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The objective of strategic cost management is to reduce costs while simultaneously strengthening the strategic position of the firm (see last month's column). Given this objective, strategic cost management cannot, like traditional management accounting, limit itself to either the four walls of the factory or the boundaries of the firm.
The dominance of financial over managerial accounting for the majority of the 20th Century led to an atrophy of cost management practices.1 In particular, traditional cost systems are limited to the walls of the factory and are used to determine the cost of products only. Other potential cost objects such as suppliers and customers are treated either as general overhead and arbitrarily allocated to products or as period costs and assigned directly to the income statement (Figure 1). The problem with this approach is that these nonmanufacturing costs cannot be managed effectively because the underlying reasons for their occurrence are masked by the way they are treated by the firm's cost system.
COST MANAGEMENT BEYOND THE FACTORY WALLS
The implications of extending cost management beyond the factory walls means that costs are assigned to suppliers and customers as well as products.2 Armed with the insights provided by this extension of cost management, a firm can begin to manage these costs strategically.
To enable these costs to be managed strategically, they must be allocated causally (Figure 2). One of the primary techniques for meaningfully assigning nonmanufacturing costs is activitybased cost management. The advantage of this technique over traditional costing methods lies in its ability to assign costs in a causal manner to a broad range of cost objects including products, suppliers, and customers.3 Managing procurement costs. In traditional cost systems, procurement costs are allocated to products arbitrarily. Without proper assignment of procurement costs, purchasing managers typically select suppliers based on the purchase price of their products. This pattern leads to a number of suboptimal buying behaviors that weaken a firm's strategic position, for example, purchasing components from suppliers whose quality, reliability, and delivery performance are below acceptable levels.
These purchasing decisions hinder the firm's ability to satisfy its customers and earn adequate profits. How can a product be high quality and delivered on time...