Determine The Purpose And Motivation For Managerial Costing Principles of Cost Analysis and Management  Show Slide #1: Determine The Purpose And Motivation For Managerial Costing References: FM 1-06, Slides, Handouts, Excel Spreadsheets Facilitator Material: Each primary facilitator should possess a lesson plan, slide deck, course handouts, and practical exercise, and FM 1-06. All required references and technical manuals will be provided by the School House Learner Material: Learners should possess standard classroom supplies, course handouts, practical exercises, FM 1-06. All required references and technical manuals will be provided by the School House. Facilitator Actions: Classroom Setup: 30 minutes Testing Requirements/Assessment: This lesson is not covered in any exams.

Would you go into battle without reconnaissance? Show Slide #2: Concrete Experience (Motivational) Facilitator’s Note: (Concrete Experience 5 minutes) Present Learners the slide questions. Ask Learners what their thoughts are on “Would you go into battle without reconnaissance”? Facilitator’s Note: (Publish and Process 5 minutes) the critical portion of this part of the ELM process is to force the Learners to reflect. Ask a series of thought influencing questions, for example: What result would you expect? What information would you want to have? Managerial cost accounting is the reconnaissance for the Cost War. It is the information crucial for managers to make the cost-critical decisions that they face.

Terminal Learning Objective Action: Determine the Purpose and Motivation for Managerial Costing Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion Standard: With at least 80% accuracy (70% for international Learners) you must: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing Discuss the process of implementing managerial cost accounting Apply the concept of managerial costing needs to a personal situation Show Slide #3: TLO Action : Determine the Purpose and Motivation for Managerial Costing Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion Standard: With at least 80% accuracy (70% for international Learners) you must: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing Discuss the process of implementing managerial cost accounting Apply the concept of managerial costing needs to a personal situation Safety Requirements: In a training environment, leaders must perform a risk assessment in accordance with DA PAM 385-30, Risk Management. Leaders will complete a DD Form 2977 DELIBERATE RISK ASSESSMENT WORKSHEET during the planning and completion of each task and sub-task by assessing mission, enemy, terrain and weather, troops and support available-time available and civil considerations (METT-TC). Local policies and procedures must be followed during times of increased heat category in order to avoid heat related injury. Consider the work/rest cycles and water replacement guidelines IAW TRADOC Regulation 350-29. Environmental Considerations: Environmental protection is not just the law but the right thing to do. It is a continual process and starts with deliberate planning. Always be alert to ways to protect our environment during training and missions. In doing so, you will contribute to the sustainment of our training resources while protecting people and the environment from harmful effects. Refer to FM 3-34.5 Environmental Considerations and GTA 05-08-002 ENVIRONMENTAL-RELATED RISK ASSESSMENT. INSTRUCTIONAL LEAD-IN. Throughout the lesson discussion seek opportunities to link the competencies with the lesson content through the Learner’s experiences.

Costing Systems Differ Financial & Regulatory Managerial Goals: Consistency Comparability Equity Users: Shareholders Congress Regulators Tax Authorities Methodology: Laws Rules GAAP Goals: Fit Functionality Relevance Users: Managers Methodology: Situation Dependent Externally Specified Require-ments Internally Specified Require-ments Show Slide #4: Costing Systems Differ 1. Learning Step/Activity #1 Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing Method of Instruction: DSL (large or small group discussion) Facilitator to Learner Ratio: 2:25 Time of Instruction: 20 minutes Media: Slides, Printed Reference Materials Facilitator's Note: Before facilitating this lesson, ask the Learners which of the 21st Century Soldier Competency do they think pertain to this lesson? Facilitate a discussion on the answers given and at the end of the lesson revisit it and see if the Learners still believe their choice are the same. 1. Communication and Engagement (Oral, written, and negotiation) 2. Critical thinking, intergovernmental, and multinational competence 3. Tactical and Technical Competence Facilitator’s Note: THIS IS A KEY SLIDE AND AN IMPORTANT CONCEPT IN DIFFERENTIATING MANAGERIAL COSTING.) Facilitator’s Note: (Read and facilitate discussion using the slide) most accounting systems focus on meeting external reporting requirements. External reporting is a fact of life and a cost of operation. However, goals for the measurement process in external reporting are seldom the same as management information goals. While external reporting requires consistency and comparability, management needs information that is relevant to its decision making needs An individual would not generally use the information in his IRS form 1040 (an external reporting requirement) to manage his household budget (an internal reporting application). He will need to take his financial information (probably his checkbook) and determine what information is important for his own decision making. (How much did I spend on groceries last month?) The comparability and consistency goal set of external reporting requires a rigid accounting methodology that is auditable. Managerial information systems do not need audits for the same reason that your checkbook does not get audited. If you cheat on your checkbook, it’s your own problem. If you cheat on your managerial costing system, you are only cheating yourself out of the ability to make good managerial decisions.

Managerial Cost Accounting Seeks to understand true economic cost Based on cause-effect relationships Reflecting drivers of resource consumption With reasonable, but not precise, accuracy Enables cost based management for continuous improvement Enables better decision making Enables rational consumption behavior Show Slide #5: Managerial Cost Accounting Facilitator’s Note: (Facilitate discussion using the slide) managerial cost accounting works best as a self-made tool: it is designed by the managers who will use it. It has two goals: 1. Seeks To Understand True Economic Cost. Based on Cause-Effect Relationships Reflecting Drivers of Resource Consumption With Reasonable, But Not Precise, Accuracy Managerial costing will look at the cause-effect relationships: What drives resource consumption. It will give a true picture of cost with reasonable accuracy, while avoiding overly detailed precision. 2. The second goal of managerial costing is to promote better resource management. Understanding true cost allows better resource management. When managers understand what things truly cost, and recognize that their decisions have an impact on costs incurred by the organization, this stimulates desired behaviors. It also gives managers the tools to control costs and be accountable for their decisions. Enables Cost Based Management for Continuous Improvement Enables Better Decision Making Enables Rational Consumption Behavior

Why Do Managerial Costing? Enhance decision making Provide reconnaissance necessary for Cost Based Management process Influence resource consumption behavior Show Slide #6: Why Do Managerial Costing? Facilitator’s Note: (Facilitator read and facilitate discussion using the slide) the purpose for undertaking the task of managerial accounting is to: Enhance Decision Making. We have already shown how cost information impacts the decision process. We have also already discussed how most managers focus on the budgetary information, which can motivate some undesired behaviors in resource consumption. Provide Reconnaissance Necessary for Cost Based Management Process. Think of managerial cost information as the scouting report for managerial decision making. You would not expect an officer to lead soldiers into battle without good information about the enemy and the battlefield. Neither should a manager attempt to manage without good cost information. Influence Resource Consumption Behavior. Knowing the true cost of resources consumed helps managers to make rational decisions about spending. Purchasing the cheapest item (rule-based management approach) is not always the wisest decision. It is also not always wise to purchase the item with the most features and capability, if they are not needed. (The “free goods” approach).

Cost Measurement’s Role in Decision Making Which Metal is Best for Transmission? Show Slide #7: Cost Measurement’s Role in Decision Making Facilitator’s Note: (Facilitator read and facilitate discussion using the slide) in absence of cost information, which metal would you choose for your transmission wires? This is the “free goods” approach mentioned on the previous slide. When cost is unknown, it becomes unimportant to the decision. Instead, the decision maker will choose the best available. That is the rational decision in absence of cost information. Which metal would you choose, knowing that while A is a good conductor, B is better and C is better still? The rational decision is to choose C. How would your decision change knowing that Metal C is gold, which is a better conductor than Metal B (silver) which is a better conductor than Metal A, copper? In fact, it is more cost-effective to use a thicker copper wire to achieve the conductivity needed than to use either silver or gold. There are some specialized applications where gold’s superior conductivity is cost effective, but for everyday transmission wires, copper is the better choice. Metal A Metal B Metal C Conductivity + ++ +++

Cost Managed Organizations Need Cost Measurement Cost managers must have cost measurement to fight Cost War Cost measurement Informs Cost Warriors of financial implications of management decisions Provides a basis of accountability Is prerequisite to cost reduction Show Slide #8: Cost Managed Organizations Need Cost Measurement Facilitator’s Note: (Facilitator read and facilitate discussion using the slide) Cost Managers Must Have Cost Measurement to Fight Cost War. Cost measurement is an important strategy for fighting the cost war. Cost Measurement Informs Cost Warriors of Financial Implications of Management Decisions. The cost warrior must have an understanding of cost in order to make financially sound decisions. Provides a Basis of Accountability Is Prerequisite to Cost Reduction. In addition, management cannot reduce cost without first knowing what things cost. Good cost measurement will eliminate free goods, which will reduce their demand. It will also help managers make best use of limited resources by giving them a criteria (cost) for decision making.

Cost Measurement’s Influence on Consumption The Demand Curve - Economics 101 Cost Quantity Demanded Show Slide #9: Cost Measurement’s Influence on Consumption Facilitator’s Note: (Facilitate discussion using the slide)the demand curve illustrates that as cost decreases, quantity demanded increases. When cost is high, demand is low. When cost is low, demand is high. Taken to its logical extreme, we can say that the demand for free goods is infinite.

Not Knowing Cost Makes Everything Appear Free Cost influences consumption Quantity demanded rises as cost falls Free goods have infinite demand Things that aren’t free, but appear free, get overconsumed Attempts to prevent overconsumption lead to rules, regulations, restrictions Show Slide #10: Not Knowing Cost Makes Everything Appear Free Facilitator’s Note:(Facilitate discussion using the slide) The “free goods” approach. Cost Influences Consumption Quantity Demanded Rises as Cost Falls Free Goods Have Infinite Demand Things that Aren’t Free, But Appear Free, Get Over consumed. Example: Military labor is only tracked at the highest levels of the budget. It appears to be free, although it is not. It is often over consumed, or at least not consumed to its maximum potential. Attempts to Prevent Overconsumption Lead to Rules, Regulations, Restrictions. This is the “rule-based” approach, where limits are placed on consumption or using the least expensive item is mandated. Ironically, rules, regulations and restrictions can sometimes lead to an entitlement mentality. Example: a regulation may state that the maximum size office space for a particular rank is 12x12. This may translate into individuals assuming they are entitled to a 12x12 office even if no office space is needed (while deployed, for example.)

LSA #1 Check on Learning Q1. How does demand for a good change as cost decreases? A1. As cost decreases, demand increases Q2. What is the logical result of not knowing what something costs? Show Slide #11: LSA #1Check on Learning Facilitator’s Note: Ask the following Questions; (Facilitate discussion on answers given) Q1. How does demand for a good change as cost decreases? A1. As cost decreases, demand increases Q2. What is the logical result of not knowing what something costs? A2. Not knowing what something costs makes it seem free. The logical result is overconsumption A2. Not knowing what something costs makes it seem free. The logical result is overconsumption

LSA #1 Summary Show Slide #12 LSA #1 Summary Facilitator’s Note: LSA Summary will be given at the end of this lesson.

What should we measure? Complex Organizations Have Many Potential Views of Cost to Measure: Organization Views Process Views Product/Service Views Customer Views Job Order Views Budgetary Views Show Slide #13: Discuss the process of implementing managerial cost accounting 2. Learning Step/Activity #2: Discuss the process of implementing managerial cost accounting Method of Instruction: DSL (large or small group discussion) Facilitator to Learner Ratio: 2:25 Time of Instruction: 20 minutes Media: Slides, Printed Reference Materials Facilitator’s Note: (Facilitator read and facilitate discussion using the slide) What should we measure? Complex Organizations Have Many Potential Views of Cost to Measure: How much does it cost to run an organization? How much does it cost to complete a process cycle? How much does it cost to make a product or provide a service? How much of my organization’s resources does that customer consume? How much does it cost to complete job? How much do I need to budget for that item? Facilitator’s Note: Learners should begin to think about what should be measured in their organizations.

Where should we start? Many cost accounting textbooks list “Define activities” as the first step Activities are meaningless if organizations do not first define: What are the outputs? What decisions must be made? How will the information be used? What view of cost is useful to management? Show Slide #14: Where should we start? Facilitator’s Note: (Facilitator read and facilitate discussion using the slide) Where should we start? Many cost accounting textbooks list “Define activities” as the first step Activities are meaningless if organizations do not first define: What are the outputs? What decisions must be made? How will the information be used? What view of cost is useful to management? Facilitator’s Note: Learners should begin to think about these questions in their own organizations.

What are the outputs? What is our mission? What are the significant inputs? What are the direct costs of the outputs? What resources are consumed indirectly by the outputs? What activities drive the consumption of indirect resources? Show Slide #15: What are the outputs? Facilitator’s Note: (Facilitator read and facilitate discussion using the questions on the slide) What are the outputs? What is our mission? What are the significant inputs? What are the direct costs of the outputs? What resources are consumed indirectly by the outputs? What activities drive the consumption of indirect resources?

What decisions must be made? Hiring? Purchasing? Choosing between alternatives? Others? What costs are relevant to the decisions? Show Slide #16: What decisions must be made? Facilitator’s Note: (Facilitator read and facilitate discussion using the questions on the slide) What decisions must be made? Hiring? Purchasing? Choosing between alternatives? Others? What costs are relevant to the decisions? Facilitator’s Note: Learners should begin to think about the kinds of decisions made in their organizations, and the cost information that is needed to make those decisions.

How will the information be used? Which cost measurement methodology best fits the use? Which key elements of information are necessary? Which elements of cost require detailed measurement? Show Slide #17: How will the information be used? Facilitator’s Note: (Facilitator read and facilitate discussion using the questions on the slide) How will the information be used? Which cost measurement methodology best fits the use? Which key elements of information are necessary? Which elements of cost require detailed measurement?

What view of cost is useful to management? What (or who) are the primary consumers of resources? Which costs are most significant? Which resources tend to be over-consumed? What do managers need to know in order to make decisions? How do decisions affect the consumption of resources? Show Slide #18: What view of cost is useful to management? Facilitator’s Note: (Facilitator read and facilitate discussion using the questions on the slide) What view of cost is useful to management? What (or who) are the primary consumers of resources? Which costs are most significant? Which resources tend to be over-consumed? What do managers need to know in order to make decisions? How do decisions affect the consumption of resources? Facilitator’s Note: Learners should ask themselves these questions in regard to their own organizations.

LSA #2 Check on Learning Q1. Many cost accounting textbooks list “______ ______” as the first step A1. Define Activities Show Slide #19: LSA #2 Check on Learning Facilitator’s Note: Many cost accounting textbooks list “Define activities” as the first step

LSA #2 Summary Show Slide #20: LSA#2 Summary Facilitator’s Note: LSA Summary will be given at the end of this lesson. Show Slide #19: LSA #2 Check on Learning Facilitator’s Note: There is no Check on learning for this LSA.

What Information will help you Win your Personal Cost War? Read Winning the Cost War Foreword Introduction Chapter 1 Prepare two PowerPoint slides to present to the class: Describe a personal Cost War you have experienced/are experiencing Describe the information you needed/need to meet that challenge Show Slide #21: What Information will help you Win your Personal Cost War? 3. Learning Step/Activity #3. Apply the concept of managerial costing needs to a personal situation Method of Instruction: Hands on Facilitator to Learner Ratio: 2:25 Time of Instruction: 40 minutes Media: Power Point Presentation, Printed Reference Materials Facilitator Read: Almost everyone has experienced some sort of personal cost war. Buying a car on a budget, balancing school and work (constrained resource is time!), balancing the family budget or dealing with rising gas prices. Facilitator’s Note: At this time have learners read Winning the Cost War. Just read the foreword, Introduction, and Chapter 1. Prepare two Power Point slides to present to the class: Describe a personal Cost War you have experienced/are experiencing Describe the information you needed/need to meet that challenge Facilitator’s Note: Have the Learners return and present their slides for discussion. The conclusion should start them thinking toward their own organization and its information needs: What information will help your organization win its Cost War? This is the ultimate question that all leaders must answer. The threat is real, and not having the needed information may cause the battle, if not the war, to be lost.

LSA #3 Check on Learning Q1. How do you know if your organization is in a Cost War? A1. If resources are continually being reduced, that is a good sign you are in a Cost War. Q2. What is the role of cost information in winning the Cost War? Show Slide #12: LSA #3 Check on Learning Facilitator’s Note: Ask the following Questions; (Facilitate discussion on answers given) Q. How do you know if your organization is in a Cost War? A. If resources are continually being reduced, that is a good sign you are in a Cost War. Q. What is the role of cost information in winning the Cost War? A. Cost information is to the Cost War as reconnaissance is to the battlefield. A2. Cost information is to the Cost War as reconnaissance is to the battlefield.

LSA #3 Summary Show Slide #23: LSA #3 Summary Facilitator’s Note: Learners will return and present their slides for discussion. Each learner’s slide will be the LSA summary © Dale R. Geiger 2011

TLO Check on Learning Show Slide #24: TLO Check on Learning Facilitator’s Note: Facilitator, have each group as a group write down one question from this lesson, give about five minutes. Once all groups have their question written, pass it to another group to answer it. Facilitate a discussion on each question.

TLO Summary Action: Determine the Purpose and Motivation for Managerial Costing Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion Standard: With at least 80% accuracy (70% for international Learners) you must: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing Discuss the process of implementing managerial cost accounting Apply the concept of managerial costing needs to a personal situation Show Slide #25: TLO Summary Facilitator’s Note: Restate the TLO Action : Determine the Purpose and Motivation for Managerial Costing Condition: FM Leaders in a classroom environment working as a member of a small group, using doctrinal and administrative publications, self-study exercises, personal experiences, practical exercises, handouts, and discussion Standard: With at least 80% accuracy (70% for international Learners) you must: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing Discuss the process of implementing managerial cost accounting Apply the concept of managerial costing needs to a personal situation “Or” Facilitator's at this time, have one learner from each group to explain the most important take away to them from this lesson. Facilitate a discussion on each answer.