Introduction to Cost

1
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
  organizations 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

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

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 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?