental and human rights advocate with: a. Recycling and resource conversation data. b. Full disclosure of suppliers located in developing countries. c. Greenhouse gas emission data. d. Child labor transparency. D. A Process Management Perspective Most companies organize themselves by functional departments, such as Marketing Department, the Research and Development Department, and the Accounting Department. These departments tend to have a clearly defined "chain of command" that specifies superior and subordinate relationships. However, effective managers understand that business processes, more so than functional departments, serve the needs of company's most important stakeholders it customers. A business process is a series of steps that are followed in order to carry out some tasks in a business. These steps often span departmental boundaries, thereby requiring managers to cooperate across functional departments. The term value chain is often used to describe how an organization's functional departments interact with one another to form business processes. A value chain, as shown below consists of the major business functions that add value to a company's products and services. Business Functions Making Up the Value Chain Research and Product Design Manufacturing Distribution Customer Development Service Managers need to understand the value chain to be effective in terms of planning, control, and decision making. For example, if a company's engineers plan to design a new product, they must communicate with the Manufacturing Department to ensure that the product can actually be produced, the Marketing Department to ensure that customers will buy the product, the Distribution Department to ensure that large volumes of the product can be cost-effectively transported to customers, and the Accounting Department to ensure that the product will increase profits From a contro.l and decision-making standpoint, managers also need to focus on process excellence instead of functional performance. For example, if the Purchasing Department focuses solely on managers shouldn’t just focus on making one part of the business look good (like cutting costs in one department) because it can create bigger problems elsewhere. Instead, they need to look at how all parts of the business work together as a whole. if the Purchasing Department is only trying to buy the cheapest materials to save money, the materials might be of low quality. This could lead to: Manufacturing Problems: More waste and extra work to fix things (because of poor-quality materials). Customer Complaints: Products might not meet expectations, leading to unhappy customers. Marketing Issues: Customers might start looking at competitors instead, making it harder to sell products. minimizing the cost of purchased materials, this narrowly focused attempt at cost Department, more complaints in the Customer Service Department, and reduction may lead to greater scrap and rework in the Manufacturing greater challenges in the Marketing Department because dissatisfied customers are turning their attention to competitors. Managers frequently use a process management method known as lean thinking, or what is called Lean Production in the manufacturing sector. Lean Production is a management approach that organizes resources such as people and machines around the flow of business processes and that only produces units in response to customer orders. Instead of making things in bulk and storing them (which can lead to extra costs or unused items), businesses only make what is needed when a customer places an order. E. Leadership Perspective To achieve success, organizational leaders must be able to unite the behaviours of the fellow employee who have diverse needs, beliefs and goals to the workplace. Leaders need to understand how (a) internal motivation (b) external incentives and (c) cognitive bias influence human behaviour. (a) Internal motivation refers to motivation that comes from within one's self. A leader who is perceived by employees as credible and respectful of their value to the company can increase the extent to which those employees are intrinsically motivated to pursue strategic goals. To be perceived as a credible and respectful leader, he (she) must possess the following attributes 1. Technical competence (spanning the value chain) 2. Personal integrity (in terms of work ethic and honesty) 3. Strong communication skills (including oral presentation skills and writing skills) 4. Strong mentoring skills (to help others realize their potential) 5. Strong listening skills (to learn from his (her) co-workers and be responsive to their needs, and 6. Personal humanity (in terms of giving recognition to all employees who contribute to the organization's success. (b) External Incentives such as bonus compensation, are given by many organizations to highlight important goals and to motivate employees to achieve them. (c) Cognitive Bias. Leaders should be aware that are all people (including themselves) should possess cognitive biases or distorted thought processes such as promoting false assertion that can adversely affect planning, controlling and decision making. While cognitive biases cannot be eliminated effective leaders should take steps and reduce their negative impacts. These steps include  1. They should acknowledge their own susceptibility to cognitive bias (e.g., being overly optimistic in assessing future outcome or overestimating ones strengths and underestimating ones weaknesses relative to others) 2. They should acknowledge the presence of cognitive bias in others and introduce techniques to minimize their adverse consequences. To reduce if not totally eliminate cognitive biases, a leader may W routinely appoint independent team of employees to assess the credibility of recommendations set forth by other individuals and groups. F. An Ethics Perspective Without ethics, the economy would operate much less efficiently less product would be available to consumers, quality would be lower and most likely, process would be higher. Ethical behaviour is the lubricant that keep the economy running smoothly. In other words, without fundamental trust in the integrity of the business, the economy would operate much less efficiently. Therefore for the benefit of everyone - including profit-making companies - it is vitally important that that business be conducted within an ethical framework that builds and sustains trust. Professional management accountants have developed and implemented a set of Ethical Standards for practitioners. Refer to pages 28 to 34 for Ethics Standards for Management Accountants. REVIEW QUESTIONS AND EXERCISES Questions 1. Give four examples for firms you think would be significant users of cost management information and explain why. 2. Give three examples of firms you think would not be significant users of cost management information and explain why. 3. What is meant by the term cost management? Who in the typical firm or organization is responsible for cost management? 4. List the four functions of management. Explain what type of cost management information is appropriate for each. 5. Which is the most important function of management, and why? 6. Identify the different types of business firms and other organizations that use cost management information and explain how the information is used. 7. Name a firm or organization you know of that you are reasonably sure uses strategic cost management and explain why it does so. 8. The opening paragraph of an accounting textbook says. "Managers need accounting information and need to know how to use it." Critically evaluate this statement. 9. The owner of a small software company felt his accounting system was useless. He stated, "Accounting systems only generate historical costs. Historical costs are useless in my business because everything changes so rapidly." Are historical costs useless in rapidly changing environments? b. Should accounting systems be limited to historical costs? 10. A finance professor and a marketing professor were recently comparing notes on their perceptions of corporations. The finance professor claimed the goal of a corporation should be to maximize the value to the shareholders. The marketing professor claimed that the goal of a corporation should be to satisfy customers. What are the similarities and differences in these two goals? 11. How do management accountant support strategic decisions? 12. Define the term strategic cost management. 13. What is meant by a business strategy? 14. What information does cost accounting provide? 15. How do cost accountants support strategic decisions? 16. Pick any large company and describe three risks that it faces and how it responds to those risks. 17. Pick three industries and describe how the risks faced by companies within those industries can influence their planning. 18. Locate the website of any company that publishes a corporate social responsibility report (also referred to as a sustainability report). Describe three nonfinancial performance measures included in the report. Why do you think the company publishes this report? Multiple Choice 1.Which of the following statements is false?  a. Cost accounting measures and reports short-term, long-term financial, and nonfinancial information. b. Cost management provides information that helps increase value for customers. c. All strategies should be evaluated regarding the resources and capabilities of the company. d. A good cost accounting system is narrowly focused on a continuous reduction of costs. 2. Which of the following statements is correct? a. a.The best-designed strategies are valuable whether or not they are effectively implemented. b. b. To take advantage of changing market opportunities, the annual budget should be strictly enforced. c. c. Linking rewards to performance is a major deterrent to good. management performance. d. d. An important strategic decision is making the correct investments in productive assets. 3. All of the following statements are true except a. A budget is a tool used to plan and express strategy. b. Financial accounting reports financial and nonfinancial information that helps managers implement company strategies. c. Feedback links planning and control. d. Control includes deciding what feedback to provide that will help with future decision making. 4. All of the following statements are false except a. Attention-directing activities should focus on cost-reduction opportunities, and not on value-adding opportunities. b. For strategic decisions, scorekeeping is the most prominent role played by management accounting. c. A budget may be used as a planning tool, but not as a control tool. d. Management accountants often are simultaneously doing problem- solving, scorekeeping, and attention-directing activities. 5. Management accounting a. focuses on estimating future revenues, costs, and other measures to forecast activities and their results.  b. provides information about the company as a whole. c. reports information that has occurred in the past that is verifiable and reliable. d. provides information that is generally available only on a quarterly or annual basis. 6. The person MOST a(n) likely to use management accounting information is application. a. a.banker evaluating a credit application b. shareholder evaluating a stock investment. c. governmental taxing authority. d. assembly departinent supervisor. 7. Which of the following description refers to management accounting information? a. It is verifiable and reliable. b. It is driven by rules. c. It is prepared for shareholders. d. It provides reasonable and timely estimates. 8. Which of the following groups would be LEAST likely to receive detailed management accounting reports? a. Stockholders b. Sales representatives c. Production supervisors d. Managers 9. Management accounting information includes a. tabulated results of customer satisfaction surveys. b. the cost of producing a product. c. the percentage of units produced that are defective. d.all of the above 10. Which of the following types of information are used in management accounting? a. a.Financial information b. b.Nonfinancial information c. Information focused on the long term d. All of the above 11. Management accounting includes a. implementing strategies. b. developing budgets.  c. preparing special studies and forecasts. d. all of the above 12. Financial accounting is concerned PRIMARILY with a. external reporting to investors, creditors, and government authorities. b. cost planning and cost controls. c. profitability analysis. d. providing information for strategic and tactical decisions. e. 13. Financial accounting provides a historical perspective, whereas management accounting emphasizes a. the future. b. past transactions. c. a current perspective. d. reports to shareholders. 14. Strategy specifies a. how an organization matches its own capabilities with the opportunities in the marketplace. b. standard procedures to ensure quality products. c. incremental changes for improved performance. d. the demand created for products and services. 15. Control includes a. implementing planning decisions. b. evaluating performance, c. providing feedback to help with future decision making: d. all of the above. 16. Linking rewards to performance a. helps to motivate managers.  b. allows companies to charge premium prices. c. should only be based on financial information. d. d.does all of the above 17. Control measures should a. be set and not changed until the next budget cycle. b. be be flexible to allow for employees who are slackers. c. be kept confidential from employees aployees so that competitors don't have an opportunity to gain a competitive advantage. d. be linked by feedback to planning 18. For control decisions, emphasis is placed on the _____________ role(s) of management accounting. a. problem-solving b. scorekeeping c. attention-directing d. both (b) and (c) 19. Which of the following terms does not represent a main focus of cost management information? a. Usefulness b. Timeliness c. Relative accuracy d. Compliance with external reporting requirements 20. Strategic management can be defined as the development of sustainable: a. a.chain of command b. competitive position c. cash flow d. business entity 21. The control area of management is primarily concerned with: a. a.standards and variances b. monitoring and evaluation c. structure and discipline d. organization and implementation 22. Cost management has moved from a traditional role of product costing and operational control to a broader strategic focus, which places an emphasis on: a. a.non-competitive pricing b. domestic marketing c. short-term thinking d. integrative thinking 23. Dramatic improvements in communication have resulted in increasing global competition, which has required firms to: a. a.completely replace existing cost information systems. b. expand existing cost information systems. c. modify existing cost information systems to handle more data. d. develop cost management systems to handle more data. 24. All the information the manager needs to effectively manage the firm or not-for-profit organization is termed: a. a.planning information. b. b.cost management information. c. c.financial information. d. life cycle information. 25. Those who develop cost management information are most often referred to as: a. a.cost accountants. b. operational accountants. c. c.management accountants. d. d.industrial accountants. 26. The main focus of cost management information must be: a. a.reliability and usefulness. b. timeliness and reliability. c. c.objectivity and reliability. d. usefulness and timeliness. 27. The development of a sustainable competitive position - understanding what specific activities are needed for the firm to succeed, and making the appropriate strategic choices - is termed:  a. strategic cost management. b. strategic management. c. total quality management d. activity-based management. 28. The development of cost information to facilitate the principal management function is termed: a. life cycle costing. b. activity-based costing c. total quality management d. strategic cost management 29. The ability to deliver a product or service faster than the competition is termed: a. just-in-time. b. statistical quality control. c. flexible manufacturing. d. speed-to-market. 30. A set of policies, procedures and approaches to business to produce long-term success is termed a: a. critical success factor. b. competitive position. c. mission. d. strategy. Exercises Exercise 1: Ethics and the Manager Raymond Diaz was recently hired as assistant controller of RD Chem Inc., which processes chemicals for use in fertilizers. Diaz was selected for this position because of his past experience in chemical processing. During his first month on the job, Diaz made a point of getting to know the people responsible for the plant operations and learning how things are done at RD Chem. During a conversation with the plant supervisor, Diaz asked about the company procedures for handling toxic waste materials. The plant supervisor replied that be was not involved with the disposal of wastes and suggested that Diaz might be wise to ignore this issue. This response strengthened Diaz' determination to probe this area further to be sure that the company was not vulnerable to litigation. Upon further investigation, Diaz discovered evidence that RD Chem was using a nearby residential landfill to dump toxic wastes. It appeared that some members of RD Chem’s management team were aware of this situation and may have been involved in arranging for this dumping; however, Diaz was unable to determine whether his superior, the controller, was involved. Uncertain how he should proceed, Diaz began to consider his options by outlining the following three alternative courses of action:  Seek the advice of his superior, the controller.  Anonymously release the information to the local newspaper.  Discuss the situation with an outside member of the board of directors with whom he is acquainted. Required: For each of the three alternative courses of action that Raymond Diaz has outlined, explain whether or not the action is appropriate according to the Standards of Ethical Conduct for Management Accountants. Exercise 2: Enterprise Risk Management The table below refers to seven industries.  Required: For each industry, provide an example of a business risk faced by companies that compete within that industry. Then, describe an example of a control that could be used to reduce the business risk that you have identified. Industry Example of Business Risk Example of Control to Reduce the Business Risk 1.Airlines (e.g., Philippine Airlines) 2.Pharmaceutical drugs (e.g., Pfizer) 3.Package delivery (e.g., LBC) 4. Banking (e.g., BPI) 5. Oil and gas (e.g., Shell) 6. E-commerce (e.g., Lazada) 7. Automotive (e.g., Toyota) Exercise 3: Ethics in Business Consumers and lawyers in more than 10 regions accused a prominent nationwide chain of auto repair shops of misleading customers and selling them unnecessary parts and services, from brake jobs to front-end alignments. "In the face of declining revenues, shrinking market share, and an increasingly competitive market management attempted to spur performance of its auto centers The automotive service advisers were given product-specific sales quotas-sell so many springs, shock absorbers, alignments, or brake jobs per shift and paid a commission based on sales [Flailure to meet quotas could lead to a transfer or a reduction in work hours. Some employees spoke of the "pressure, pressure, pressure" to bring in sales. This pressure-cooker atmosphere created conditions under which employees felt that the only way to satisfy top management was by selling products and services to customers that they didn't really need. Suppose all automotive repair businesses routinely followed the practice of attempting to sell customers unnecessary parts and services. Required: 1. How would this behaviour affect customers? How might customers attempt to protect themselves against this behaviour? 2. How would this behaviour probably affect profits and employment in the automotive service industry? Exercise 4: Ethics in Decision Making Assume that you are the chairman of the Department of Accountancy at Mountain State University. One of the accounting professors in your department, Dr. Cruz, has been consistently and uniformly regarded by students as an awful teacher for more than 10 years. Other accounting professors within your department have observed Dr. Cruz’s classroom teacher and they concur that his teaching skills are very poor. However, Dr. Cruz was granted tenure 12 years ago, thereby ensuring him life-long job security at Mountain State University. Much to your surprise, today you received a phone call from an accounting professor at University of Eastern Philippines. During this phone call you are informed that the University is on the verge of making a job offer to Dr. Cruz. However, before extending the job offer, the faculty at the University wants your input regarding Dr. Cruz’s teaching effectiveness while at Mountain State University. Required: How would you respond to the professor from University of Eastern Philippines? What would you say about Mr. Cruz’s teaching ability? Would you describe your answer to this inquiry as being ethical? Why? Exercise 5: Ethics and Decision Making Assume that you just completed a December weekend vacation to a resort within the Entertainment City in Pasay City. During your trip you won P100,000 gambling. When the casino exchanged your chips for cash they did not record any personal information, such as your driver's license number or social security number. Four months later while preparing your tax returns for the prior year, you stop to contemplate the fact that the Bureau of Internal Revenue requires taxpayers to report all gambling winnings on Form XXX. Required: Would you report your gambling winnings to the Bureau of Internal Revenue so that you could pay income taxes on those winnings? Do you believe that your actions are ethical? Why? CHAPTER 2 THE PROFESSIONAL ENVIRONMENT OF COST MANAGEMENT EXPECTED LEARNING OUTCOMES After studying this chapter, you should be able to… 1. Describe the position of the management accountant in the organization structure of the business firm 2. Explain the role and the relationship between the Chief Financial and the Controller 3. Describe the functions and responsibilities of the Controller as the top management accountant 4. Explain the role and the relationship between the Chief Financial Officer and the Treasurer 5. Describe the functions and responsibilities of the Treasurer 6. Understand the ethical standards for management accountants 7. Realize the need for a company code of conduct 8. Be familiar with typical ethical challenges that management accountants encounter 9. Describe the international certifications that are available to management accountants  a management accountant helps make sure that the company's financial decisions and activities are aligned with its goals. They adjust and apply financial processes in a way that supports both the short-term and long-term success of the organization. For example, if the company wants to grow, the management accountant ensures that the budgeting, cost control, and financial planning are done in a way that helps achieve that growth while keeping things running smoothly in the present. They essentially ensure the financial side of things works in the best interest of the company's goals. CHAPTER 2 THE PROFESSIONAL ENVIRONMENT OF COST MANAGEMENT ORGANIZATION STRUCTURE AND THE MANAGEMENT ACCOUNTANT Many of the activities constituting the field of management accounting are interrelated and thus must be coordinated, ranked and implemented by the management accountant in such a fashion as to meet the objectives of the organization as perceived by him or her. A major function of the the accounting function is often a management accountant is that of tailoring the application of the process to the organization so "support" role within a company. The that the organization’s objectives, short-term and long-term, are achieved effectively. accountants don't usually make the final decisions, but they help other managers Management accounting is intended to include persons involved in such functions as (like those in charge of different departments) controllership, treasury, financial analysis, planning, and budgeting, cost accountants thus may by offering their have titles as controller, treasurer, budget analyst, cost analyst, and accountant, among others. expertise in financial matters. For example, they provide advice on how to create budgets, The accounting function is usually “staff”, with responsibility for providing line managers and monitor expenses, set prices for products or also other staff managers, with specialized services. This includes advice and help in the areas of services, and make important decisions budgeting, controlling, pricing and special decisions. when needed. Sales managers or production managers have line authority because they manage employees and are directly responsible for the success of the business. line authority Line authority is the authority to command action or give orders to subordinates. Line managers involves managing and controlling are directly responsible for attaining the objectives of the business firm as efficiently as possible. activities directly, while staff authority Sales and production managers typically have line authority. Staff authority is the authority to involves supporting and advising those advise but not command others; it is exercised laterally or upward. Staff managers give support, in line authority without advice and service to line departments. Examples of staff authority are found in personnel, purchasing, engineering and accounting.make direct decisions about operations. commanding them. Accountants or HR managers have staff authority because they advise on financial matters or staffing, but they don’t the controller in a company typically has a staff authority role because they mainly advise and guide other departments on accounting procedures. However, they are also given functional authority by top management, which allows them to direct line managers and employees in certain situations regarding their specific expertise, like accounting procedures. While the controller doesn't have direct Except for exercising line authority over his department, the chief accounting officer usually the authority over core business operations (like controller generally fills the staff role in his company as contrasted with the line roles of sales sales or production), their functional authority gives and production executives. Theoretically, the controller transmits the best accounting procedures them the right to instruct and ensure that the best to be followed by the line people to the President who will communicate such through a manual accounting practices are followed by the line of instructions. In practice however, the controller holds delegated authority from top line managers and employees. This authority management to direct the line people on how to apply these procedures. This is known as is more focused and specific to accounting functional authority which Is the right to command action, laterally or downward, with regar