Strategic Cost Management | Accounting

The strategic cost management (SCM) is a fundamentally new way of managing an organization. It comprises:

(a) A strategic analysis of the business to identify unprofitable products, customers, marketing and distribution channels, etc.

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(b) An evaluation of the business from a value chain perspective. Linkages, both internally and externally, are taken into consideration.

(c) The optimization of business processes and activities instead of functions, and the evaluation of the effect of both upstream and downstream decisions.

(d) The implementation of continuous cost improvement programs instead of comparisons with outdated standard costing approaches.

(e) The use of performance measurement systems that are early indicators of corporate success in critical areas such as time, quality and cost.

(f) The improvement in activities that add value while value-destroying activities are identified and eliminated. Particular emphasis is placed on the evaluation of support activities.

(g) The elimination of capacity and other constraints.

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(h) The integration of quality management programs with the costing system, not only to identify wastage but also to develop the methods to value and to eradicate it.

(i) The implementation of productivity management programs that are supplemented by appropriate benchmarking and service level evaluations.

(j) Changes in costing and accounting systems to reflect total cost approaches instead of conventional classifications of cost between production, marketing, administration, etc. (or only the minimum information that is required by law).

(k) Value engineering and value analysis that are used as important tools to restructure product costs.

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(l) A thorough understanding by management of the cost behaviour and the underlying cost drivers.

(m) The introduction of cost of capital theory as well as residual income theory to cost decision making in order to optimize the use of capital resources.

(n) Managing costs with a long-term focus. Few costs are considered fixed and therefore non-manageable.

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