By Convey, Steve
CMA - the Management Accounting Magazine , Vol. 65, No. 9
The key to cost management and continuous improvement in your organization is analysis of all activities and processes with a view to eliminating those that do not add value.
Can your management confidently answer embarrassingly simple questions such as: "How much does it cost to produce and sell our products, or service our customer base?"
It's getting harder to do so as business operations become more complex and the corporate overhead component of total organizational costs grows. Despite the significant advances in information technology that have given managers ready access to detailed financial data, these developments have challenged traditional approaches to cost management and highlighted deficiencies in current cost management systems.
Much of the information available today on cost management techniques is directed toward manufacturing operations. But many organizations now recognize the importance of developing techniques that can be used in broader applications, including the so-called "white collar" processes.
Such techniques, known as "business process improvement" techniques, involve analyzing the activity of administrative and support-related processes within an organization. Examples of typical business processes include:
* sales and order processing * customer credit and collections * warranty administration * product development, and * corporate financial reporting.
In service industries, value is added to the organization's output through service-oriented activities. The growing service sector and increasing customer demand for product-support activities in the manufacturing sector have increased the opportunity to improve the bottom line with cost management techniques focusing on a full range of business processes.
The basic issues facing cost managers today can be summarized as follows:
1. Most cost management systems do not provide the analytical tools needed to identify areas where growing administrative and support processes can be made more efficient and cost-effective. Cost management systems typically account for major administrative activities as "overhead" and allocate these costs on the basis of output measures, such as direct labor dollars, which often have little direct relationship to actual expenses.
2. Management is unable to sustain cost and performance improvements and continuous gains in administrative and support efficiency, for a number of reasons. First, the root causes of inefficiencies and non-value-added activities are not being eliminated. Second, the improvement initiatives do not typically include performance measurement targets which will lead to continuous improvement. Third, company objectives are not re-established or confirmed to stimulate further improvement. Finally, management's focus and priorities are not driven by customer requirements and improvement of product and/or service value to achieve the best practices possible.
New cost management techniques can be used to achieve continuous improvement in administrative and support areas. These techniques are based on identifying and analyzing value-added and non-value-added activities, and analyzing the efficiency and effectiveness of business processes.
The objective of an effective cost management system is to provide the tools and techniques management needs to achieve efficiency improvements, and then to foster continuous improvement within the organization.
Continuous improvement simply means recycling cost management effort toward achieving more efficient and effective business processes. Exhibit 1 illustrates the stages of a cost management cycle or "continuous improvement cycle."
Organizing for improvement
The first phase of a continuous improvement cycle involves training and encouraging all employees, and integrating the cost management process within the existing management structure. …