Chapter 01 - Cost Management and Strategy
Chapter 1
Cost Management and Strategy
Learning Objectives
New in this Edition
• Update of content in all Real World Focus items, one new Real World Focus item, and
update of Cost Management in Action item; updated surveys on strategy and ethics;
updated content on real world information used throughout the chapter
• Replaced Sara Lee company example with Tyson Foods (Sara Lee in North American
became Hilshire Brands, Inc. in 2012 and Hillshire Brands became a subsidiary of Tyson
Foods on August 29, 2014)
• Twelve new exercises added; several revised problems and five all-new problems with a
focus on strategy and ethics
Teaching Suggestions
Most instructors will choose to assign this chapter for the first one or two class meetings, but to
spend little, if any, class time on it. Some instructors will choose to spend more time if a more thorough
coverage of strategic positioning is desired. The main topic areas, except for strategic positioning and
professional ethics, do not require class discussion and exercise. The presentation for these other topics is
factual and informative, covering some of the basic concepts of management organization and of the
Chapter 01 - Cost Management and Strategy
1. Cost and management accounting have changed from what was once a focus on financial record
4. As the demands on cost management change, so have the responsibilities of the management
accountant. Each topic covered in the course will include professional and ethical issues.
Welcome to Students
(The following is in the front pages of the book, and can be used to help motivate the first day of
class. Also, for a description of how the first two chapters of the text can be used in the first days of
class, see the article by Edward J. Blocher, “Teaching Cost Management: A Strategic Emphasis,”
Issues in Accounting Education, February, 2009, pp 1-12.
To the student:
We have written this book to help you understand the role of cost management in helping an organization
succeed. Unlike many books that aim to teach you about accounting, we aim to show you how an
important area of accounting, cost management, is used by managers to help organizations achieve their
goals. An important aspect of cost management in our text is the strategic focus. By strategy we mean
the long-term plan the organization has developed to compete successfully
Most organizations strive to achieve a competitive edge through the execution of a specific strategy. For
some firms it is low cost, and for other it might be high quality, customer service, or some unique feature
or attributes of its product or service. We know in these competitive times that an organization does not
succeed by being ordinary. In contrast, it develops a strategy that will set it apart from competitors and
assure its attractiveness to customers and other stakeholders into the future. The role of cost management
is to help management of the organization attain and maintain success through strategy implementation.
Thus, in every chapter, and in every problem and case in the text, there is a larger issue, which is: “How
Chapter 01 - Cost Management and Strategy
cost-management techniques. Knowing how to do the accounting alone, no matter how well you
do it, is by itself no longer sufficient. Cost management with a strategic emphasis is one way to
enhance your career and to add value to your employer, whatever type of organization it might
be.
A Motivator
To help the students see the importance of cost management, the instructor can periodically use a
short case with an issue the student may have some difficulty seeing initially, but which can be easily
explained. The Bloomberg Business week stories which start each chapter can be used for this purpose.
As an example, you can use the following question: You are a domestic appliance manufacturer and a
Japanese competitor has entered the market with a product that has better quality, features, and a lower
4) preparation of financial statements.
Chapter 01 - Cost Management and Strategy
The New Definition of Management Accounting
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 Statement on Management Accounting:
Management accounting is a profession that involves partnering in management decision
making, devising planning and performance management systems, and providing expertise
in financial reporting and control to assist management in the formulation and
implementation of an organization’s strategy.
Chapter 01 - Cost Management and Strategy
The Contemporary Business Environment
The chapter emphasizes the six forces acting on the contemporary business environment which have
strongly influenced cost management:
13. Enterprise Risk Management
Strategy and the Strategic Role of Cost Management
As a framework for the integration of strategy throughout the text, the Michael Porter model of
competitive strategy is used. This model explains that an organization succeeds either by pursuing
a cost leadership strategy or a differentiation strategy. The cost leader succeeds by providing the
1. Determine the Strategic Issues Surrounding the Problem.
2. Identify the Alternative Actions:
3. Obtain Information and Conduct Analyses of the Alternatives
4. Based on Strategy and Analysis, Choose and Implement the Desired Alternative
5. Provide an On-going Evaluation of the Effectiveness of implementation in Step 4.
Chapter 01 - Cost Management and Strategy
Lecture Notes
A. The Uses of Cost Management Information. Cost management information is the information
managers need to effectively manage the firm or not-for-profit organization. By combining traditional
1. The Four Functions of Management. The cost accountant fills several different roles, as well as
provides a wealth of knowledge to the CFO and other company managers.
a. Strategic Management. Strategic Management is the development if a sustainable competitive
position in which the firm’s competitive advantage provides continued success. In order to
accomplish this goal, the management account must implement a strategy, or a set of goals and
specific actions plans that provide the desired competitive advantage.
b. Planning and Decision Making. The management accountant is also responsible for budgeting and
2. Strategic Management and Strategic Cost Management. Overall, cost management’s traditional
Chapter 01 - Cost Management and Strategy
1. The Global Business Environment. A key factor that drives the changes in the contemporary
4. Focus on the Customer. As a result of an increased focus on consumer expectations regarding
Chapter 01 - Cost Management and Strategy
C. The Strategic Focus of Cost Management. Realizing, anticipating, and reacting to changes in the
1. The Balanced Scorecard and Strategy Map. Keeping with the renewed focus on both financial and
4. Business Intelligence. Business Intelligence (also called business analytics or predictive analytics) is
an approach to strategy implementation in which the management accountant uses data to understand
Chapter 01 - Cost Management and Strategy
10. Lean Accounting. Lean accounting uses value streams to measure the financial benefits of a firm’s
1. Cost Leadership. Cost leadership is a strategy in which a firm outperforms competitors in producing
products or services at the lowest cost. The cost leader makes sustainable profits a lower price, thereby
2. Differentiation. The differentiation strategy is implemented by creating a perception among
3. Other Strategic Issues. While most firms will have a dominant strategy, recognize that many firms
are likely to employee both of the strategies at the same time. However, a firm following both strategies
is likely to succeed only if it achieves one of them significantly; otherwise, it could face the problem of
Chapter 01 - Cost Management and Strategy
1. Professional Organizations. The professional environment of the management accountant is
influenced by two types of organizations: one that sets guidelines and regulations regarding management
accounting practices and one that promotes the professionalism and competence of management
accountants.
a. Federal Agencies. The first group or organizations include several federal agencies, such as the
Internal Revenue Service (IRS), which sets product costing guidelines for tax purposes, and the
Federal Trade Commission (FTC), which restricts pricing practices and requires that prices be
2. Professional Certifications. The role of professional certifications is to provide a distinct measure of
experience, training, and performance capability. There are three types of certifications relevant to the
management accountant.
a. The Certified Management Accountant (CMA). The CMA is administered by the IMA, and
3. Professional Ethics. Professional ethics can be summed up as the commitment of the management
accountant to provide a useful service for management. This commitment means that the management
accountant has the competence, integrity, confidentiality, and objectivity to serve effectively.
Chapter 01 - Cost Management and Strategy
How to Apply the Code of Ethics.
• First, the management accountant must consider the ethical principles that apply to the