Chapter 12 Introduction to Cost Management Systems Cost Accounting Foundations and Evolutions Kinney and Raiborn Seventh Edition COPYRIGHT © 2009 South-Western, a part of Cengage Learning. South-Western is a trademark used herein under license.

Learning Objectives (1 of 2) Explain why companies have management control systems List the goals of cost management systems Describe the factors that influence the design of cost management systems

Learning Objectives (2 of 2) List the three groups of elements that comprise a cost management system and explain the purposes of these elements Define gap analysis and explain how it is used in the evolution of a cost management system

Relationship of Financial, Management, and Cost Accounting FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING COST ACCOUNTING

Cost Accounting Financial Accounting –Uses cost accounting information for external reporting Conforms to GAAP Highly aggregated Historical

Cost Accounting Management Accounting –Uses cost accounting information for internal purposes – planning, controlling, decision, making, and performance evaluation Segmented Current Relevant for specific purposes

Cost Management System (CMS) Formal methods to plan and control an organization’s cost-generating activities with major challenges of –Achieving profitability in the short run –Maintaining a competitive position in the long run

Short Run Organizational Efficiency Specific costs: manufacturing, service, marketing, administration Timely, accurate, highly specific, short term Long Run Survival Cost categories: customers, suppliers, products, distribution channels Periodic, reasonably accurate, broad focus, long term Cost Management System (CMS) Objective Focus Information Characteristics IMA 1998

Cost Management System Goals 1.Develop product costs 2.Assess product/service life-cycle performance 3.Improve understanding of processes and activities 4.Control costs 5.Measure performance 6.Allow pursuit of organizational strategies

The design of the CMS is influenced by –Organizational form, structure, and culture –Organizational mission and core competencies –Operations and competitive environment and strategies Cost Management System

Organizational Form, Structure, Culture Choice of form affects –Cost of raising capital –Cost of operating business –Cost of litigating –Statutory authority to make decisions Forms of the business include –Corporations, Partnerships, LLPs, LLCs

Organizational Form, Structure, Culture Distribute authority and responsibility –Centralized or decentralized decision making Group subunits –Geographically –By similar missions (build, harvest, or hold) –By natural product clusters Determine accountability for cost management and organizational control Determine the information needed by the decision maker

Organizational Form, Structure, Culture Organizational Culture Underlying set of assumptions about the entity and the goals, processes, practices, and values that are shared by its members How people interact with each other Extent to which individuals take authority and assume responsibility for organizational outcomes

Organizational Mission and Core Competencies Business mission regarding competition –Avoid competition Product Differentiation Cost Leadership –Confront competition by identifying and exploiting temporary opportunities Business mission in relation to product life cycle

Organizational Mission and Core Competencies Timeliness Quality Customer service Efficiency and cost control Responsiveness to change The cost management system gathers data and reports about core competencies

Operations and Competitive Environment and Strategies Management needs to assess the Cost structure, including the proportion of fixed and variable costs Level of technology costs, which tend to be fixed and not susceptible to short- run control Production capacity Flexibility to respond to a change in short-term conditions

Operations and Competitive Environment and Strategies Strategies include Being first to market, which allows pricing flexibility –increase market share –large per-unit profit Substantial reduction in product costs –develop new production processes –capture learning curve effects –increase capacity utilization –create a focused factory arrangement –design for manufacturability, logistical support, reliability, maintainability

Operating and Competitive Environment and Strategies Supplier relations –form strategic alliances –involve suppliers in product design and development –link electronically Integration of entire information system –payroll –Inventory valuation –budgeting –costing

CMS Elements Motivational elements Information elements Reporting elements

Implement CMS Gap Analysis –Identify gap to overcome –Prioritize differences –Develop and deploy improvements –Repeat process to ensure continuous improvement

Enterprise Resource Planning For a truly integrated CMS Standardize information systems/replace legacy systems Automate and integrate transfer of data among systems Improve the quality of information Improve timeliness of information –real-time, on-line reporting

Questions Why do companies have management control systems? How does the external operating environment affect the cost management system? What is gap analysis?