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Cost management summary
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Summary study book Cost management of Marc Wouters, Frank Selto, Ronald Hilton, Michael Maher - ISBN: 9780077132392
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CHAPTER 1Cost management: an organizational commitment, a professional attitude and a set of techniques to
create more value at lower cost.
Cost management system: the set of cost management techniques that function together to
support the organization’s goals and activities.
Decision-making Framework:
I. Setting goals and objectives
Strategic decision making
Selecting goals
Specifying tangible objectives
II. Gathering information
Generating feasible decision alternatives
Measuring decision alternatives on various criteria
Understanding activities and cost drivers
III. Evaluating alternatives
Anticipating the future outcomes of each action
Choosing the best alternatives
Budgeting resources and activities, financial planning
IV. Execution and tracking costs
Implementing the best alternative
Accumulating actual cost and assigning them to products and services
V. Obtaining feedback
Evaluating actual outcomes
Setting transfer prices
Measuring managerial financial performance
The objective of the decision-making framework is to reinforce that cost management is a
purposeful activity – more value creation at lower cost – and a proactive attitude – decisions drive
costs; costs do not just happen.
1
,Stage 1 is about setting goals and objectives. Most goals are abstract in nature.
Tangible objectives: benchmarks capable of being measured in some manner.
Criteria: the attributes on the basis of which the decision maker compares the decision alternatives
and makes a decision.
In stage 2 analysts collect information to understand the decision alternatives through which
organizational goals and objectives can be achieved.
Decision alternatives: the considered alternative courses of action about which a decision is made.
Organizations often identify alternatives by thoroughly seeking information from, among others:
Employees, who know their work best.
Customers, who can articulate their unmet needs and visions.
Competitors, who are seeking the same competitive edge and made changes that the
organization can imitate or improve.
Non-competitors, who use ‘best practices’ that might be transferrable.
Universities, which seek to push beyond the boundaries of scientific, engineering and social
practices.
Consultants, who observe best practices and can help adapt them to this organization.
The Internet, which is a continually involving repository of vast and growing knowledge.
Financial criteria: a monetary unit of measurement (a currency). Ex: Acquisition price, material cost
and labor cost.
Non-financial criteria:
Quantitative: a non-monetary but still quantitative unit of measurement. Ex: Delivery time,
production speed, process yield or size tolerances.
Qualitative: expressed in words instead of numbers. Ex: Description of a supplier’s
innovative capabilities or testimonials from a supplier’s other costumers.
Financial quantification: translating a non-financial criterion into a financial criterion.
Information quality: the dimensions of which are decision usefulness, subjectivity, objectivity,
accuracy, timeliness, cost and relevance for current decisions. Managers need to find a balance for
the required information quality, because gathering information requires time and is costly.
Decision usefulness: the overriding consideration: does it help managers make sufficiently better
decisions to justify the cost of the information?
2
,Subjectivity: the degree of disagreement about what to measure, how to measure it, what the
observed measure is or whether the measurement is important.
Objectivity: the degree of consensus about measurement, is the mirror image of subjectivity.
Accuracy: precision in measurement.
Timeliness: information is available in time to fully consider it when making a decision.
Relevance: whether it is pertinent to a decision: that is, knowing the information or different values
of the information can influence choices. What information is relevant for the specific situation?
Relevant costs and benefits: occur in the future and differ for feasible alternatives. Costs that differ
for alternatives are also called differential costs.
Sunk costs: costs that are in the past and cannot be changed anymore are not relevant for decisions
making.
NB: Costs that are in the future and are the same for all decision alternatives will not influence the
comparison and are also not relevant for decision making.
Stage 3 focusses on evaluating the alternatives. Non-financial information is harder to factor then
financial information, unless it can be translated into financial information. But not everything that
matters can be made financial.
Stage 4 is to put the selected alternative into practice, and to keep track of the actual costs and
revenues.
Stage 5 is the final stage and is to obtain feedback. This means that the actual outcomes are
analyzed for improving future decisions and for holding managers accountable.
More about stage 1
Strategy: the overall plan or policy to achieve its goals. To develop a strategy managers answer two
basic questions:
Where do we want to go?
How do we want to get there?
Strategic decision making: determining the ‘where’ and ‘how’ by choosing and implementing
actions that will affect an organization’s future abilities to achieve its goals.
Where do we want to go?
Exhibit 1.2 shows four common types of strategic missions along the important dimensions of
reward and risk; build, hold, harvest, divest.
3
, Risks: the possible variations in incentives, which might turn out to be very high or very low.
Rewards (for profit seeking firms): financial incentives in the form of profits, cash flow and share
price appreciation. Ex of non-financial reward: improved social responsibility.
How do we get there?
Successful strategic decision-making involves choosing the destination and the best route to it. The
latter can be more successful when managers:
Understand the sources and threats to competitive advantages.
Use effective decision making techniques.
Competitive advantage: a resource, process or value chain that enables the organization to provide
more value, perhaps at lower costs than its competitors.
Process: a related set of tasks, manual or automated, that transforms inputs into identifiable
outputs.
Value chain: the relation of an organization’s processes that links ideas, resources suppliers and
customers; a competitive value chain does so in a superior way.
Exhibit 1.3 shows a generic value chain that links all major processes that most organizations
perform in some way.
4
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