STRATEGIC COST MANAGEMENT

Strategic Cost Management

Strategic Cost Management

Introduction

Worldwide destinations are spending an estimated US$1,480 billion on attracting real estate investment through both capital and government expenditures, making this a lucrative product where very little organized academic research exists. Accordingly, the execution of destination branding is often confined to logo design and development. It is estimated that more than US$2 billion is earned per day through international real estate investment.

This paper focuses on Dubai, an emirate of the UAE. UAE lies in the heart of the Middle East (ME) and is one of the world's fastest growing economies with a per capita income of US$31,000. Worldwide, in 2006, the Middle Eastern Real estate economy was ranked number nine in terms of absolute size (US$150 billion) and is expected to grow to US$280 billion by 2020. UAE ranks 18th in the world and number one in the Arab world, according to the global tourism competitiveness report by the World Economic Forum (Rahman, 2007a, b). Global Futures and Foresight, a British think tank expects the investment in tourism and infrastructure for the ME to be about US$3 trillion by 2020, with current investments standing at US$1 trillion which is much higher than what is considered current global expenditure.

Discussion

Most real estate firms (in Dubai in this case) have separate financial and cost management systems. Financial accounting systems are designed to translate company activities into dollar values that are reported to various external entities. The methods and procedures must conform to UAE's cost management standards. This system acts on the behalf of shareholders and other concerned parties (i.e., the government and other stakeholders) to reflect the current and future realities of the business in financial terms. Through the analysis of financial reports, stakeholders are provided “information” for making short- and long-term investment decisions, judgments concerning acquisitions or joint ventures, etc. In theory, cost and managerial accounting systems are designed to furnish “information” for internal decision making. These systems should provide the firm with revenue and cost information that reflects the current and future realities of the business in relation to goals, customers, finances, and resources.

Since the 1980s, there has been a considerable amount of research on the problems associated with using traditional (full absorption) accounting systems in real estate firms (in Dubai in this case) transitioning toward world-class operating principles and techniques. Kaplan (1983) was among the first to identify the shortcomings of traditional accounting in today's manufacturing environment. Others such as Miller et al. (1986), Goldratt and Fox (1986), Howell and Soucy (1987a, b, c), Johnson and Kaplan (1987), Foster and Horngren (1987), Plossl (1987), Finch and Cox (1989), Fry and Cox (1989), Morgan (1989), Burns and Kaplan (1990), Vollmann (1991), Fry (1992), Bhimani (1994), and Plenert (1999) have continued to reveal the shortcomings of traditional accounting practices and how true operational and division performance is misrepresented and distorted.

In addition, the increased need for accounting information to support just-in-time systems (Boyd et al., 2002), (Toomey, 1994), new product development activities (Anderson and Sedatole, 1998; Boer ...