The first element of managerial accounting is cost behavior within an organization. Management analysis of cost behavior influences cost classifications and decisions made in order to control costs. This module covers two main concepts—cost management and how it is used in strategic decision making. In any strategic decision making, ethics always should be top priority. Not only is making ethical decisions the correct thing to do, but it is also key to running an efficient, long-term business.
For example, assume you are in charge of the pharmacy in a hospital. In your role as manager, you need to help control the cost of medications administered to patients. Many of these drugs are very expensive and are never fully reimbursed by the patients’ insurance companies. One day, an individual offers to sell you the required medications for exactly one-half of the cost currently paid. This individual represents a company that has had significant issues with timely delivery in the past and that has been subject to multiple lawsuits by other hospitals. The company’s failure to deliver the drugs on time had caused significant patient-care issues within those hospitals. Strictly from a cost standpoint, you might think it would be sensible to switch to this vendor. However, ethically, is it appropriate to make the switch that may save cost but also risk the well-being of patients?
Strategic decisions are the most important decisions a company can make because they dictate future decisions and level of organization performance. Some common examples of strategic decisions include:
Finding or seeking out new business opportunities that will allow the organization to grow and expand
Responding to any threats to competitive advantage to protect the company’s place in the industry
Creating goals related to the performance of the organization and finding ways to reach these goals in a reasonable time frame
There are many other strategic decisions not listed that companies make on a daily basis.
Cost management is made up of three parts:
A philosophy to increase customer value while keeping costs at a minimum
An attitude that accepts all decisions made by management will incur a cost
Techniques to allow an organization to increase customer value while at the same time reducing costs
In order to do these three things, managers must always collect and interpret information to find alternate ways of doing business. One common way of doing this is through a cost-benefit analysis. A cost-benefit analysis is used to assess the believed benefits and costs of a business move. If the benefits outweigh the costs, the decision will be considered beneficial. If the costs outweigh the benefits, the decision will not be considered worthwhile.
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