Chapter 2

Introduction to Cost

Management Systems

Cost AccountingTraditions and Innovations

Barfield, Raiborn, Kinney

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

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

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

Internal Information Flows

Planning

Control

Decision

Performance

External Information Flows

Clients

Government

Competition

Suppliers Creditors

Organization

Intelligence

Organizational communications

Control System Components

• Detector or sensor

• Assessor

• Effector

• Communications network

Management Control System

Detector

Assessor

Effector

Control device

Entity being

controlled

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

Integrated Cost Management System

Marketing

Quality Control

Financial Accounting

Production Planning and Scheduling

Research and Development

Cost Accounting

Inventory Management

Production Reporting

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

Designing a Cost Management System

ANALYZE

DETERMINEdesired outputs

PERFORMgap analysis

ASSESSgap reduction

Improve

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

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

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

Organizational Form, Structure, Culture

Underlying set of assumptions about entity and goals, processes, practices, and values

that are shared by its members

Organizational Mission and Core Competencies

• Business mission regarding competition– Avoid competition

• Differentiation• Cost Leadership

– Confront competition

• Business mission in relation to product life cycle

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

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

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

Operating and Competitive Environment and Strategies

• Supplier relations– link electronically

• Integration of entire information system– payroll– inventory– budgeting– costing

CMS Elements

• Motivational elements

• Informational elements

• Reporting elements

CMS Elements

• Motivational elements– Performance measurements– Reward structure– Support of organizational mission and

competitive strategy

CMS Elements• Motivational elements

• Informational 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

CMS Elements• Motivational elements

• Informational elements

• Reporting elements– Prepare financial statements– Implement responsibility

accounting system

Implement CMS

Perform GAP analysis

Information Needs

<Information Available>

Gap to OvercomeGAP

Implement CMS

• Gap Analysis– Identify gap to overcome– Prioritize differences– Develop and deploy improvements

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

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?