Cost Management and Strategic Management Accounting
Traditional cost management systems, widely used at present, focus on comparing actual costs with pre-established standards, identifying and analyzing deviations and implementing corrective actions that ensure that future costs meet the accepted standards. The main focus here is on preventing cost increases, not cost reductions.
However, today's competitive environment of international business with the participation of transnational companies is best matched by such methods of cost management, in which the focus is not so much on restraining growth in costs, but on reducing them. One of them is strategic management accounting.
Costing over the lifetime of a product
Traditional management accounting procedures focus on the production stage of the product life cycle. Pre-production costs, as well as post-production costs, are generally not included in the cost of production calculations, which limits the managers' understanding of the profitability of the product, since they do not know the actual profit received throughout life.
Identifying the costs incurred at all stages of the life cycle of the product allows you to better understand the essence of the total costs associated with a particular product throughout its existence, and effectively manage them. In particular, costing over the lifetime of a product helps managers understand the consequences in terms of identifying areas (stages) at which cost reduction is likely to be most effective.
The target costing is a consumer-oriented method and is widely used by Japanese multinational companies that calculate the cost of their products in the following order:
- determination of the value (target price) of the product from the point of view of the consumer;
- setting the target profit size;
- determination of the target cost price as a difference between the target price and the target profit.
After that, the target cost price is compared with the projected actual cost price. If the forecasted actual cost price exceeds the target, then efforts are being made to close the gap, so that the projected costs are equal to the target ones.
■ Cost Engineering is a system-wide analysis of the factors that affect the costs associated with the manufacture of a product or service. Used to provide the necessary level of target costs, or by determining product characteristics that can be improved by reducing costs without impairing the functional purpose of the product, or by eliminating unnecessary functions from the design that make it more labor-intensive (expensive), for which consumers do not show willingness to pay .
Cost engineering involves the use of a functional analysis apparatus, which is an analysis of the main functions of the corresponding product. For example, for a car, such functions can be style, comfort, operational characteristics, reliability, quality, attractiveness, etc. In the course of such analysis, the prices of each item are determined, reflecting the money that the consumer is ready to pay for them. The sum of all prices for all product functions gives the total estimated selling price, from which the target profit is deducted to determine the target cost price. The cost price for each function of the product is compared with the benefits for the consumer provided by this function. If the cost of the function exceeds the benefits to the consumer, then this function must be eliminated or modified so that either the cost of it becomes less, or its value in the eyes of consumers exceeds the cost of obtaining it.
Cost management and value chain
Currently, transnational companies pay much attention to the analysis of the so-called value chain as a means of increasing customer satisfaction and the most effective cost management. The value chain (Figure 20.9) is an interconnected set of activities that create value (value), ranging from the supply of basic inputs from suppliers to the delivery of the final product or service to the consumer.
Fig. 20.9. Value chain
Companies that perform all kinds of activities that are part of the value chain, get a competitive advantage more efficiently and at lower cost than their competitors. It must be understood that all activities represented in the chain are not a set of independent components but a system of interrelated stages in which the results of one of them affect the costs of others.
If we consider the value chain from the point of view of the consumer, then each of its subsequent links can be integrated as a consumer of the products of the previous link. In this case, consumer opinions can be used as constructive feedback for estimating the level of costs for products supplied by suppliers. In addition, the company must constantly compare its value chain with similar value chains of its competitors or the industry as a whole. The methodology of such an analysis can be as follows:
■ Identify the value chain in the industry, and then determine the cost levels for each link in that chain;
■ carry out diagnostics of cost factors that govern each of these activities;
■ Provide a sustainable competitive advantage, even if the values of company-controlled cost factors are higher than those of competitors, or reformat the entire value chain.
Thus, due to a systematic analysis of costs for each type of activity, the company will be able to reach lower costs.
In search of opportunities to reduce the overall cost level, many multinational companies are actively using at present the classification of activities for "adding value" and not adding. Actions aimed at eliminating or reducing activities that do not add value are important, because if the company does this constantly, it can reduce costs without reducing the value from the point of view of the consumer of the product.
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