Determine The Purpose And Motivation For Managerial Costing © Dale R. Geiger, 2011 Used by Permission 1

Would you go into battle without reconnaissance? © Dale R. Geiger, 2011 Used by Permission2

Terminal Learning Objective Task: Determine The Purpose And Motivation For Managerial Costing Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors Standard: with at least 80% accuracy: Demonstrate understanding and awareness of the purpose and motivations for Managerial Costing © Dale R. Geiger, 2011 Used by Permission3

Costing Systems Differ Goals: Consistency Comparability EquityUsers: Shareholders Congress Regulators Tax Authorities Methodology Methodology: Laws Rules GAAP Goals: Fit Functionality RelevanceUsers: ManagersMethodology: Situation Dependent Financial & Regulatory Managerial © Dale R. Geiger, 2011 Used by Permission4

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 © Dale R. Geiger, 2011 Used by Permission5

Why Do Managerial Costing? 1.Enhance decision making 2.Provide reconnaissance necessary for Cost Based Management process 3.Influence resource consumption behavior © Dale R. Geiger, 2011 Used by Permission6

1. Cost Measurement’s Role in Decision Making Which Metal is Best for Transmission? Metal AMetal BMetal C Conductivity © Dale R. Geiger, 2011 Used by Permission7

2. 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 © Dale R. Geiger, 2011 Used by Permission8

3. Cost Measurement’s Influence on Consumption The Demand Curve - Economics 101 Cost Quantity Demanded © Dale R. Geiger, 2011 Used by Permission9

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 © Dale R. Geiger, 2011 Used by Permission10

Check on Learning How does demand for a good change as cost decreases? What is the logical result of not knowing what something costs? © Dale R. Geiger, 2011 Used by Permission11

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 © Dale R. Geiger, 2011 Used by Permission12

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? © Dale R. Geiger, 2011 Used by Permission13

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? © Dale R. Geiger, 2011 Used by Permission14

What decisions must be made? Hiring? Purchasing? Choosing between alternatives? Others? What costs are relevant to the decisions? © Dale R. Geiger, 2011 Used by Permission15

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? © Dale R. Geiger, 2011 Used by Permission16

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? © Dale R. Geiger, 2011 Used by Permission17

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: 1.Describe a personal Cost War you have experienced/are experiencing 2.Describe the information you needed/need to meet that challenge © Dale R. Geiger, 2011 Used by Permission18

What Information will help your Organization win its Cost War? © Dale R. Geiger, 2011 Used by Permission19

Check on Learning How do you know if your organization is in a Cost War? What is the role of cost information in winning the Cost War? © Dale R. Geiger, 2011 Used by Permission20