Chapter One
COST MANAGEMENT AND
STRATEGY
Blocher, Juras, and Smith: COST MANAGEMENT: a strategic emphasis, 9e
Copyright © 2022 McGraw-Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill.
LEARNING OBJECTIVES
Explain the use of cost management information for each of
the four functions of management and in different types of
organizations, with emphasis on the strategic management
function
Explain the evolution of management accounting
Explain the contemporary business environment and how it
has influenced cost management
LEARNING OBJECTIVES
(CONTINUED)
Describe the professional environment of the management
accountant, including professional organizations and
professional certifications
Understand the principles and rules of professional ethics and
explain how to apply them
COST MANAGEMENT
INFORMATION AND COST
MANAGEMENT
•
•
Cost Management Information consists of financial and
nonfinancial information that is developed and used to
implement the organization’s strategy
Cost management is the development and use of cost
management information by the management accountant
MANAGEMENT ACCOUNTING INFORMATION (1)
The Institute of Management Accountants has defined
management accounting as:
 A value-adding continuous improvement process of
planning, designing, measuring and operating both
nonfinancial information systems and financial
information systems that guides management action,
motivates behavior, and supports and creates the
cultural values necessary to achieve an organization’s
strategic, tactical and operating objectives
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MANAGEMENT ACCOUNTING INFORMATION (2)
Be aware that this definition identifies:
 Management accounting as providing both financial information and nonfinancial
information
 The role of management information as supporting strategic (planning), operational
(operating) and control (performance evaluation) management decision making
In short, management accounting information is pervasive and
purposeful
 It is intended to meet specific decision-making needs at all levels in the organization
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MANAGEMENT ACCOUNTING INFORMATION (3)
Examples of management accounting information include:
 The reported expense of an operating department, such as the assembly department of an
automobile plant or an electronics company
 The costs of producing a product
 The cost of delivering a service
 The cost of performing an activity or business process – such as creating a customer invoice
 The costs of serving a customer
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MANAGEMENT ACCOUNTING INFORMATION (4)
Management accounting also produces measures of the economic performance
of decentralized operating units, such as:
 Business units
 Divisions
 Departments
These measures help senior managers assess the performance of the company’s
decentralized units
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MANAGEMENT ACCOUNTING INFORMATION (5)
Management accounting information is a key source of information for
decision making, improvement, and control in organizations
Effective management accounting systems can create considerable
value to today’s organizations by providing timely and accurate
information about the activities required for their success
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CHANGING FOCUS
Traditionally, management accounting information has been
financial information
Management accounting information has now expanded to
encompass information that is operational and nonfinancial:
 Quality and process times
 More subjective measurements (such as customer satisfaction, employee
capabilities, new product performance)
Three dimensions:
 Financial / Non-financial information
 Internal / External information
 Operational / Strategic information
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FINANCIAL V. MANAGEMENT ACCOUNTING
Financial Accounting
Deals with reporting to
parties outside the
organization
Management Accounting
Deals with activities inside an
organization
Deals with the organization
as a whole
Deals with responsibilities centers
within the organization as well as
with the organization as a whole
Highly regulated
Unregulated
Primarily uses historical data
May use projections about the
future
Watch video from this link:
https://www.youtube.com/watch?v=YCAbg2pwl58
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A BRIEF HISTORY (1 OF 4)
Origin of Management Accounting:
https://www.youtube.com/watch?v=uuEPnnsYMeI&list=PL_KGEFWqEaTAswdGBQr2YwKDQoKz84iox&index=1
In the late 19th century, railroad managers implemented large and complex
costing systems
 Allowed them to compute the costs of the different types of freight that they
carried
 Supported efficiency improvements and pricing in the railroads
The railroads were the first modern industry to develop and use broad financial
statistics to assess organization performance
About the same time, Andrew Carnegie was developing detailed records of the
cost of materials and labor used to make the steel produced in his steel mills
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A BRIEF HISTORY (2 OF 4)
The emergence of large and integrated companies at the start of the 20th
century created a demand for measuring the performance of different
organizational units
 DuPont and General Motors are examples
Managers developed ways to measure the return on investment and the
performance of their units
After the late 1920s management accounting development stalled
 Accounting interest focused on preparing financial statements to meet new
regulatory requirements
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A BRIEF HISTORY (3 OF 4)
It was only in the 1970s that interest returned to developing more
effective management accounting systems
 American and European companies were under intense pressure from
Japanese automobile manufacturers
During the latter part of the 20th century there were innovations
in costing and performance measurement systems
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A BRIEF HISTORY (4 OF 4)
The history of management accounting comprises two characteristics:
1.
Management accounting was driven by the evolution of organizations and their
strategic imperatives


2.
When cost control was the goal, costing systems became more accurate
When the ability of organizations to adapt to environmental changes became
important, management accounting systems that supported adaptability were
developed
Management accounting innovations have usually been developed by
managers to address their own decision-making needs
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HISTORICAL EVOLUTION OF MANAGEMENT ACCOUNTING
16
HISTORICAL EVOLUTION OF
MANAGEMENT ACCOUNTING
Characteristics of Management Accounting Practices in Four Stages of Evolution
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Typical Organization Chart
Chief Executive Officer (CEO)
Chief Financial
Officer (CFO)
Vice President
for Marketing
Vice President
for Operations
Controller
Treasurer
Chief Information
Officer (CIO)
Cost Management
Financial Reporting
Financial Information Systems
Other Reporting Obligations (e.g., tax)
FOUR FUNCTIONS OF
MANAGEMENT
Cost management information is needed for each of the
following management functions:
•
•
•
•
Strategic Management
Planning and Decision Making
Management and Operational Control
Preparation of Financial Statements
MANAGEMENT
FUNCTIONS
Strategic management
 Most important of the management functions
 Involves identifying and implementing goals and action plans to
maintain a competitive advantage
MANAGEMENT FUNCTIONS
(CONTINUED)
Planning and decision-making
 Information is needed to support recurring decisions such as
scheduling production, pricing, repairing and replacing
equipment
Management and operational control
 Information is needed to identify inefficient operations and
reward effective management practices
Preparation of financial statements
 Information is needed to guarantee compliance with regulatory
reporting requirements
THE STRATEGIC EMPHASIS
The focus of cost management is on working with
management to achieve the organization’s goals, through
understanding the organization’s competitive environment
and implementing the organization’s strategy to succeed in
this environment
This often means using all of the organization’s resources to
identify and satisfy the customers’ needs
The strategic emphasis often requires creative and
integrative thinking from a cross-functional viewpoint
TYPES OF
ORGANIZATIONS
Manufacturers
Merchandisers
Wholesalers
Service
firms
Retailers
Government and
Not-for-profit
CHANGES IN THE
CONTEMPORARY
BUSINESS ENVIRONMENT
1. Shift to a global business environment


Economic interdependence and competition
Recent trend to economic nationalism

Tariffs

Uncertainty and volatility
2. Lean Manufacturing



Inventory reduction and quality control
Flexible manufacturing systems
Emphasis on speed-to-market
CHANGES IN THE CONTEMPORARY
BUSINESS ENVIRONMENT
(CONTINUED)
3. Importance of information technology

Increased use of the internet has reduced processing
time, increased access to important information, and
facilitated information exchange
4. Focus on the customer


Consumers expect functionality, quality, and innovation
With economic nationalism, focus shifts to the
producer, less to the consumer
CHANGES IN THE CONTEMPORARY
BUSINESS ENVIRONMENT
(CONTINUED)
5. Shifts in management organization


Shift from financial to customer-based measures
The focus has shifted from financial measures and
hierarchal command-and-control organizations to
nonfinancial measures and flexible organizational
structures
6. Social, political, and cultural considerations

Changes include a more diverse workforce, changes in
regulatory requirements, and a renewed sense of
ethical responsibility
Comparison of Prior and Contemporary Business
Environment by Function: Manufacturing, Marketing, and
Management Organization
THE STRATEGIC FOCUS OF COST
MANAGEMENT: KAPLAN’S PHASES FOR
DEVELOPING COST MANAGEMENT SYSTEMS
Stage One
Stage Two
Stage Three
Stage Four
Cost management systems are basic
transaction reporting systems
Cost management systems focus on
external reporting and reliable reports–
decision usefulness of cost management
data is limited
Cost management systems track key
operating data and relevant cost
information for decision-making
Strategically relevant cost management
information is an integral part of the
system
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HOW DO THE CHANGES IN THE
CONTEMPORARY BUSINESS
ENVIRONMENT AFFECT COST
MANAGEMENT?
The management accountant’s role:
 Provide strategically relevant cost management information to help the organization keep up with
the ever-changing environment
 This requires the development of critical success factors (CSFs), measures of performance that are
essential to competitive advantage
 Management accountants have responded to the contemporary business environment with thirteen
Contemporary Management Techniques
CONTEMPORARY
MANAGEMENT TECHNIQUES
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
The Balanced Scorecard and Strategy Map
The Value Chain
Activity Based Costing and Management
Business Analytics
Target Costing
Life-Cycle Costing
Benchmarking
Business Process Improvement
Total Quality Management
Lean Accounting
The Theory of Constraints
Sustainability
Enterprise Risk Management
1-30
PROFESSIONAL
ORGANIZATIONS
Organizations that provide guidelines and
regulations:
 Internal Revenue Service (IRS), Federal Trade Commission
(FTC), Securities and Exchange Commission (SEC), Cost
Accounting Standards Board (CASB)
Organizations that promote professionalism
and expertise:
 Institute of Management Accountants (IMA), Financial
Executives Institute (FEI), and American Institute of Certified
Public Accountants (AICPA)
PROFESSIONAL
CERTIFICATIONS
There are three important certifications that are
relevant for management accountants in the U.S.
(other similar certifications are available outside the
U.S.):
– Certified Management Accountant (CMA)
– Certified in Strategy and Competitive Analysis (CSCA)
– Certified Public Accountant (CPA)
– Certified Global Management Accountant (CGMA)
PROFESSIONAL ENVIRONMENT
Institute of Management Accountants (IMA)
 Sponsors Certified Management Accountant & Certified Financial Management
programs
 Publishes a journal, policy statements and research studies on management accounting
issues
 Visit link and take note of requirements and benefits: https://www.imanet.org/cmacertification?ssopc=1
CMA is globally recognized as a certified program in financial accounting and
strategic management. The certification is offered by ICMA (Institute of Certified
Management Accounts) and IMA (Institute of Management Accountants). The
headquarters of IMA is located in New Jersey, U.S and has reached across 140
countries. CMAs work in corporate finance, accounting, and strategy teams in a
company. They can also parse the data from many sources to improve performance.
Besides, they also work as risk managers, cost accountants, budgeters, FP&A
managers, corporate accountants, financial strategists, management accountants,
and executive decision-makers.
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PROFESSIONAL ENVIRONMENT
Chartered Institute of Management Accounting (CIMA)
 Leading professional organization in England and Wales
 Sponsors certificate and diploma programs
 Visit link and take note of requirements and benefits:
https://www.cimaglobal.com/
CIMA is globally recognized as the career qualification in Business and Finance. It
was established in 1919. It is considered as the largest professional accountant
management with 220,000 members who are working in 182 countries. The
qualified professionals in CIMA work in the field of Project Finance, Corporate
finance, Business Analysis, Financial Reporting, Risk Management, Treasury
Management, and so on.
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CMA VS. CIMA
35
CMA VS CIMA
Watch video to know more about CMA and CGMA designation:
https://www.cmacoach.com/cgma-vs-cma-which-is-right-for-you/
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EXAMS FOR CMA DESIGNATION
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EXAMS FOR CGMA DESIGNATION
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IMA ETHICAL PRINCIPLES AND STANDARDS
IMA’s overarching ethical principles include: Honesty,
Fairness, Objectivity, and Responsibility
The four standards of ethical conduct for management
accountants as advanced by the Institute of Management
Accountants:
 Competence
 Confidentiality
 Integrity
 Objectivity
You may visit this link for the IMA Statement of Ethical Professional Practice:
https://www.imanet.org/-/media/b6fbeeb74d964e6c9fe654c48456e61f.ashx
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IMA STANDARDS
I.
COMPETENCE
1.
2.
3.
II.
Maintain an appropriate level of professional leadership and expertise by
enhancing knowledge and skills.
Perform professional duties in accordance with relevant laws, regulations, and
technical standards.
Provide decision support information and recommendations that are accurate,
clear, concise, and timely. Recognize and help manage risk.
CONFIDENTIALITY
1.
2.
3.
Keep information confidential except when disclosure is authorized or legally
required.
Inform all relevant parties regarding appropriate use of confidential
information. Monitor to ensure compliance.
Refrain from using confidential information for unethical or illegal
advantage.
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IMA STANDARDS
III.
INTEGRITY
1.
2.
3.
Mitigate actual conflicts of interest. Regularly communicate with business
associates to avoid apparent conflicts of interest. Advise all parties of any
potential conflicts of interest.
Refrain from engaging in any conduct that would prejudice carrying out
duties ethically.
Abstain from engaging in or supporting any activity that might discredit the
profession. 4. Contribute to a positive ethical culture and place integrity of
the profession above personal interests.
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IMA STANDARDS
IV.
CREDIBILITY
1.
2.
3.
4.
Communicate information fairly and objectively.
Provide all relevant information that could reasonably be expected to
influence an intended user’s understanding of the reports, analyses, or
recommendations.
Report any delays or deficiencies in information, timeliness, processing, or
internal controls in conformance with organization policy and/or applicable
law.
Communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity
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Chapter Summary
•Cost management is the development and use of cost
management information by the management accountant
Cost management information is used in all four of the
management functions and is important in the pursuit of
a firm’s mission and goals
The contemporary business environment has increased
the level of competition faced by organizations, and has
influenced the role of the management accountant
There were several contemporary management
techniques in which cost management responds to the
changing business environment
Chapter Summary (continued)
• The management accountant looks to professional
organizations for guidance, training, and professional
support
• Professional certifications can be obtained from many
professional organizations, including the Institute of
Management Accountants (the Certified Management
Accountant certificate)
• Management accountants are expected to maintain a high
standard of ethical behavior including competence,
confidentiality, integrity and credibility
1-44
RESOURCES
Lecture videos on youtube by Albert Cruz, Edspira and Mark Meldrum
 https://www.youtube.com/watch?v=YCAbg2pwl58
 https://www.youtube.com/watch?v=uuEPnnsYMeI&list=PL_KGEFWqEaTAswdGBQr2YwKDQoKz84iox&index=1
 https://www.youtube.com/watch?v=wM77_vV_sJg&list=PLM9WI-4yn8BIDKcbNcwKbvlh7W1p7TY3s&index=3
Websites of IMA and CIMA
 https://www.imanet.org/cma-certification?ssopc=1
 https://www.cimaglobal.com/
 https://www.imanet.org/-/media/b6fbeeb74d964e6c9fe654c48456e61f.ashx

https://www.cmacoach.com/cgma-vs-cma-which-is-right-for-you/
Some of the slides are sourced from this reference.
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