1. Chapter 12 Introduction to Cost Management Systems
Cost Accounting
Foundations and Evolutions
Kinney, Prather, Raiborn
Chapter 12
Introduction to Cost
Management Systems

2. 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

3. Learning Objectives (2 of 2)
List the three groups of elements that affect the design of cost management systems and explain the purposes of these elements
Define gap analysis and explain how it is used when implementing a cost management system

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

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

6. Cost Accounting
When cost accounting is shaped and dominated by financial accounting needs, the information generated may be of limited value to managers
A Cost Management System
may provide information that is more relevant to internal users
is part of the Management Information System

7. 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

8. Cost Management System (CMS)
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
Objective
Focus
Information Characteristics
IMA 1998

9. Cost Management System Goals
Develop product costs
Assess product/service life-cycle performance
Improve understanding of processes and activities
Control costs
Measure performance
Allow pursuit of organizational strategies

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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. Operations and Competitive Environment and Strategies
Strategies include
Being first to market, which allows pricing flexibility
increase market share
large per-unit profit
Substantial reducing 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

18. 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
budgeting
costing

19. CMS Elements Motivational elements Information elements
Reporting elements

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

21. 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
JDEdwards
SAP
Oracle

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