Cost Management

Introduction

1. Similarities and differences between financial accounting and cost accounting

2. Cost accounting’s support to MA & FA3. Business functions in the value chain4. Dimensions of performance from

customer’s perspective5. Planning & control decisions of managers

Learning ObjectivesLearning Objectives

Learning objectives

6. Different roles of management accounting

7. Guidelines followed by management accountants

8. Management accounting & organisation structure

9. Professional ethics & MA

Limitations of FA• No operating details of particular departments• Does not ensure control over material use; does not

help in wastage avoidance• Costs are not assigned to products, departments,

divisions, etc.• No standards for comparison• Loss is not analysed taking idle time, defective

material, etc.• Does not help in pricing decisions• No information for managerial decisions such as shut

down or continue, deciding about product-mix, buy or manufacture, etc.

Management accounting

• Extension of managerial aspect of cost accounting.

• Uses tools of both financial a/c & cost a/c for decision making and control.

• Cost accounting- cost control is of prime importance.

• Management accounting- primary emphasis is on decision making (Mgt. a/c employs many techniques from OR, statistics, etc.)

GROUNDS OF DIFFERENCE FINANCIAL ACCOUNTING COST ACCOUNTING

Purpose B/S, P&L A/C, CFSGeneral Purpose

Cost Information for planning, decision making & controlSpecial purpose: Different costs for different purposes

For Whom? External Users Internal Users

Coverage Total organisation Segmental (product, process, job, depart., etc.)

Control Does not provide for control of elements of cost

Provides

Principles GAAP Need driven

Need Statute demands Optional, need driven except when cost a/c record rules provide

Reporting Time Accounting Year Need based (planning and control)

Basis of measurement

Monetary terms Could be physical also (like labour hours, machine hours,etc.)

Use of standards No standards to compare performance and evaluate efficiency

Standards are used

Information Historical Projects past into future

Strategic decisions & MA

Strategy formulationBuilding resources and capabilitiesImplementing strategy

Building resources and capabilities

• Current assets• Long term productive assets• Intangibles

Planning and Controlling

Management Decision Management Accounting System

Planning

Control

PerformanceEvaluation

Budgets

AccountingSystem

PerformanceReports

Feed

bac

k

Planning and Controlling

What is planning?

Settinggoals

Predictingresults

Deciding howto attain goals

Planning and Controlling

What is control?

Decidingand

takingactions

Deciding onperformanceevaluation

and feedback

Roles of MA- Problem solving

This involves comparative analysisfor decision making.

This role asks: Of the several alternativesavailable, which is the best?

Scorekeeping

This involves accumulating data andreporting reliable results toall levels of management.

This role asks: How is the business doing?

Attention Directing

This involves helping managersproperly focus their attention.

This role asks: Which opportunities andproblems should be emphasized first.Attention directing should focus on all

opportunities to add value to an organization,not just cost-reduction opportunities.

Cont….

• Strategic decisions and planning decisions: problem solving role is most important

• Control decisions: the later two roles are important

Key Themes in ManagementDecision Making

Customer Focus

Value Chainand

Supply ChainAnalysis

Key Success Factors:Cost and Efficiency,

Time, Quality,Innovation

ContinuousImprovement

andBenchmarking

Customer Focus

continueinvesting sufficient (but not excessive)

resources in customer satisfactionsuch that profitable customers

are attracted and retained.

Value Chain andSupply Chain Analysis

1. Treat each of the business functions in the value chain as an essential and valued contributor.

2. Integrate and coordinate the efforts of all business functions in addition to developing the capabilities of each individual business function.

Key Success Factors

operational factors that directly affectthe economic viability of the organization

Cost –continuouspressure to reduce costs.

Quality – customersare expecting higher

levels of quality

Key Success Factors

Time – organizations are under pressure tocomplete activities faster and to meet

promised delivery dates more reliably.

Innovation – continuing flow of innovative products

or services is a prerequisite to the ongoingsuccess of most organizations.

Continuous Improvementand Benchmarking

Continuous improvement by competitors createsa never-ending search for higher levels ofperformance within many organizations.

Value Chain

The term “value chain” refers to the sequence ofbusiness functions in which usefulness is addedto the products or services of an organization.

The term “value” is used because as the usefulnessof the product or service is increased, so is its value

to the customer.

MA provides decision support across value chain

Value Chain

R & D Design Production

Marketing Distribution Service

Management Accounting

MA’s support to managers- Key Guidelines

1. Cost-benefit approach2. Full recognition of behavioral as well as technical considerations3. Using different costs for different purposes

Partial Organization Chart, Manufacturing Company

PresidentPresidentLine Function Staff Function

Financial Financial Vice-PresidentVice-President

ControllerController TreasurerTreasurer

Internal Internal AuditAudit CostCost FinancialFinancial SystemsSystems TaTa

xx

Production Production Vice-PresidentVice-President

Production Production SupervisorSupervisor

Assembly Assembly ForemanForeman

Machining Machining ForemanForeman

Current Factors Affecting Cost Management

• demand for more cost information but also for more accurate information quickly

A. Global Competition

Current Factors Affecting Cost Management

B. Growth of the Service Industry service sector of the economy has increased in

importance

deregulation of many services has increased competition in the service industry

Current Factors Affecting Cost Management

C. Advances in Information Technology Computer aided operations – information accumulation

and supply of information to management instantaneously.

The emergence of e-commerce allowing buyers and sellers to come together electronically

Current Factors Affecting Cost Management

D. Advances in Management Environment

Just-in-time manufacturing

Computer-integrated manufacturing

Current Factors Affecting Cost Management

E. Customer Orientation value to the customer for establishing competitive

advantage

Companies to compete in technology, manufacturing, speed of delivery and response

Current Factors Affecting Cost Management

F. New Product Development high proportion of production costs are

committed during the development and design stage

cost control- use of target costing and activity-based management

Current Factors Affecting Cost Management

G. Total Quality Management Continual improvement and elimination of waste

A philosophy of total quality management

Current Factors Affecting Cost Management

H. Time as a Competitive Element• Time is the crucial element in all phases

of the value chain.

• Decreasing non-value-added time appears to go hand-in-hand with increasing quality