Introduction to Cost Accounting

These lectures cover introduction to cost accounting, management accountant and Michael Porter Competitive Strategies

Introduction to Cost Accounting

Cost Accounting in Contemporary Business Environment

Michael Porter Competitive Strategies

Management accountants are the accounting and finance professionals who develop and use cost management information to assist in implementing the organization’s strategy. Cost management information consists of financial information about costs and revenues and non- financial information about customer retention, productivity, quality, and other key success factors for the organization. Cost management is the development and use of cost management information. The strategic role of the management accountant in an organization is explained in the definition of management accounting provided by the Institute of Management Accountants (IMA). Relevant additional information on the definition can be found in the IMA’s Statement on Management Accounting: Definition of Management Accounting.

The Four Functions of Management The management accountant develops cost management information for the CFO, other managers, and employee teams to use to manage the firm and make the firm more competitive and successful. Cost management information is provided for each of the four major management functions: (1) strategic management, (2) planning and decision making, (3) management and operational control, and (4) preparation of financial statements. (See Exhibit 1.2.) The most important function is strategic management, which is the development and implementation of a sustainable competitive position in which the firm’s competitive advantage provides continued success. A strategy is a set of goals and specific action plans that, if achieved, provide the desired competitive advantage. Strategic management involves identifying and implementing these goals and action plans. Next, management is responsible for planning and decision making, which involve budgeting and profit planning, cash flow management, and other decisions related to the firm’s operations, such as deciding when to lease or buy a facility, when to repair or replace a piece of equipment, when to change a marketing plan, and when to begin development of a new product. The third area of responsibility, control, consists of two functions, operational control and management control. Operational control takes place when mid-level managers (e.g., site managers, product managers, regional managers) monitor the activities of operating-level managers and employees (e.g., production supervisors and various department heads). In contrast, management control is the evaluation of mid-level managers by upper-level managers (the controller or the CFO). In the fourth function, preparation of financial statements, management complies with the reporting requirements of relevant groups (such as the Financial Accounting Standards Board) and relevant federal government authorities (for example, the Internal Revenue Service and the Securities and Exchange Commission). The financial statement preparation role has recently received a renewed focus as countries throughout the world have adopted International Financial Reporting Standards (IFRS), and the United States is expected to adopt these standards in the coming years. The financial statement information also serves the other three management functions, because this information is often an important part of planning and decision making, control, and strategic management.

The Contemporary Business Environment

Many changes in the business environment in recent years have caused significant modifications in cost management practices. The primary changes are (1) increased global com- petition; (2) lean manufacturing; (3) advances in information technologies, the Internet, and enterprise resource management; (4) greater focus on the customer; (5) new forms of management organization; and (6) changes in the social, political, and cultural environment of business. The current global economic challenges (high public debt, high unemployment rates, and slow economic growth, among others) will surely have a significant effect on each of these six changes. It is likely there will be an even greater rate of change in each of these six areas as firms search for new ways to compete and governmental regulations adapt to the difficult economic times.

 

Cost Leadership

Cost leadership is a competitive strategy in which a firm outperforms competitors in producing products or services at the lowest cost. The cost leader makes sustainable profits at lower prices, thereby limiting the growth of competition in the industry through its success at reducing price and undermining the profitability of competitors, which must meet the firm’s low price. The cost leader normally has a relatively large market share and tends to avoid niche or segment markets by using the price advantage to attract a large portion of the broad market.

Differentiation

The differentiation strategy is implemented by creating a product or service that is unique in some important way, usually in regard to higher quality, better customer service, improved product features, or some type of innovation. Sometimes a differentiation strategy is called product leadership to refer to the innovation and features in the product. In other cases, the strategy might be called a customer-focused or customer-solution strategy, to indicate that the organization succeeds on some dimension(s) of customer service. This perception allows the firm to charge higher prices and outperform the competition in profits without reducing costs significantly.