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