M.A - COST MANAGEMENT I

how has management accounting evolved

Tracking costs → improving processes → creating value + sustainability

Moved from cost control to value creation → more strategic + forward looking

what have been the five stages of management accounting

S1: cost determination → budgeting/cost accounting

S2: planning and control → using cost info to help decisions

S3: Waste Reduction → focus shift to efficiency and reducing costs where possible

S4: Value creation → not just saving costs but through creating value/increasing shareholder value

S5: Sustainable Development →think long term and environmentally

Traditional v Contemporary Cost Management : 1) Manufacturing

-traditional = only looks at production stage, ignores the desgin costs, supply chain and after sales costs

Traditional v Contemporary Cost Management : cost containment v cost management

Traditional : compares actual costs v standard

Contemporary : Tries to eliminate

Traditional v Contemporary Cost Management : Expense Items vs Processes

Traditional: focuses on staying within budget

Contemporary : considers if the cost should exist at all →eliminates unecessary

Traditional v Contemporary Cost Management : Expense Items vs Processes

traditional : focus on labour costs, material costs and overheads

contemporary : focus on activities and processes

Traditional v Contemporary Cost Management : PUSH V PULL

traditional : produce based on forecasts but leads to overproduction

contemporary : produce based on demand

What is the difference between cost containment and cost reduction?

Containment = staying within limits; reduction = eliminating unnecessary costs

Why is focusing on expense items problematic?

It ignores underlying processes and leads to poor decisions

What is a push system?

Producing based on forecasts rather than demand (supply > demand)

foundation of value chain analysis

-what activities create value and which do not

formal definition of value added activity

An activity that:

• increases the worth of the product or service, and/or

• increases the customer’s willingness to:

  • pay a higher price

  • buy more

So value-added is linked to customer-perceived value.

should a company cut costs equally

-no → shld protect activties that create value and reduce/eliminate activties that dnt

what does not a dichotomy mean

not valuable

should non value activities always be removed

-some activities may not directly increase customer value but are necessary for long term operational effectiveness/success (eg improve quality checks/staff training)

What should a firm do with level 1 activities?

-Discard/Eliminate them

What should a firm do with level 3 activities?

-Review how to achieve them more efficiently

-level 3 activities are ones customers dont care for but are necessary eg compliance/internal controls

What should a firm do with level 5 activities?

-reduce cost without destroying value

-customers value level 5 → high value and keeps them competitive eg next day delivery / excellent service

-activties shld be based on the value they create

what is a value chain + who argued what

a linked set of value creating activities

porter argued that firms can gain a competitive advantage by analysing how value is created across activities

define primary activities v support activities

-primary = directly involved in creating the product/service to the customer + delivering it

-support activities = help primary activties work effectively

what does traditional costing look at and what does value chain analysis look at

-traditional costing looks at department/cost categories

-value chain analysis looks at the activtities themselves → how they connect → where value is created → where waste exists

What is the aim of value chain analysis?

To gain competitive advantage through cost reduction and/or differentiation.

What are the five primary activities?

Inbound logistics, operations, outbound logistics, marketing & sales, service.

Name four support activities

Infrastructure, HRM, technology development, procurement.

what determines profit margin in the value chain model?

value added - total costs

What are linkages in value chain analysis?

Relationships where the way one activity is performed affects the cost or performance of another

What are the two main aims of value chain analysis?

Improve individual activities and exploit linkages between activities

How do linkages create competitive advantage?

Through optimisation and coordination.

How is value chain analysis broader than value-added analysis?

-it includes suppliers, channels, and customers, not just internal activities

Why is this broader view useful?

-Because cost reduction and differentiation opportunities may lie outside the firm itself

Competitive advantage may come from:

• choosing where in the chain to operate

• integrating multiple stages

• specialising in a stage where the firm is stronger

• coordinating stages better than rivals

How is value chain analysis carried out

• Identify and disaggregate value activities

• Assign costs and assets to each activity

• Determine the cost drivers of each activity

• Identify opportunities for lower cost or enhanced differentiation

• Improve control of cost drivers and/or reconfigure the chain

costs and assets assigned to each activity → degree of disaggregation

-how far you break the business down into separate activities

costs and assets assigned to each activity - what are the 3 areas of disaggregation

a) Size + Growth of cost represented by an activity → if activity is becoming larger break it out seperately

b) Cost behaviour of the activity → Activities w diff cost patterns should be seperated as they may behave differently eg advertising and promotions

c)Competitor differences in the performing activity → If competitors perform an activity very differently, it may be strategically important and worth isolating.

After assigning costs, you compare:

• with previous periods

• with competitors

A cost driver is:

-a factor that causes or influences a cost of an activity

what are the 2 categories of cost drivers

-structural cost drivers

-execution cost drivers

Structural cost drivers: State five of them

Scale
Size of operations. Larger scale may reduce unit cost through economies of scale.

Scope
Range of products/activities. Shared activities may reduce cost.

Experience
Learning over time can improve efficiency.

Technology
Better technology may reduce cost or improve performance.

Complexity
More complex products/processes often increase cost.

what are executional cost drivers

These depend on how well the firm performs activities.

They are more operational and controllable in day-to-day management.

eg:

• workforce involvement

• TQM

• capacity utilisation

• plant layout efficiency

• product configuration effectiveness

• exploitation of linkages

These affect how efficiently activities are carried out.

key distinction between structural v execution cost drivers

structural = cost is driven by what the firm is

executional = cost is driven by how well the firm operates

overall logic of value chain analysis

Activities create different levels of value

• The business is a linked chain of value-creating activities

• Competitive advantage comes from improving:

  • individual activities

  • linkages between activities

• The analysis should extend beyond the firm to suppliers, channels, and customers

• To perform VCA:

  • assign costs/assets to activities

  • identify cost drivers

  • find cost reduction or differentiation opportunities

• Cost drivers may be structural or executional

What are the two stages in traditional costing?

overheads → cost centre → cost objects

What drivers are used?

Volume-based drivers (labour hours, machine hours)

What does abc costing look at

instead of departments → Looks at activities

What are the two stages in ABC?

overheads → activities → cost objects

What is the key difference vs traditional?

ABC uses activity drivers instead of volume-based drivers

what are the four steps for TACS (traditional costing system)

1)Assign overheads to product/service department

2)re allocate service department costs to product departments

3)Calculate overhead rates eg per labour hour

4)Apply overheads → products

what are the four steps of the ABC method

-identify major activities

-Assign costs to activity cost centres

-Determine cost drivers + calculate rates

-Assign activity costs to products

difference between traditional and abm

-traditional → wheres the cost

-abm → whys the cost happening

What is ABM

• reports by activities

• reports by sub-activities

• crosses departments

what is activity based costing vs activity based management

-calculates costs (measures)

-abm uses abc info to improve decisions

ABC tells you:

• product A costs more due to many setups

ABM tells you:

• reduce number of setups OR redesign process

-efficiency scale (Kaplan and Cooper)

-level 1 →very efficient

-level 3 → moderate efficiency

-level 5 → inefficient

-even if an activity is valueable may be inefficient

what is operational ABM + what does it acc do

-focuses on improving efficiency by managing activities and cost drivers

-improve processes, reduce costs and eliminates wastes

-Operational ABM directs attention to high-cost, low-value, and inefficient activities, with priority given to those that satisfy multiple criteria.

what does strategic abm focus on

-doing the right things, not just doing things efficiently

-asks are we making the right products, serving the right customers, serving the right strategy

-“Strategic ABM focuses on profitability and strategic positioning by analysing products, customers, and markets, rather than simply improving operational efficiency.

what is key about cost reduction

-it shouldn’t reduce value

case study practice:

Lets say you are charging the same price for alpha and beta but found out alpha is more expensive to produce, run me through your thinking on what youd do, explain limitations

-basic response: higher price for alpha to reflect higher costs and reduce price for beta

-looking deeper into it need to think ab elasticity of demand → will customers still buy if price increases

-long term positioning → does change affect brand perception →lower price signals lower quality, higher price

-competitors reaction → could this trigger price war

what is menu based pricing + example + drawbacks

-allows firms to charge customers based on their consumption of activities, these should be expected by customers and high value added

-eg charging seperate for deliveries/urgent fee order/small order fee some customers use it more than others

-improves cost recovery

-may lead to negative customer satisfaction for value added services