Strategic Cost Management

STRATEGIC COST MANAGEMENT- is the application of cost management techniques which
aim to reduce cost while strengthening the strategic position of a business. Strategic cost
management can be applied in service, manufacturing, and not-for-profit organizations.
The above objective can be attained if the company can determine which costs support a
company’s strategic position. In this case, it would be beneficial to increase costs that support the
strategic position of a business. It is not good to cut costs in strategically important areas. Doing
so reduces consumer satisfaction and experience. Eventually, it could lead to a decline in sales,
and ultimately, in profit.
A company should also identify which costs either causes decline in the strategic position of a
business or have no impact at all. Thus, management needs to focus on reduction initiatives on
these types of cost so that they can provide input regarding how certain costs should be incurred
to support the competitive position of a company.
Three ways to institute cost management techniques that will not only manage costs but also
augment profit realization are as follows:
1) Develop systems that would streamline the transaction between corporate support
departments and the operating units.
2) Establish transfer pricing systems to coordinate the buyer-supplier interactions between
decentralized organizational operating units
3) Utilize pseudo profit centers to create profit maximizing behavior in what were formerly
cost centers.
MANAGEMENT ACCOUNTING (also called Managerial accounting or Internal accounting)-

field of accounting that provides economic and financial information for internal users, particularly
the managers or decision-makers in an organization.
Applications of Management Accounting

1) Business- managerial accounting provides the economic information needed by the
business managers so they can attain their profit/other economic goals.
2) Non profit organizations- these organizations likewise need the economic information
provided by management accountants in attaining their organization’s objectives.
Principles governing the design of management accounting system

1) The system should help to establish the decision-making authority over the organization’s
assets.
2) The information generated by the system should support planning and decision-making.
3) The reports should provide a means for performance monitoring and evaluation.
Distinctions among Management Accounting, Cost Accounting and Financial Accounting

The accounting system is part of the organization’s Management Information System (MIS).
The cost accounting system, which accumulates data about the costs of producing goods and
services, is part of the organization’s overall accounting system. It accumulates cost information
for both management accounting and financial accounting.
Management Accounting Financial Accounting
Users of reports Internal Users: officers and External users: stockholders,
managers creditors, concerned
government agencies
Purpose To provide internal users To provide external users
with information that may be with information about the
used by managers in carrying organization’s financial
out the functions of planning, position and results of
controlling, decision making, operation.
and performance evaluation.
Types of reports Different types of reports, Primarily financial
such as budget, financial statements and the
projections, cost analyses , accompanying notes to such
etc. depending on the statements.
specific needs of
management.
Basis of reports Reports are based on a Reports are based almost
combination of historical, exclusively on historical
estimated and projected data. data.
Standards of presentation In preparing reports, the Reports are prepared in
management of a company accordance with GAAP and
can set rules to produce other pronouncements of
information most relevant to authoritative accounting
its specific needs. bodies,
Reporting entity Focus of reports is on the Financial reports relate to the

company’s value chain, such business as a whole
as a business segment,
product line, supplier or
customer.
Period Covered Reports may cover any time Reports usually cover a year,
period- year, quarter, month, quarter, or month.
week, day, etc. Reports may
be required as frequently as
needed.
The Need for Accounting Information-

Managers need information to make decisions about:
1) Acquiring and financing production capacity
2) Determining which products to produce and market
3) Pricing products, jobs or service
4) Determining the best method of distributing goods and services to the target market
5) Locating the best property for production facilities
6) Financing the costs of production and operations
Management accountants should provide both quantitative and qualitative information to assist
managers in decision making. Managers are information users, while accountants are information
providers.
Essential characteristics and qualities of information:

1) Accuracy and verifiability-accuracy refers to the degree to which the information is free
from error.
2) Completeness- the completeness quality refers to the degree to which the information is
free from omission
3) Relevance- refers to the appropriateness of the information as input for a particular
decision to be made. Not all information at hand could be relevant to the user. Information
overload may happen, which means the volume of available information is too many that
the user cannot distinguish relevant information from that which is not relevant.
4) Timeliness- refers to the time sensitivity of information. Sensitivity refers to the effect of
the decision that should have been made if the information was given on time or not.

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STRATEGIC COST MANAGEMENT- is the application of cost management techniques which

MANAGEMENT ACCOUNTING (also called Managerial accounting or Internal accounting)-

Applications of Management Accounting

Principles governing the design of management accounting system

Distinctions among Management Accounting, Cost Accounting and Financial Accounting

Reporting entity Focus of reports is on the Financial reports relate to the

The Need for Accounting Information-

Essential characteristics and qualities of information:

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