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Chapter 1 - Cost Management and Strategy
1-1
CHAPTER 1: COST MANAGEMENT AND STRATEGY
QUESTIONS
1-1 Firms Using Cost Management. Here are some examples; there are many
possible answers.
1. Wal-Mart: to keep costs low by streamlining restocking and sales
2. Dell: to keep costs low by improving manufacturing performance and by using
to be able to analyze the relative profitability of its different products, using cost
management
7. A small machine shop: which needs cost management to determine whether it
should repair or replace a machine
8. A dance studio: to analyze and choose between different compensation plans
for its teachers; and to determine whether it should open a new studio
1-2 Firms not expected to be significant users of cost management information:
1. Microsoft: here the focus is on forming strategic alliances, innovation and
competition; cost management is more important for other firms in the
4. Major league sports: dependent primarily on the development of fan support,
good coaching and player acquisition
1-3 Cost management information is a broad concept. It is the information the
manager needs to effectively manage the firm or not-for-profit organization --
Chapter 1 - Cost Management and Strategy
1-2
1-4 In the private sector, the Financial Accounting Standards Board, an independent
organization, and the American Institute of Certified Public Accountants (AICPA)
supply guidance regarding financial reporting practices. The Sarbanes-Oxley Act
of 2002 also created the Public Company Accounting Oversight Board which
reports to the SEC to oversee auditing standards and practices. The AICPA also
around the world. The Financial Executives International (FEI) organization
provides services much like the IMA for financial managers, including controllers
and treasurers. Because of the nature of its membership, the FEI tends to focus
on management and operational control issues, and less on the product costing,
planning, and decision-making functions.
1-5 The Certificate in Management Accounting (CMA) is the most relevant
certification program for management accountants since it focuses on the types
of skills that are most in demand for management accountants: economics,
1-6 The four functions of management are:
1. Strategic Management -- information is needed by management to make
sound strategic decisions regarding choice of products, manufacturing methods,
marketing techniques and channels, and other long term issues.
2. Planning and Decision Making -- information is needed to support recurring
requirements, for the preparation of financial reports and for use in the three
other management functions.
1-3
1-7 Strategic management is the most important management function since it most
goals drives all other activities in the firm.
1-8 Merchandising firms purchase goods for resale. Merchandisers that sell to other
merchandisers are called wholesalers, while those selling directly to consumers
are called retailers. Examples of merchandising firms include the large retailers,
such as Sears, Wal-Mart, and Radio Shack. Merchandisers use cost
Governmental and not-for-profit organizations provide services, much like the
firms in service industries. However, the service provided by these organizations
is such that there is often no direct relationship between the amount paid and the
services provided. Instead, both the nature of the services to be provided and
the customers who receive the service are determined by government or
philanthropic organizations. These organizations use cost management
information to determine and control the costs of the services they provide.
1-9 The answers here can vary from large manufacturers such as Hewlett-Packard
(HP) to small retail stores. If the class has trouble getting started, the instructor
in a given industry, etc.
1-10 As firms move to the Internet for sales and customer service it is likely that
strategies will change. For some firms, a popular web site can be an important
differentiating factor. Firms such as Amazon.com, Etrade and eBay have
Chapter 1 - Cost Management and Strategy
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1-11 As firms move to the Internet for sales and customer service it is likely that their
demand for cost management information will change. For example, order
response and reliability which can be achieved through the web-site. Whether
and how soon the firm can achieve these benefits is a critical question.
1-12 The factors in the contemporary business environment that affect business firms
and cost management are:
1. Increased global competition, which means an increasingly competitive
environment for all firms and thus the need for cost management information
to become more competitive; the need for competitive non-financial
information in addition to financial information in cost management reports;
2. Lean manufacturing, in which companies reduce costs by using flexible
the firm work together to make the firm successful;
6. Changes in the social, political, and cultural environment of business, which
requires an expansion of cost management reporting to include critical
success factors related to the expectations of those beyond the ownership of
the firm including employees, local government officials, and community
leaders.
Chapter 1 - Cost Management and Strategy
1-13 Refer to Exhibit 1-3 in the text, reproduced here.
Comparison of Prior and Contemporary Business Environments
The Prior Business
Environment
The Contemporary
Business Environment
MANUFACTURING
Basis of Competition
economies of scale,
standardization
quality, functionality,
customer satisfaction
Manufacturing Process
high volume, long
production runs,
significant levels of in-
process and finished
inventory
low volume, short production
run, focus on reducing
inventory levels and other
non-value-added activities
and costs
Manufacturing
Technology
assembly line
automation, isolated
technology applications
robotics, flexible
manufacturing systems,
integrated technology
applications connected by
network
Required Labor Skills
machine paced, low-
level skills
individual and team paced,
high-level skills
Emphasis on Quality
acceptance of a normal
or usual amount of
waste
strive for zero defects
Chapter 1 - Cost Management and Strategy
Question 1-13 (continued)
MARKETING
Products
relatively few variations,
long product life cycles
large number of variations,
short product life cycles
Markets
largely domestic
global
MANAGEMENT
ORGANIZATION
Types of Cost
Management
Information Needed
almost exclusively
financial data
financial and operating data,
the firm's strategic success
factors
Management
Organizational
Structure
hierarchical; command
and control
network-based organization
forms; teamwork focus --
employee has more
responsibility and control;
coaching rather than
command and control
Management Focus
short term: short term
performance measures
and compensation;
concern for sustaining
stock price; short tenure
and high mobility of top
managers
long term; focus on critical
success factors, commitment
to the long term success of
the firm, including adding
shareholder value
1-7
1-14 The thirteen contemporary management techniques are:
1. The Balanced Scorecard (BSC) and the Strategy Map. The BSC is an
accounting report that includes the firm’s critical success factors in four areas:
financial performance, customer satisfaction, internal processes, and learning
and growth (human resources). The Strategy Map is a method, based on the
balanced scorecard, which links the four perspectives in a cause-and-effect
diagram.
2. Value-Chain Analysis is a tool that helps the firm identify the specific steps
required to provide a product or service.
3. Activity-based Costing and Management: Activity-based costing is used to
processes to match or beat the performance of its competitors.
8. Business Process Improvement is a management technique in which
managers and workers commit to a program of continuous improvement in
quality and other critical success factors.
Chapter 1 - Cost Management and Strategy
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9. Total Quality Management is a technique in which management develops
policies and practices to ensure that the firm's products and services exceed the
11. The Theory of Constraints is a strategic technique to help firms effectively
improve the rate at which raw materials are converted to finished product.
1-14 (continued)
12. Enterprise Sustainability means the balancing of the company’s short- and
13. Enterprise Risk Management is a framework and process that firms use to
manage the risks that could negatively or positively affect the company’s
competitiveness and success.
Chapter 1 - Cost Management and Strategy
1-9
BRIEF EXERCISES
1-15 Many students will answer Wal-Mart or Target since these are mentioned in the
text. A variety of answers are possible and sometimes students will disagree , as
for example, in discussing a fast food restaurant such as McDonald’s. Some will
and price only, and I will get a few examples there, but not many.
1-16 (a) This question is set to get a positive response and that is usually what I get.
Then I try to spend some time getting some examples of why a strong ethical
climate would be beneficial, and note the increasing importance of an ethical
social and environmental values affect financial performance in the short run.
The article notes, as do many other surveys, that the firm Johnson& Johnson is
perhaps the best known example of a company that has high corporate values.
1-17 Again this question is posed for a positive response, and the main goal I have for
the question is to have the class think through the decision as both a business
and an ethical issue. According to a Wall Street Journal article at the time of this
media companies that were counting on Merck’s spending for VIOXX advertising.
1-18 Like most beverage companies, there is a strong differentiation. Refer the
students to the information in Problem 1-41 which shows Coke as having the
1-19 A commodity is a product or service that is difficult to differentiate from
competitors: gasoline and paper products are some examples. You can ask the
Chapter 1 - Cost Management and Strategy
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1-20 Most students will argue that they chose their bank because of service and
location, thus differentiation. Others will say the rates are better, and then
perhaps cost leadership. It is useful to distinguish the banking needs of say, a
student, versus a small business like a car dealership which will rely more
heavily on a variety of customer services and will likely see banks as more
boast that they can afford to offer more personal service than the industry
behemoths.” The large banks are not ignoring customer service, however; at
that time, Wachovia was the fourth largest bank in the U.S. (acquired by Wells
Fargo in 2008) and number one in customer service (for larger banks).
1-21 There are a number of possible answers here. The main point of the question is
that the cost leadership or differentiation classification applies across different
consider the automobile industry and to identify cost leaders and differentiators.
1-22 It is certainly likely that a new product, with technologically advanced features,
may begin as a differentiator and then as the market for the product matures and
1-23 Often people think of strategy as simply planning, or “long term” planning. In the
broadest sense, this is correct, though the planning in strategy formulation and
Chapter 1 - Cost Management and Strategy
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EXERCISES
1-24 Strategy; Real Estate Services (15 min)
This exercise can be used to provide a good perspective for the
students to see the role of cost management in solving business
issues, and in placing the management accountant in more of a
leadership role in the firm. It also provides an early motivation for the
cost behavior issues to be discussed later in chapter 3 and chapter 8.
The management accountant has a hunch that the company is
about to take on a potentially damaging strategic initiative. This is a
Here’s how the case might be used in a class discussion. First,
ask the class to identify the types of costs likely to be incurred by this
company in providing its service. The answers are likely to include
labor costs and materials for cleaning and maintenance, in addition to
costs for maintaining the firm’s office. As these examples are given,
put them on the chalkboard and collect 6 or 8 of them. Then, ask
how each of these costs might differ between large and small
customers. For example, the cost of cleaning labor and materials will
likely be somewhat proportional to the square feet of space each
customer occupies, so that cost projections based on current
space) means the smaller customers will be more costly, per unit of
floor space, than the larger customers. This should be taken into
account in pricing the smaller jobs and in projecting profits from the
smaller customers.
1-12
1-24 (continued-1)
An important issue this case brings out is the need for the
management accountant to take a proactive role in business decision
proposed.
1-25 Impact of the Recession on the Role of Cost Management (15
min)
This question is intended for a brief class discussion, with a number
of possible answers. Some students will note that the financial crisis
has increased the importance of finance generally, as companies
(especially smaller ones) work hard to manage cash flow and to
reduce costs in the face of declining revenues. Others will argue that
the financial crisis has turned management’s focus to operational
skills required of management accountants, and the second is the
increased importance of the management accountant’s role in
strategy.
The impact of the recession on finance and cost management, as for
other areas of business, is to motivate a drive for efficiency. Many
finance staffs have reduced their numbers significantly. On the
other hand, the important development is that the demand for
finance skills has shifted. Automation of the finance function and
economic times.
Chapter 1 - Cost Management and Strategy
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For example, cost management can also be used in target costing
and strategic planning to identify opportunities for success in the
currently weak economic conditions in the U.S. and Europe. To
1-25 (continued -1)
Another important finding, based on a survey of CFOs, shows:
o 46% of the CFOs surveyed report that the crisis has enhanced
beyond finance, including corporate strategy.”
A broad take-away of the discussion should be the enhanced role of
the finance function, the management accountant, and particularly
Source: Alix Stuart, “The Incredible Shrinking Finance Department,”
CFO, November 2010, pp 46-52; “Recession Impressions,” CFO,
November 2009, pp 42-43; John Helyar and Phil Kuntz, “A Mini-
Revival for the Rust Belt,” Bloomberg Businessweek, August 29,
2011, pp 20-21.
1-14
1-15
1-27 Contemporary Management Techniques (30 min)
1. For an article on target costing, Tim should consider the types of
firms which would demand this type of strategic costing. These would
be firms that are in very competitive industries, where cost/price
competition is critical, such as consumer products. Examples of firms
that might use target costing also include those that have short
product life cycles (the time from introduction of the product into the
cycle.
2. For an article on life-cycle costing, Tim’s search for appropriate
firms would lead him to many of the same types of firms as for target
costing in (1) above. Intense competition on price/cost and short
product life cycles are indicators of firms that are likely to use life-
through continuous improvement efforts, the product will become
profitable later in its life cycle.
3. For an article on the theory of constraints, a wide variety of firms,
including both manufacturing firms and service firms, would be
appropriate. Manufacturing firms would be good examples to use for
production process.
