Study note on academic ideas about cost management

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”;