The Strategic Cost Model: Linking Strategy and Costs for Improved Decision Making
Companies often struggle to understand costs as a result of the breadth and interdependencies of activities and operations across the organization. Many companies lack an effective cost model as a result of complex issues rooted in systems, processes, organization structure and the capabilities of business process owners.
A strategic cost model is the foundation for change and focuses reporting on understanding performance drivers linked to strategy, such as:
- Which products, services, or business units are making money?
- What customer relationships are profitable and what is the impact of incentive and marketing programs?
- Which operations run efficiently and what areas need management focus and attention?
- Where are the cross-functional synergies achieved within product delivery and customer service?
In creating an effective cost model, corporate strategy and business operations are critical to the design.
- Develop costing model requirements and utilize the company’s strategic approach as a guidepost.
- Determine the costing information necessary to meet the reporting and analysis requirements.
- Define cost drivers to understand the activities and operations that create costs. Define cost drivers to enhance the usefulness and relevance of cost information.
- Establish the costing model to establish a uniform costing guideline and meet the predefined goals of the costing model.
- Understand the various costing conventions available and determine what best aligns with the stated goals.
- Assess the process, data sources, and systems and the effectiveness of the processes for capturing cost information as well as the quality of cost data in the associated systems (ERP and legacy systems) to support integrity of the cost model.
A Strategic Cost Model provides an essential foundation to enable meaningful analysis and reporting to help execute the business strategy. The model is constructed by applying a top-down, holistic approach that spans the organization and includes the key people, processes, systems, controls and governance requirements.
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