Cost Management
Introduction
Learning Objectives
1. Similarities and differences between financial
accounting and cost accounting
2. Cost accounting’s support to MA & FA
3. Business functions in the value chain
4. Dimensions of performance from customer’s
perspective
5. Planning & control decisions of managers
Learning objectives
6. Different roles of management accounting
7.
Guidelines
followed
by
management
accountants
8. Management accounting & organisation
structure
9. Professional ethics & MA
Limitations of FA
•
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No operating details of particular departments
Does not ensure control over material use; does not
help in wastage avoidance
Costs are not assigned to products, departments,
divisions, etc.
No standards for comparison
Loss is not analysed taking idle time, defective
material, etc.
Does not help in pricing decisions
No information for managerial decisions such as shut
down or continue, deciding about product-mix, buy or
manufacture, etc.
Management accounting
• Extension of managerial aspect of cost
accounting.
• Uses tools of both financial a/c & cost a/c for
decision making and control.
• Cost accounting- cost control is of prime
importance.
• Management accounting- primary emphasis is
on decision making (Mgt. a/c employs many
techniques from OR, statistics, etc.)
GROUNDS OF DIFFERENCE
FINANCIAL ACCOUNTING
COST ACCOUNTING
Purpose
B/S, P&L A/C, CFS
General Purpose
Cost Information for planning,
decision making & control
Special purpose: Different costs for
different purposes
For Whom?
External Users
Internal Users
Coverage
Total organisation
Segmental (product, process, job,
depart., etc.)
Control
Does not provide for control of Provides
elements of cost
Principles
GAAP
Need driven
Need
Statute demands
Optional, need driven except when
cost a/c record rules provide
Reporting Time
Accounting Year
Need based (planning and control)
Basis
measurement
of Monetary terms
Use of standards
No standards to
performance
and
efficiency
Information
Historical
Could be physical also (like labour
hours, machine hours,etc.)
compare Standards are used
evaluate
Projects past into future
Strategic decisions & MA
Strategy formulation
Building resources and capabilities
Implementing strategy
Building resources and capabilities
• Current assets
• Long term productive assets
• Intangibles
Planning and Controlling
Management Accounting System
Planning
Budgets
Control
Accounting
System
Performance
Evaluation
Performance
Reports
Feedback
Management Decision
Planning and Controlling
What is planning?
Setting
goals
Predicting
results
Deciding how
to attain goals
Planning and Controlling
What is control?
Deciding
and
taking
actions
Deciding on
performance
evaluation
and feedback
Roles of MA- Problem solving
This involves comparative analysis
for decision making.
This role asks: Of the several alternatives
available, which is the best?
Scorekeeping
This involves accumulating data and
reporting reliable results to
all levels of management.
This role asks: How is the business doing?
Attention Directing
This involves helping managers
properly focus their attention.
This role asks: Which opportunities and
problems should be emphasized first.
Attention directing should focus on all
opportunities to add value to an organization,
not just cost-reduction opportunities.
Cont….
• Strategic
decisions
and
planning
decisions: problem solving role is most
important
• Control decisions: the later two roles are
important
Key Themes in Management
Decision Making
Customer Focus
Value Chain
and
Supply Chain
Analysis
Key Success Factors:
Cost and Efficiency,
Time, Quality,
Innovation
Continuous
Improvement
and
Benchmarking
Customer Focus
continue
investing sufficient (but not excessive)
resources in customer satisfaction
such that profitable customers
are attracted and retained.
Value Chain and
Supply Chain Analysis
1. Treat each of the business functions in the value
chain as an essential and valued contributor.
2. Integrate and coordinate the efforts of all business
functions in addition to developing the capabilities
of each individual business function.
Key Success Factors
operational factors that directly affect
the economic viability of the organization
Cost –continuous
pressure to reduce costs.
Quality – customers
are expecting higher
levels of quality
Key Success Factors
Time – organizations are under pressure to
complete activities faster and to meet
promised delivery dates more reliably.
Innovation –
continuing flow of innovative products
or services is a prerequisite to the ongoing
success of most organizations.
Continuous Improvement
and Benchmarking
Continuous improvement by competitors creates
a never-ending search for higher levels of
performance within many organizations.
Value Chain
The term “value chain” refers to the sequence of
business functions in which usefulness is added
to the products or services of an organization.
The term “value” is used because as the usefulness
of the product or service is increased, so is its value
to the customer.
MA provides decision support across value chain
Value Chain
R&D
Design
Production
Management Accounting
Marketing
Distribution
Service
MA’s support to managers- Key
Guidelines
1. Cost-benefit approach
2. Full recognition of behavioral as well as
technical considerations
3. Using different costs for different purposes
Partial Organization Chart,
Manufacturing Company
President
Line Function
Staff Function
Production
Vice-President
Financial VicePresident
Production
Supervisor
Machining
Foreman
Assembly
Foreman
Controller
Internal
Audit
Cost
Financial
Treasurer
Systems
Ta
x
Current Factors Affecting Cost
Management
A. Global Competition
• demand for more cost information but also for more
accurate information quickly
Current Factors Affecting Cost
Management
B. Growth of the Service Industry
 service sector of the economy has increased in
importance
 deregulation of many services has increased
competition in the service industry
Current Factors Affecting Cost
Management
C. Advances in Information Technology
 Computer aided operations – information accumulation
and supply of information to management
instantaneously.
 The emergence of e-commerce allowing buyers and
sellers to come together electronically
Current Factors Affecting Cost
Management
D. Advances in Management Environment
Just-in-time manufacturing
Computer-integrated manufacturing
Current Factors Affecting Cost
Management
E. Customer Orientation
 value to the customer for establishing competitive
advantage
 Companies to compete in technology, manufacturing,
speed of delivery and response
Current Factors Affecting Cost
Management
F. New Product Development
 high proportion of production costs are
committed during the development and design
stage
 cost control- use of target costing and activitybased management
Current Factors Affecting Cost
Management
G. Total Quality Management
 Continual improvement and elimination of waste
 A philosophy of total quality management
Current Factors Affecting Cost
Management
H. Time as a Competitive Element
• Time is the crucial element in all phases
of the value chain.
• Decreasing non-value-added time appears
to go hand-in-hand with increasing
quality