Study note
on academic ideas about cost management
Academic
ideas
are bolded
Giampiero Favato
and Roger Mills. “Identifying best practices in cost management” Henley Manager Update Vol. 18 No. 3 Spring 2007.
“Cost management practices have come under
substantial criticism for their lack of efficiency
and capacity for coping with the
requirements of a rapidly evolving environment”;
“LaLonde and Ginter 4 argue that cost management applications generally
fit into three major categories: diagnostic, re-engineering, or integrated
cost management systems. The categories differ in focus, detail and
sophistication. Integrated cost management systems represent the most mature
forms of activity-based costing.5 Integration of information is essential if an
organisation’s resources are to be deployed optimally. Integration provides the
basis for robust decision analysis because it supports the incorporation of
multiple perspectives. Many unsuccessful implementations have occurred because
diagnostic and re-engineering models promise the capabilities of an integrated cost
management system but cannot deliver the same result. Integrated cost
management systems go beyond cost budgeting to make proactive strategic and operating
decisions based on value added rather than cost information, and they should be
regarded as current best practices in cost management”;
“The key
principles of the integrated cost management systems reflect the
information and decision-making needs of the managers who use it. Specifically,
these principles include:
Strategic orientation: a cost management system must incorporate and
reflect the strategies of the organisation and the core competencies that
support the achievement of strategic goals.
Customer driven: information system design, integration and
use must be centred on defining and meeting customer requirements.
Value based: competitive advantage and profitable growth
stem from understanding how and where the organisation creates value for its
customers.
Process/horizontal
focus: integration must incorporate
the flows of materials and information across and between organisations,
highlighting interdependencies.
Decision relevance: information systems have to be defined around
and support the key decisions of the organisation.
Cost effective: integration should focus on the essential 20
per cent of data that support 80-90 per cent of the decisions made within an
organisation rather than on comprehensive integration of all of the
organisation’s available data.
Relationship based: integrated information systems must be based
on and highlight the performance of key transactions and relationships across
the value chain.
The target costing (TC) process combines all requirements
of an effective integrated cost management system”;
Harri I. Kulmala*,
Jari Paranko, Erkki Uusi-Rauva. “The role of cost management in network
relationships” Int. J. Production Economics 79 (2002) 33}43.
“Dealing with today's
competition is challenge enough, even when we have all the right information. However,
if we respond to the wrong information, we could be losing a battle [29]. Cost accounting
offers
very important knowledge for management both at strategic and operational level.
In a world of nonsustainable competitive advantage costs have to be managed
both aggressively and intelligently. A firm that fails to reduce costs as
rapidly as its competitors will find its profit
margins squeezed and its existence threatened. The competitive environment
demands the development of sophisticated cost management practices to keep
costs down. The poor state of management accounting is a well-known fact.
Johnson and Kaplan made the state of affairs known as early as in 1987
with their Relevance Lost book. & Today's
management accounting information, driven by the procedures and cycle of the
organization's financial reporting system, is too late, too aggregated, and too distorted
to be relevant for managers' planning and control decisions. The management accounting system also fails
to provide accurate product costs' [30]”;
“Effective and
appropriate modern cost accounting systems and information should [31]:
_ Provide
a multi-dimensional focus on a
multiplicity of cost objects such as customers, products, services,
functions, processes and activities.
_ Focus
less on cost tracking and reporting
and more on cost planning and control.
_ Support every key business decision, including sourcing, pricing, investment
justification, efficiency and productivity measures,
product elimination and new product introduction.
Martin Christopher
& John Gattorna. “SUPPLY CHAIN COST
MANAGEMENT AND VALUE-BASED PRICING” Industrial Marketing Management, Vol. 34, No. 2, pp. 115-121, 2005.
“It
has long been recognised by some that the key
to major cost reduction lies not so much in the internal activities of the
firm but in the wider supply chain. Back in 1929 Ralph Borsodi (5)
expressed it in the following words:- “ …. In 50 years between 1870 and 1920
the cost of distributing necessities and luxuries has nearly trebled, while
production costs have gone down by one-fifth …. What we are saving in
production we are losing in distribution.”..”;
“The need to take a supply chain view of cost is further underscored by the major trend
that is observable across industries worldwide towards outsourcing. For many
companies today, most of their costs lie outside their legal boundaries.
Activities that used to be performed in-house are now outsourced to specialist
service providers. The amazing growth of contract manufacturing in electronics
bears witness to this trend. If the majority of an organisation’s costs lie
outside the business then it follows that the biggest opportunities for
improvement in their cost position will also be found in that wider supply
chain. As out-sourcing increases the supply chain becomes more like a network than
a chain (10) and, as a result, the number of interfaces between organisations increases. It is our contention
that a growing proportion of total costs
in the network occur at these interfaces. These costs have sometimes been
labelled ‘transaction’ costs (11) but in truth they are much more than the
everyday costs of doing business. These costs result as much as anything from
the lack of transparency and visibility
across organisational boundaries”;
