Chapter 1 – Cost Management and Strategy
Chapter 1
Cost Management and Strategy
Teaching Notes for Cases
1-1. Critical Success Factors
The critical success factors for Kirsten’s business, including the proposed new publishing
business are related to the needs of these customers, which probably includes, now and into the future:
timeliness of the information in the publishing business
reliability of the repair and consulting business
expertise and ability to solve problems which competitors may not be able to solve
ability to respond quickly, faster than her competitors
since her business probably grows primarily on the basis of references and recommendations
from satisfied customers, the ability to consistently satisfy her current customers is critical;
she should not try to grow too fast or to move into new areas in which she cannot be
immediately successful
The cost information she will need will be primarily in the management functions of (1) strategic
management and (2) management and operational control. In the strategic management area, she will
need cost information to understand which of her businesses is most profitable, which she can be most
competitive in from a cost perspective, and to provide a basis for analysis of potential new businesses.
Strategic management methods are covered in Parts One, Two and Six of the book. In management and
operational control, she will need cost information to provide a fair and effective basis for identifying the
most inefficient operations, and for rewarding the most effective managers. Operational control is covered
in Part Five and management control is covered in Part Six.
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Chapter 1 – Cost Management and Strategy
1-2. Contemporary Management Techniques
Delight competes in both a low-cost/low-price market (wholesale) and in a less price-sensitive
market where its innovation and product leadership are critical. The benchmarking, continuous
improvement, activity-based costing, and theory of constraints techniques are likely to be used in the low-
cost market. These techniques are used to assist in reducing production costs. In addition, target costing
can be used for those products which have significant development costs, to focus the design effort on
developing a profitable product.
Total quality management is probably used by Delight in both market segments. Quality is
important to both types of customers. Also, life-cycle costing can be used in either market segment, to
give Delight a basis for analyzing the profitability of each of its products over its entire life cycle. This
will be especially important for products which require substantial development costs.
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Chapter 1 – Cost Management and Strategy
1-3. Pricing; Ethics
The staff cost analyst has the responsibility to notify immediate supervisors that the decision to
cancel plans for the new cost system, without appropriately informing the U.S. Government of the
implications for the contract, is unethical. Because of the accountant’s responsibility for confidentiality,
the accountant should not report the matter outside the firm. The only exception to this confidentiality
requirement would be a legal requirement to disclose the matter, as would be the case in a court order.
The accountant should also carefully consider whether the ethical climate in the company is
sufficiently weak that it would be appropriate to leave the company. Is this an isolated incident or one of a
pattern of incidents which reflect a pervasive unethical climate?
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Chapter 1 – Cost Management and Strategy
1-4 Selected Ethics Cases
1. The action of the COO is both unethical and illegal. If the beer was near to (but not past) its
shelf life, potential customers should be advised, but if the beer is past the shelf life, the sale of the beer is
illegal as well as unethical. It is also likely, depending on the degree of care taken by local authorities, that
an inspection of the firm’s records will disclose the illegal act. If Jim is directly involved in the decision,
then he should clearly state to immediate supervisors that the action is illegal and unwise, and refuse to
take part in it. If Jim on the other hand becomes indirectly involved as an observer or becomes aware of it
from others, then he should again state clearly to his immediate supervisors that the action is improper
and unethical. In either case, Jim should not inform anyone outside the firm, because of his ethical
responsibility to maintain the confidentiality of his employer.
2. As in part 1 above, the action of the firm appears to be in conflict with local laws. While the
ethical principles are not as clear in this case, Jim is obliged to comply with local laws and ordinances,
and as such should refuse to become directly involved in the act, and to report the impropriety to his
immediate supervisor.
3. Since disclosure of insider information is in conflict with SEC regulations, Jim should be
careful to say nothing that would provide assistance to his friends, even if it appears they may have
already heard the information from another source. Jim would be subject to SEC penalties, and from an
ethical standpoint, the disclosure would be unfair to the current and potential investors in the firm.
4. The salesman’s action is an unethical attempt to manipulate the financial report of the firm and
to cause his or her sales commission to be received earlier than is appropriate. An evaluation of an action
5. The marketing executive’s action is unethical, in effect, stealing from the company. There is
also a possibility from what the executive has said that there is an outside business which might compete
with the company. This would also be unethical. As in part 4 above, the materiality of the amount and the
possibility of a pattern to the action would have an important effect on Jim’s evaluation of the incident.
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Chapter 1 – Cost Management and Strategy
1.5 Strategy; Branding Beef
1. The meatpacking industry overall is probably best described as a commodity business. The product is
hard to differentiate other than by USDA grade or preparation (percent lean,…). On the other hand,
some meatpackers and supermarkets are able to differentiate their product through careful selection of the
meat, and focus on freshness and customer service. Husker Beef Company (huskerbeefco.com) and
Kansas City Steak Company (kcsteak.com) are two examples of firms in the industry that differentiate.
2. The meatpackers plan to address some of the issues with preparing meat meals that are likely to be the
cause of the decline in beef purchases over the last few decades. The new focus is on convenience for
the customer by reducing food preparation time, and by making the food preparation process simpler so
that the product is can be served with the best possible flavor and nutritional benefit.
Two of the largest meatpackers, Hormel and IBP Inc. are developing new products that improve
convenience for the customer. For example, one new Hormel product, called “Always Tender” is
prepared with a patented solution of salt, vinegar, and sugar to keep the meat moist, even if it is
overcooked.
Also, the firms are putting more effort into marketing their product, with the goal of developing a
brand image and brand loyalty. For example, IBP Inc is using the Wilson brand, and will advertise it as
the centerpiece of family time, not just a meal. Together, these efforts change the nature of the
competition from a commodity-based, cost leadership type to a differentiated type of competition based
on customer convenience.
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Chapter 1 – Cost Management and Strategy
1.6 Top 10 Companies
This question is intended for class discussion in which a number of different views are likely to be
expressed. I would make the observation that many of the top 10 firms in sales are cost leaders, either
low cost retailers (Wal-Mart) or commodity producers (the energy companies). One might also observe
that the global demand for oil products and the price increases in these products in recent years have
affected the energy companies significantly, and is a reason why they are in the top 10. I would also
point out that many cost leadership firms are very large because they succeed on very low margins, and
therefore attain a very large size to sustain the low margins and still show strong earnings growth. Note
for example that Wal-Mart is top in sales and 8th in earnings. Large manufacturers such as GM, Ford and
GE are not easily identified as cost leaders or differentiators, but are established companies that have
attained large size.
The list of most profitable firms includes both costs leaders and differentiators. Berkshire Hathaway,
Wells Fargo, J.P Morgan Chase and Fannie Mae (financial firms), Apple, Microsoft, and IBM can be
identified with differentiation, as innovation and customer service are key elements of their success.
ExxonMobil and Chevron deals with a global commodity, and thus cost leaders.
Source: Fortune.com
An interesting note is that the 2011 list for Largest Revenue has 8 of the same firms from the 2014 list;
also 8 of the Top Firms in profits are on both the 2011 and 2014 lists.
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Chapter 1 – Cost Management and Strategy
Teaching Strategies for Articles
1-1 “Are You a Business Partner?”
This article is based on interviews of 100 accountants who have made the transition to business partner.
For firms such as McDonalds, Trane, and Boeing, they explain the transition from traditional accountant
to accountant as business partner.
Discussion Questions
1. What are the key findings of the recent research of 100 accountants, now business partners?
The article begins by defining a business partner as one who works in teams with members of
other disciplines to improve business processes and work for the overall success of the firm or
organization.
The traditional accountant of the past was viewed as an information specialist who was valued for
2. What are the implications of these findings for the education and training of management accountants?
The accountant as business partner needs an entirely different skill set from that of the traditional
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Chapter 1 – Cost Management and Strategy
1.2 Creating an Ethical Culture
This article takes a look at the financial fraud at WorldCom and other companies in recent years, and
examines the role of controls and the ethical culture in the frauds that occurred in these companies. In
considers the following questions. How does the ethical culture effect the risk of fraud? How does a
company develop an ethical culture?
Discussion Questions:
1. According to the article, did World Com lack internal controls to detect fraud? Why was the fraud not
detected earlier, or prevented all together?
The article suggests that internal controls were adequately in place at World Com, but the fraud
that occurred there was enabled by the culture that permitted unethical conduct. The point is that to
reduce the risk of fraud, the company must focus as much on developing an ethical culture within the
company supported the unethical environment there.
2. According to the Culture Risk Assessment model, what are the levels of values of an organization and
what are the objectives of each?
The levels and objectives of each are identified in Figure 1 in the article:
3. What are some of the ways a company can help to develop an ethical culture?
The criteria for success of an ethics program must be outcomes based.
Formal programs are guides to shape the culture, not vice versa.
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