Session 1A: Cost Management

1
Session 1A Cost Management

• Prof. Frank Selto
• CURISES
• Cost and Management Accounting

2
Objectives for Today

• Review Syllabus (available online)
• Understand Mission of Cost Management
• Cover Chapters 1 and 2

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About the Instructor

• Frank Selto
• Professor at CU for 22 years
• PhD and MBA in Accounting
• BS and MS in Mechanical Engineering
• Worked as Mechanical Engineer
• Consults and conducts research as Management
  Accountant (whatever that is)
• Extensive Contacts with Local, National, and
  International Companies

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Review Syllabus

• Syllabus at course homepage

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How to Find Me

• Office Room S405 E, Koelbel Hall
• Office Hours each day of class
• Phone [phone] (voice mail also at this
  number but email is better)
• E-mail Frank.Selto_at_Colorado.edu

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Purpose of Course

• Develop value-adding cost-management information
  and analysts (you!)
• Answer central questions
• How to add value to organizations?
• How to improve products, processes, and
  organization
• How to reduce costs of operations while
  maintaining or increasing value?

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Strategic Approach

• Answer two key questions
• Q1 Where do we want to go?
• A1 Create more value at lower cost
• Q2 How do we want to get there?
• A2 Cost management

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Syllabus Linear Organization of Knowledge

• Forced by progression of time to deliver a
  sequence of topics
• Expert knowledge usually reflected in a network
• Everything is connected to everything else
• I hope and expect that you will fashion your own
  knowledge network of cost management

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Two Common Ways of Organizing Knowledge

• Linear (logical progression)
• A ? B ? C ? D
• Non-linear (network or cognitive map)

B
A
D
C
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Why Study Cost Management?

• Costs Dont Just Happen!!!
• Caused by Decisions
• Separate Value-Added Costs from Non-Value-Added
  Costs
• Use Talent and Knowledge to Improve and Innovate
• Need Sensible Way to Control or Cut Costs
• Across-the-Board Cuts are the Worst!
• Need to Maintain Customer Value While Cutting
  Costs

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Text, Etc.

• Cost Management by Hilton, Maher, and Selto,
  2008, 4th edition
• You Must Read This Text
• Lectures Will Focus on Extensions and Homework
  Problems
• Other Materials will be put on course homepage

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Examples of Cost Management Practice

• Benefit-Cost Analysis
• Value-Chain Analysis
• Process Analysis
• Benchmarking

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Example Benchmarking Airlines
Why is Southwest so much more valuable to
investors?
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What about Differences in Size?
Larger Size More Value? Many measures of size
Total assets, Number of Employees, Revenues.
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What About Efficiency?

• Productivity Measure of desired output relative
  to constrained input
• Usual meaning behind efficiency
• Usual output is profit
• Each industry has commonly used measures of input
• Employees, Hours of capacity, Sales
• Airlines Available seat miles (ASM)

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Relative Measures of Efficiency
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More on Benchmarking

• US auto manufacturers have 2,000 cost
  disadvantage relative to Japanese competitors
• Causes?
• Wages, health benefits
• These have gotten the most press
• What about cost management and efficiency?
• Complexity and variation are the enemies of
  efficiency (and quality)
• When would complexity and variation be justified?

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Cost of Complexity

• One common measure of complexity is total number
  of unique parts
• Example Engine firewall
• US manufacturers
• Unique part for each model
• Toyota
• Virtually the same part for all models
• Tip of the iceberg?

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Example 2 Value Chain
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Tools for Analyzing Changes to the Value Chain

• Cost/Benefit Analysis
• Quantitative AND qualitative costs and benefits
• Qualitative factors can outweigh quantitative
• Process Analysis
• Identify Individuals and Their Process Tasks
  (Activities)
• Estimate Percentage of Time Spent on Process
• Estimate Cost of Current Process
• Evaluate Relative Costs of Alternative Processes

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Importance of Strategy

• Alice Oh, no, no. I was just wondering if you
  could help me find my way.
• Cheshire Cat Well that depends on where you want
  to get to.
• Alice Oh, it really doesn't matter, as long
  as...
• Cheshire Cat Then it really doesn't matter which
  way you go.
• Strategy Answer to two questions
• Where do you want to go?
• How do you want to get there?

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How Does Cost Management Help Organizations
Succeed?

• Remember Cost Dont Just Happen Decisions
  Cause Costs
• Benchmarking is Common Tool for
• Motivating Change
• Finding Opportunities for Improvement
• Benefit-cost analysis is used for choosing among
  alternative changes