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Chapter 2 Introduction to Cost Management Systems
Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney Chapter 2 Introduction to Cost Management Systems
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Learning Objectives (1 of 2)
Explain why companies have management control systems List cost management system goals Describe what factors influence the design of cost management systems Explain why organizational form, structure, and culture are important to the design of cost management systems
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Learning Objectives (2 of 2)
Explain how the internal and external operating environments affect cost management systems List the elements that affect the design of cost management systems Describe the use of gap analysis when implementing cost management systems
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Management Information System
A structure of interrelated elements that collects, organizes, and communicates data so managers may plan, control, evaluate performance, and make decisions Emphasizes satisfying internal demands for information rather than external demands
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Internal Information Flows
Planning Control Decision Performance
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External Information Flows
Intelligence Clients Government Competition Suppliers Creditors Organization Organizational communications
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Control System Components
Detector or sensor Assessor Effector Communications network
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Management Control System
Control device Assessor Detector Effector Entity being controlled
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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
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Integrated Cost Management System
Financial Accounting Marketing Production Reporting Quality Control Cost Accounting Research and Development Inventory Management Production Planning and Scheduling
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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
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Designing a Cost Management System
ANALYZE DETERMINE desired outputs PERFORM gap analysis Improve ASSESS gap reduction
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CMS Information Enables managers to perform analyses on:
determining core competencies and organizational constraints positive and negative financial and non-financial factors of strategic and operational plans
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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 business include Corporations, Partnerships, LLPs, LLCs
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Organizational Form, Structure, Culture
Distribute authority and responsibility Centralized, decentralized decision making Group subunits geographically by similar missions by natural product clusters Determine accountability for cost management and organizational control
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Organizational Form, Structure, Culture
Underlying set of assumptions about entity and goals, processes, practices, and values that are shared by its members
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Organizational Mission and Core Competencies
Business mission regarding competition Avoid competition Differentiation Cost Leadership Confront competition Business mission in relation to product life cycle
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Organizational Mission and Core Competencies
Timeliness Quality Customer service Efficiency and cost control Responsiveness to change Cost management system gathers data and reports about core competencies
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Operating and Competitive Environment and Strategies
Fewer costs susceptible to short-run control Cost management efforts targeted toward the longer term capacity management Decreased flexibility when responding to a change in short-term conditions
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Operating and Competitive Environment and Strategies
Being first to market - pricing flexibility increase market share or large per-unit profit Reduce product cost substantially develop new production processes capture learning curve effects increase capacity utilization create a focused factory arrangement design for manufacturability, logistical support, reliability, maintainability
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Operating and Competitive Environment and Strategies
Supplier relations link electronically Integration of entire information system payroll inventory budgeting costing
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CMS Elements Motivational elements Informational elements
Reporting elements
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CMS Elements Motivational elements Performance measurements
Reward structure Support of organizational mission and competitive strategy
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CMS Elements Informational elements Motivational elements
Support budgeting process Identify cost drivers Reduce/eliminate non-value-added activities Emphasize product life cycle Adapt to changing competitive conditions Relate cost to product/process design Focus on capital spending Minimize cost distortions
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CMS Elements Motivational elements Informational elements
Reporting elements Prepare financial statements Implement responsibility accounting system
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<Information Available>
Implement CMS Perform GAP analysis Information Needs <Information Available> Gap to Overcome GAP
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Implement CMS Gap Analysis Identify gap to overcome
Prioritize differences Develop and deploy improvements
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Enterprise Resource Planning
For a truly integrated CMS Automate and integrate business processes Share common data and practices Produce and access information in real-time SAP Oracle Baan PeopleSoft JDEdwards
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Questions Why do companies have management control systems?
Are organizational form, structure, and culture important to the design of cost management systems? Explain. How do the internal and external operating environments affect cost management systems?
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