Module 3
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ACCT802-Ch.10-FundamentalsofCostManagement.pptxChapter 10 Fundamentals of Cost Management
ACCT 802
Strategic Management Accounting
Dr. Tien Lee, Ph.D., PMP, CISA, CISSP [email protected] | (415)644-TIEN
San Francisco State University Lam Family College of Business
Beyond Cost Allocation…
Cost allocation investigates various ways to allocate costs that are shared, through assignment of cost pools, define cost drivers, and understand the activities in the value adding process.
Visualization Tools for Cost Allocation
Cost allocation without visualization can be confusing and users may lose track of various cost pools and cost objects in the midst.
The Sankey diagram is an effective tool in making visual communication of how costs are allocated.
Sankey Diagram:
https://www.displayr.com/create-a-sankey-diagram /
https:// www.hashtagtechgeek.com/2019/11/6-tools-create-sankey-diagram-online.html
Cost Management
Cost Management takes shape after various cost pools, cost objects, and cost drivers are defined.
I.E., in Activity-Based Management, the accounting function can then manage and fine-tune the cost associated with activities.
Setting budget in the activity cost pool
Reduce cost of each activity.
Fine tune number of activities performed
It can also be done by looking at:
Cost Pools: Manage variable costs
Cost Objects: Manage the cost of a car
Cost Drivers: reduce the labor hours needed in assembly.
Cost Management by Management Focus
In addition to traditional cost management by cost pools, cost objects, and cost drivers, management may choose different focuses to manage costs.
Cost of Customer – “customer profitability”
Cost of Supplier – How much would it be to have a relationship with one supplier over another?
Cost of Capacity – It costs resources to maintain a certain capacity; therefore, if capacity is unused, opportunity costs ensue.
Cost of Quality – The cost needed to maintain at certain quality.
Cost Management Fallacies
Cost Management Cost reduction
One of the most common fallacies in cost management is the misconception that cost management equates cost reduction.
The purpose of cost management is “provide relevant information to the management to support decision making and achieve business objectives”
While Cost reduction, can be a business objective in itself too, but it is NOT the ONLY job of the accounting function!
Cost of Customer
Considers the revenue effect vs cost effect of different customers.
High revenue, demanding customers
Focus: Maintain niche, and keep customer happy. Small but effective employee size
Low revenue, less demanding customers
Focus: volume, size and efficiency of operation.
There is NO SILIVER BULLET in cost of customer, one must balance the resources need against business objectives.
Asynchronous Workshop:
10-58 Customer Profitability – SkiBlu, Ltd.
What would be your recommendation to the management?
Cost of Supplier
Considers beyond the input cost of goods.
Choosing a supplier CANNOT be based purely on the input costs of the goods or services!
freight?
lead and lag time?
stability of business?
capacity?
Relationship?
Cost of Capacity
Considers resource USED and resources SUPPLIED.
Capacity: requires firms to SUPPLY resources at a certain level
i.e., space, time slots, energy, and carbon emission allotment
This results in “COSTS of Resources SUPPLIED.
The difference between the Cost of Resources supplied and resources used, is COST OF UNUSED CAPACITY.
Cost of Capacity, theory and practice
Theoretical capacity is the amount of production possible under IDEAL condition with no down time.
Practical capacity considers needed maintenance, inspection, vacation, and downtime.
Consider a restaurant, running things at theoretical capacity is not only impossible, but also may cause cost of quality to increase dramatically.
Asynchronous Workshop
10-68 Assigning Capacity Costs - Mercia Chocolates
Cost of Quality
Cost of Quality derives from the Conformance cost and non-conformance costs.
Conformance Costs are the costs associated with keeping goods and services at a reasonable level of quality.
Non-conformance Costs are the cost of failing to control the costs
Internal failure: Scrap, rework, reinspection
External failure: repair, return, lost sales…
Conformance Costs
Conformance costs can include the following:
Prevention Costs:
Materials inspection
Process control
Quality training
Machine inspection
Product design
Appraisal Costs:
QA sampling and inspection
Field Testing
Cost of Quality
Both Conformance Costs and non Conformance costs will lead to increase of cost of quality.
Focus: Finding the minimum level.
Asynchronous Workshop
10-70 Quality Improvement – Iport Products
Think: What other nonfinancial and qualitative factors should management consider?
