Introduction to Cost Management
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Intended Learning Outcomes
Describe Cost Management and explain how it differs from financial accounting
Identify the current factors affecting cost management
Describe how management accountants’ function within an organization
Apply the ethical behavior for management accountants
Accounting information system
-Consists of interrelated manual and computer parts
-Uses processes such as collecting, recording, summarizing, analyzing, and managing data to
transform inputs into information provided to users
Two major systems of Accounting Information System with the targeted user being the major
difference.
A. Financial accounting information system
• Produces outputs for external users
• Uses well-specified economic events as inputs
• Follows rules and conventions set by the Securities and Exchange Commission (SEC) and the
Financial Accounting Standards Board (FASB)
• Provides outputs such as financial statements
• Used for investment decisions, stewardship evaluation, activity monitoring, and regulatory
measures
B. Cost management accounting information system
• Produces outputs for internal users
• Has three broad objectives that provide information for:
o Costing out services, products, and other objects of interest to management
o Planning and control
o Decision making
• Cost management is concerned with factors that drive costs
o Cycle time
o Quality
• Process productivity
Different Systems for Different Purposes
1. Cost Accounting Information System
• Assigns costs to individual products and services and other objects as specified by
management
• Assists external financial reporting
o By assigning costs to products in order to value inventories and determine cost of sales
• Conforms to the rules and conventions set by the SEC and the FASB
2. Operational Control Information System
• Provides accurate and timely feedback concerning the performance of managers and others
relative to their planning and control of activities
o Focuses on identifying opportunities for improvement and helping to find ways to
improve
• Improves profit by increasing customer value
Factors affecting cost management
1. Global competition
• Increased the demand for more accurate cost information
2. Growth of the service industry
• Deregulation has increased competition
o Led to the need to have accurate cost information for planning, controlling, continuous
improvement, and decision making
Advances in information technology
1. Use of computers to monitor and control operations
• Results in the integration of manufacturing data with marketing and accounting data
2. Enterprise resource planning (ERP) software: Provides an integrated system capability
3. Use of tools such as personal computers (PCs), online analytic programs (OLAP), and decisionsupport systems (DSS)
4. Development of business analytics
• Key differences between the use of PCs, OLAP, and DSS and the use of business analytics
o Expansion of business analytics to include external data sets and the integration of the
analysis with an organization’s internal databases
o Emergence of very large data sets
5. Emergence of electronic commerce (e-commerce)
• Internet trading
• Electronic data interchange
• Bar coding
6. Electronic data interchange (EDI): Exchange of documents between computers using
telephone lines
7. Supply chain management: Management of products and services from the acquisition of raw
materials through manufacturing, warehousing, distribution, wholesaling, and retailing
Advances in manufacturing environment
1. Theory of constraints: Method used to continuously improve manufacturing and
nonmanufacturing activities
2. Just-in-time manufacturing: Produces a product only when it is needed and only in the
quantities demanded
• Focuses on continual improvement by reducing inventory costs and dealing with other
economic problems
3. Lean manufacturing: Persistent pursuit and elimination of waste that simultaneously embodies
respect for people
4. Computer-integrated manufacturing
• Automation of the manufacturing environment allows firms to:
o Reduce inventory
o Increase productive capacity
o Improve quality and service
o Decrease processing time
o Increase output
• Implies the following capabilities:
o Products are designed through the use of a computer-assisted design (CAD) system
o Computer-assisted engineering (CAE) system is used to test the design
o Product is manufactured using a computer-assisted manufacturing (CAM) system
o An information system connects the various automated components
Customer Orientation
• Firms establish competitive advantage by delivering value to the customer
• Value chain
o Set of activities required to design, develop, produce, market, and deliver products and
services to customers
• Customer driven accounting departments assess the value of cost reports
o To ensure effective communication of significant information
New Product Development
• High proportion of production costs is involved during the development and design stage of
new products
• Cost management procedures
– Target costing:
o Encourages mangers to assess the overall cost impact of product designs over the
product’s life cycle
– Activity-based management:
o Identifies the activities produced at each stage of the development process and assesses
their costs
Sustainable development
• Development that meets the needs of the present without compromising the ability of future
generations to meet their own needs
Total quality management
• Managers create an environment that will enable organizations to produce defect-free
products and services
• Has replaced the acceptable quality attitudes of the past
o Continuous improvement and elimination of waste are the two foundation principles
o Objectives: Producing products and services that actually perform according to
specifications and with little waste
Time as a competitive element and Efficiency
• Time as a competitive element
o Crucial element in all phases of the value chain
o Decrease in non-value-added time increases quality
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Efficiency
o Improving efficiency is a vital concern
o Cost is a critical measure of efficiency
The Roles
• Management Accountants
-they assist who are responsible for carrying out an organization’s objectives
• Line positions: Positions that have direct responsibility for the basic objectives of an
organization
• Staff positions: Positions that are supportive in nature and have only indirect responsibility for
an organization’s basic objectives
• The controller
o Chief accounting officer
o Supervises all accounting departments
o Participates in planning, controlling, and decision-making activities
o Responsible for both internal and external accounting requirements
• The treasurer
o Responsible for the finance function
o Raises capital and manages cash, investments, and investor relations
o In charge of credit and collections as well as insurance
Information for planning, controlling, continuous improvement, and decision making
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Planning: Detailed formulation of future actions to achieve a particular end
o Requires setting objectives and identifying methods to achieve those objectives
Controlling: Managerial activity of monitoring a plan’s implementation and taking corrective
action
o Achieved with the use of feedback
o Performance reports: Accounting reports that provide feedback by comparing planned
data with actual data
Continuous improvement: Relentless pursuit of improvement in the delivery of value to
customers
o Required to remain competitive or to establish a competitive advantage
Decision making: Process of choosing among competing alternatives
Accounting and ethical conduct
• Business ethics: Learning what is right or wrong in the work environment and choosing what is
right
• Benefits of ethical behavior
o Creates customer and employee loyalty
o Avoids litigation costs
Standards of ethical conduct for management accountants
• Institute of Management Accountants (IMA) has established ethical standards for management
accountants
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Major divisions of the code
o Competence
o Confidentiality
o Integrity
o Credibility
o Resolution of ethical conflict
Certification
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Certificate in management accounting
o Establishes management accounting as a recognized, professional discipline, separate
from the profession of public accounting
Certificate in public accounting
o Provides evidence of a minimal professional qualification for external auditors
Certificate in internal auditing
o Recognizes competency in internal auditing