Strategic Cost & Management Accounting

Chapter-11: Strategic Cost Management

1) What does it mean to obtain a competitive advantage? What role does the cost management system play in helping to
achieve this goal?
A competitive advantage is providing better customer value for the same or lower cost or equivalent value for lower cost. The
cost management system must provide information that helps identify strategies that will create a cost leadership position.

2) What is customer value? How is customer value related to a cost leadership strategy? To a differentiation strategy? To
strategic positioning?
Customer value is the difference between what a customer receives and what the customer gives up (customer realization less
customer sacrifice). Cost leadership focuses on minimizing customer sacrifice. A differentiation strategy, on the other hand,
focuses on increasing customer realization, with the goal of ensuring that the value added exceeds the costs of providing the
differentiation. Focusing selects the customers to which value is to be delivered. Strategic positioning is the choice of the mix
of cost leadership, differentiation, and focusing that a company will emphasize.

3) Explain what internal and external linkages are.

External linkages describe the relationship between a firm’s value chain and the value chain of its suppliers and customers.
Internal linkages are relationships among the activities within a firm’s value chain.

4) What are organizational and operational activities? Organizational cost drivers? Operational cost drivers?
Organizational activities are activities that determine the structure and business processes of an organization. Operational
activities are the day-to-day activities that result from the structure and processes chosen by an organization. Organizational
cost drivers are the structural and procedural factors that determine a firm’s long-term cost structure. Operational cost drivers
are the factors that drive the cost of the day-to-day activities.

5) What is the difference between a structural cost driver and an executional cost driver? Provide examples of each.
A structural cost driver is a factor that drives costs associated with the organization’s structure, such as scale and scope
factors. Examples include number of plants and management style. Executional cost drivers are factors that determine the
cost of activities related to a firm’s ability to execute successfully. Examples include degree of employee participation and
plant layout efficiency

6) What is value-chain analysis? What role does it play in strategic cost analysis?
Value chain analysis involves identifying those internal and external linkages that result in a firm achieving either a cost
leadership or differentiation strategy. Managing organizational and operational cost drivers to create long-term cost reductions
is a key element in the analysis. Value-chain analysis is a form of strategic cost management. It shares the same goal of creating
a long term competitive advantage by using cost information.

7) What is an industrial value chain? Explain why a firm’s strategies are tied to what happens in the rest of the value
chain. Using total quality control as an example, explain how the success of this quality management approach is
dependent on supplier linkages.
An industrial value chain is the linked set of value-creating activities from basic raw materials to end-use customers. Knowing
an activity’s relative position in the value chain is vital for strategic analysis. For example, knowing the relative economic
position in the industrial chain may reveal a need to backward or forward integrate in the chain. A total quality control strategy
also reveals the importance of external linkages. Suppliers, for example, create parts that are used in products downstream
in the value chain. Producing defect-free parts depends strongly on the quality of parts provided by suppliers.

8) What are the three viewpoints of product life cycle? How do they differ?
The three viewpoints of product life cycle are the marketing viewpoint, the production viewpoint, and the consumption
viewpoint. They differ by the nature of the stages and the nature of the entity’s life being defined. The marketing viewpoint
has a revenue-oriented viewpoint, the production viewpoint is expense oriented, and the consumption viewpoint is customer
value oriented.

Cost Management: Accounting and Control by Hansen & Moween (6th edition) Page 1 of 2 AL-I (CM-341)
 Strategic Cost & Management Accounting

9) What are the four stages of the marketing life cycle?

The four stages of the marketing life cycle are introduction, growth, maturity, and de-cline. The stages relate to the sales
function over the life of the product. The introduction stage is slow growth, the growth stage is rapid growth, the maturity
stage is growth but at a decreasing rate, and the decline stage is characterized by decreasing sales.

10) What are life-cycle costs? How do these costs relate to the production life cycle?
Life-cycle costs are all costs associated with the product for its entire life cycle. These costs correspond to the costs of the
activities associated with the production life cycle: re-search and development, production and logistics.

11) What are the four stages of the consumption life cycle? What are post purchase costs? Explain why a producer may
want to know post purchase costs.
The four stages of the consumption life cycle are purchasing, operating, maintaining and disposal. Post purchase costs are
those costs associated with operating, maintaining, and disposing of a product. Knowing these costs is important because a
producer can create a competitive advantage by offering products with lower post purchase costs than products offered by
competitors.

12) “Life-cycle cost reduction is best achieved during the development stage of the production life cycle.” Do you agree
or disagree? Explain.
Agree. According to evidence, ninety percent of a product’s costs are committed during the development stage. Furthermore,
$1 spent during this stage on preproduction activities can save $8–$10 on production and postproduction activities. Clearly,
the time to manage activities is during the development stage.

13) What is target costing? What role does it have in life-cycle cost management?
Target costing is the setting of a cost goal needed to capture a given market share and earn a certain level of profits. Actions
are then taken to achieve this goal—usually by seeking ways to reduce costs to the point where the plan becomes feasible
(often by seeking better product designs). This is consistent with the cost reduction emphasis found in life-cycle cost
management.

14) Explain why JIT with dedicated cellular manufacturing increases product costing accuracy.
Cells act as a “factory within a factory.” Each cell is dedicated to the production of a single product or subassembly. Costs
associated with the cell belong to the cell’s output. By decentralizing services and redeploying equipment and employees to
the cell level, the quantity of directly attributable costs in-creases dramatically.

15) Explain how backflush costing works.

Backflush costing is a simplified approach to accounting for manufacturing cost flows. It uses trigger points to determine when
costs are assigned to inventory or temporary accounts. In the purest form, the only trigger point is when the goods are sold.
In this variation, the manufacturing costs are flushed out of the system by debiting Cost of Goods Sold and crediting Accounts
Payable and Conversion Cost Control. Other trigger points are possible but entail more journal entry activity and involve some
inventory accounts.

Cost Management: Accounting and Control by Hansen & Moween (6th edition) Page 2 of 2 AL-I (CM-341)