MAS – Strategic Cost Management

Strategic Cost Management

• Use of cost data to develop and identify superior strategies that will help produce a sustainable
competitive advantage

Several Tools in Strategic Cost Management

Tools Nature
Value chain analysis Add value to customers reducing costs, and understanding relation
between business organization and customers
Activity based To provide accuracy in allocating indirect costs
Costing (ABC)
Competitive Defining strategy that an organization could adopt to excel over
Advantage Analysis rivals
Target costing Cost that an organization is willing to incur according to competitive
price that could be used to achieve desired profit
Total quality Adopt necessary policies and procedures to meet customers’
management (TQM) expectations
Just-in-time (JIT) A comprehensive system to buy materials or produce commodities
when needed in appropriate time
SWOT analysis Systematic procedure to identify critical success factors of an
organization
Benchmarking Process performed to determine critical success factor and study
ideal procedures of other organization in order to improve
operations and dominate market
Balanced scorecard Accounting report of critical success factors about the organization.
It is divided into four major dimensions: financial performance,
customers’ satisfaction, internal operation, and innovation and
Growth
Theory of Constraints A tool to improve rate of transferring material into finished goods
Continuous Conducting continuous improvements in quality and other critical
improvement (Kaizen) success factors
Business process Recreating a core business process with the goal of improving
reengineering product output, quality, or reducing costs.

Strategies in Achieving Competitive Advantage

• Cost leadership - The same or better value is provided to customers at a lower cost than a company’s
competitors
• Product differentiation - Strives to increase customer value by increasing what the customer receives
(customer realization)
• Focusing - When a firm selects or emphasizes a market or customer segment in which to compete

Quality Concepts:
• Six Sigma
• a production view of quality that states that a process should produce no more than 3.4 defects
per million “opportunities” (99.999…%)

Total Quality Management

• Management approach of an organization, centered on quality, based on the participation of all its
members and aiming at long-term success through customer satisfaction, and benefits to all members
of the organization and to society
• Tenets
• Dictate continuous improvement to the internal managerial system (quality system)
• Require participation by everyone in the organization (employee involvement)
• Focus on improving goods and services from the customer’s point of view (product/service
improvement)
• Value long-term partnerships with suppliers

Costs of Quality
• Cost of Compliance
• Preventive costs—prevent product defects
• Appraisal costs—monitor and compensate when prevention fails
• Cost of Noncompliance
• Failure costs
• Internal losses—scrap, rework
• External losses—warranty work, customer complaint departments, litigation, product
recalls
Questions:
1. The three major types of competitive strategy include
a. cost leadership, differentiation, and productivity.
b. cost leadership, focus, and productivity.
c. differentiation, focus, and productivity.
d. cost leadership, differentiation, and focus.

2. Engaging in which of the following will result in radical changes being made to an organization's
processes?
a. Continuous improvement
b. Benchmarking
c. Reengineering
d. Mass customization

3. Sustainability means the balancing of

a. short term and long-term goals in economic performance.
b. short term and long-term goals in social aspects.
c. short term and long-term goals in environmental aspects.
d. all of the above.

4. In the contemporary business environment, cost management focus is on

a. financial reporting and cost analysis.
b. common emphasis on standardization and standard costs.
c. development and implementation of the business strategy.
d. a and c.

5. Which of the following emerging themes in the cost accounting deals with managers striving to create
an environment which will enable workers to manufacture defects products?
a. Customer orientation
b. Global competition
c. Total quality management
d. Advance in information technology

6. A primary objective in measuring productivity is to improve operations either by using fewer inputs to
improve the same output or to produce
a. More effectively
b. With fewer constraint
c. More output with the same inputs
d. More outputs with more inputs

7. Strategic planning is different from operational planning is that the operational planning:
a. Involves a large sum of money
b. Deals with determining production levels for next quarter
c. Involves only long-range goals
d. Operational and strategic planning are the same

8. The primary objective of just-in-time processing is to

a. accumulate overhead in activity cost pools
b. eliminate or reduce all manufacturing inventories
c. identify relevant activity cost drivers
d. none of them

9. The benefits of a successful Just-In-Time system include all the following except:
a. funds tied up in inventories are released for use elsewhere.
b. inventory buffers are increased.
c. throughput time is reduced.
d. defect rates are decreased.

10. The company's goal for defective units as a percentage of total units produced should be:
a. 1.50%
b. 0.00%
c. 0.05%
d. 0.53%

11. Setting balanced objectives, setting target values, and aligning rewards are
a. necessary steps in creating a balanced scorecard
b. important aspects of the capital budgeting process
 c. the heart of process innovation
d. the ingredients for economic forecasting

12. An all-inclusive definition of quality views it as the ability of products/services to

a. only meet internal design specifications.
b. meet the customer's stated or implied needs.
c. be produced using all value-added production activities.
d. be produced with no rework costs.

13. Which of the following can be used to indicate factors that slow down or cause unnecessary work in a
process?
a. activity analysis
b. total quality management
c. cost of quality
d. all of the above

14. Value reflects the ability of a product to

a. provide the best quality at any price.
b. have all possible product and service characteristics.
c. meet the majority of a customer's needs at the lowest possible price.
d. have the longest technical or service life and the best warranty.

15. Benchmarking allows a company to

a. identify its strengths and weaknesses.
b. imitate those ideas that are readily transferable.
c. improve on methods in use by others.
d. all of the above.

16. Reverse engineering is used in

a. statistical process control.
b. process benchmarking.
c. results benchmarking.
d. price fixing.

17. Which of the following is not a critical element in a total quality management system?
a. employee involvement
b. activity-based costing
c. continuous improvement
d. problem prevention emphasis

18. Total quality management is inseparable from the concept of

a. ISO certification.
b. centralized organizational structure.
c. continuous improvement.
d. the product life cycle.

19. The four categories of product quality costs are

a. external failure, internal failure, prevention, and carrying.
b. external failure, internal failure, prevention, and appraisal.
c. external failure, internal failure, training, and appraisal.
d. warranty, product liability, training, and appraisal.

20. Management can decide where to concentrate its quality prevention dollars using
a. statistical process control charts.
b. just-in-time inventory systems.
c. a feedback loop.
d. Pareto analysis.

Problems:
1. The projected sales price for a new product (which is still in the development stage of the product life
cycle) is $50. The company has estimated the life-cycle cost to be $30 and the first-year cost to be $60.
On this type of product, the company requires a $12 per unit profit. What is the target cost of the new
product?
a. $30
b. $38
c. $42
d. $60
For 2-7:
StatPro Corporation is a manufacturer of a versatile statistical calculator. The following information is a
summary of defective and returned units for the previous year.

Total defective units 1,000

Number of units reworked 750
Number of customer units returned 150
Profit for a good unit $40
Profit for a defective unit $25
Cost to rework a defective unit $10
Cost of a returned unit $15
Total prevention cost $10,000
Total appraisal cost $5,000

2. The profit lost by selling defective units not reworked is

a. $25,000.
b. $15,000.
c. $18,750.
d. $3,750.

3. The total rework cost is

a. $7,500.
b. $15,000.
c. $2,500.
d. $3,750.

4. The cost of processing customer returns is

a. $9,000.
b. $2,500.
c. $22,500.
d. $2,250.

5. The total failure cost is

a. $15,000.
b. $13,500.
c. $11,250.
d. $8,250.

6. The total quality cost is

a. $15,000.
b. $15,750.
c. $28,500.
d. $11,250.

7. The profit lost by selling defective units to Pittman Company totals $1,440. The total rework cost for 700
units is $28,000. The difference between the profit earned on a good unit and a defective unit is $12.
How many total defective units did StatPro Corporation produce?
a. 120
b. 740
c. 736
d. 820

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