Tools for Decision Making
Financial accounting is oriented toward external users and is concerned with general-purpose financial statements. These financial accounting statements are highly aggregated, report on relatively long time periods, are oriented toward the past, and must conform to external standards. These standards emphasize the use of objective data.
Management accounting is oriented toward internal users and is concerned with special-purpose information. This information may be aggregated or disaggregated, depending on need, and the reporting period may be long or short, depending on need. The information is oriented primarily toward the future and does not need to conform to external standards. Consequently, the data may be subjective, if subjective information is relevant.
Strategic cost management is a blending of three themes: cost driver analysis, strategic position analysis, and value chain analysis.
An organization's mission is the basic purpose toward which its activities are directed. Organizations vary widely in their missions. A goal is a definable, measurable objective. Goals are based on an organization’s mission.
The three strategic positions that lead to business success are cost leadership, product or service differentiation, and focus on a market niche. Cost leadership involves controlling costs to better the competitive position of the firm. Product or service differentiation involves creating something considered unique and worth a premium price, and focusing on a market niche says that the firm can better serve a narrow strategic market than a broad one.
With a strategy of cost leadership, an organization is unable to distinguish its product from that of competitors, and competition is primarily on the basis of price. Careful budgeting and cost control with frequent and detailed performance reports are critical for a cost leadership strategy to succeed.
With a strategy of product differentiation, the organization’s products are easily distinguished from those of competitors, and customers are less sensitive to price. In this case, while managers must understand the financial consequences of their actions, frequent and detailed cost information is less important. Instead, costs should be analyzed from the customer’s viewpoint, and the organization should work closely with customers to enhance the value of products or services to them.
Planning, organizing, and controlling are referred to as a continuous cycle because the process of controlling feeds back into the process of planning. Future plans and organizing to accomplish and implement them are modified on the basis of past experience. Information on how actual results differ from planned results is provided in the controlling phase of operations.
Advances in telecommunications to move data, in computers to process data into information, and in transportation to move products and people have fostered the move away from isolated national economic systems toward an interdependent global economy.
Today's competition takes place on the three interrelated dimensions of cost, quality, and service. Cost includes the purchase price and all subsequent operating and maintenance costs. Quality is the degree to which products or services meet customer needs. Service includes such things as the helpfulness of sales personnel, product modifications to satisfy a particular customer's needs, timely delivery, and subsequent support.
Activity cost drivers are affected by previous decisions concerning structural and organizational cost drivers.
1. Structural cost drivers result from fundamental decisions about the size and scope of operations and the technologies employed in delivering products or services to customers.
2. Organizational cost drivers result from...
Please join StudyMode to read the full document