Chapter 15 Managing costs and time for customer value Copyright ª 2006 McGraw­Hill Australia Pty Ltd 15­ 1 Cost management • Contemporary management accounting systems include a range of tools and techniques that provide information for cost management • Cost management – Improvement of an organisation’s cost effectiveness through understanding and managing the real causes of cost – Main focus is on cost reduction, but also on improving other aspects of performance such as quality and delivery Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-2 Conventional versus contemporary approaches • Drivers of cost – Conventional approach Managers control costs by bringing them into line with some predetermined goal – Contemporary approach Reduce costs by identifying waste and eliminating it through identifying the real cost drivers continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-3 Conventional versus contemporary approaches • Strategic perspective – Conventional approach Control costs within the organisation An internal perspective – Contemporary approach Cost management also concerned with achieving value for the customer A strategic perspective continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-4 Conventional versus contemporary approaches • Process perspective – Conventional approach Control costs by reporting results for responsibility centres based on functional areas of the business – Contemporary approach Recognise that customers’ needs are met by processes which flow across the business • Contemporary approaches include – Activity-based management – Business process re-engineering – Life cycle management – Target costing Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-5 Activity-based management (ABM) • Process of using information from activity-based costing to analyse activities, cost drivers and performance so that customer value and profitability are improved • Customer value – The value a customer places on particular features of a product or service • Addresses the vertical view on the activity-based costing model Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-6 Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-7 Using ABM to reduce costs 1. Identify the major opportunities for cost reduction 2. Determine the real causes of these costs 3. Develop a program to eliminate the causes and, therefore, the costs 4. Introduce new performance measures to monitor the effectiveness of cost reduction efforts Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-8 Identifying the major opportunities for cost reduction • Activities – The units of work performed • Undertake value analysis – Classification of activities • Value-added activities – Provide essential value to the customer, or are essential to the functioning of the business • Non-value-added activities – Do not add value to a product or service from the customers’ perspective or for the business and, therefore, can be eliminated Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-9 Determining the real causes of non-value-added costs • Building activities into processes – Eliminating non-value-added activities requires a clear understanding of the way work is done in an organisation – Aseries of activities that are linked together to achieve a specific objective – Processes may cross the boundaries of responsibility centres, such as functional departments – Activities in various processes may share common cost drivers and performance measures continued Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-10 Determining the real causes of non-value-added costs • Cost driver analysis – Identification of root cause cost drivers for the major non-value-added activities • Analysis of root cause cost drivers of value-added activities may also lead to more efficient use of resources Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-11 Measuring performance in cost reduction • Activity-based performance measures can be used to monitor the effectiveness of cost reduction efforts • Performance measures may reflect both costs and cost drivers • Targets may be set • Corrective actions taken when targets not achieved • Performance monitored over time Copyright 2006 McGraw-Hill Australia Pty Ltd PPTs t/a Management Accounting: Information for managing and creating value 4e Slides prepared by Kim Langfield-Smith 15-12 Impediments to implementing ABM