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    Introduction To Cost Management Systems: Cost Accounting: Foundations and Evolutions, 8e

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    Michelle Rotairo
    This document discusses cost management systems (CMS), which provide internal users with information that is more relevant for planning, controlling, decision making, and performance evaluation. A CMS is part of an organization's management information system. It emphasizes satisfying internal demands for information rather than external demands like financial reporting. The document outlines the purposes of a CMS and factors that influence its design, such as organizational structure and culture, mission, operations, and strategies. It also describes the three elements of a CMS - motivational, reporting, and information elements - and their purposes.

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    Introduction To Cost Management Systems: Cost Accounting: Foundations and Evolutions, 8e

    Uploaded by

    Michelle Rotairo
    253 views34 pages
    This document discusses cost management systems (CMS), which provide internal users with information that is more relevant for planning, controlling, decision making, and performance evaluation. A CMS is part of an organization's management information system. It emphasizes satisfying internal demands for information rather than external demands like financial reporting. The document outlines the purposes of a CMS and factors that influence its design, such as organizational structure and culture, mission, operations, and strategies. It also describes the three elements of a CMS - motivational, reporting, and information elements - and their purposes.

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    This document discusses cost management systems (CMS), which provide internal users with information that is more relevant for planning, controlling, decision making, and performance evaluation. A CMS is part of an organization's management information system. It emphasizes satisfying internal demands for information rather than external demands like financial reporting. The document outlines the purposes of a CMS and factors that influence its design, such as organizational structure and culture, mission, operations, and strategies. It also describes the three elements of a CMS - motivational, reporting, and information elements - and their purposes.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    253 views34 pages

    Introduction To Cost Management Systems: Cost Accounting: Foundations and Evolutions, 8e

    Uploaded by

    Michelle Rotairo
    This document discusses cost management systems (CMS), which provide internal users with information that is more relevant for planning, controlling, decision making, and performance evaluation. A CMS is part of an organization's management information system. It emphasizes satisfying internal demands for information rather than external demands like financial reporting. The document outlines the purposes of a CMS and factors that influence its design, such as organizational structure and culture, mission, operations, and strategies. It also describes the three elements of a CMS - motivational, reporting, and information elements - and their purposes.

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    You are on page 1of 34

    Chapter 12:

    Introduction to Cost
    Management Systems
    Cost Accounting:
    Foundations and Evolutions, 8e
    Kinney Raiborn

    Learning Objectives

    Why do organizations have management control


    systems?
    What is a cost management system?
    What are the organizational roles of a cost
    management system?
    What factors influence the design of a cost
    management system?
    What are the three groups of elements that
    comprise a cost management system, and what are
    the purposes of these elements?
    What is gap analysis, and how is it used in the
    evolution of a cost management system?

    Relationship of Financial,
    Management, and Cost Accounting

    FINANCIAL
    ACCOUNTING

    COST
    MANAGEMENT
    ACCOUNTIN ACCOUNTING
    G

    Cost Accounting

    Financial accounting

    Uses cost accounting


    information for external
    reporting
    Conforms to GAAP
    Highly aggregated
    Historical

    Management
    accounting

    Uses cost accounting


    information for internal
    purposes

    Planning
    Controlling
    Decision making
    Performance evaluation

    Segmented
    Current
    Relevant for specific
    purposes

    Cost Management Systems

    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 (CMS):

    May provide information that is more relevant to internal users


    A CMS is part of the Management Information System (MIS)
    A structure of interrelated elements that collects, organizes,
    and communicates data so managers may plan, control, make
    decisions, and evaluate performance
    Emphasizes satisfying internal demands for information rather
    than external demands
    A CMS offers 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

    Internal Information Flows

    Planning
    Control
    Decision
    Performance

    External Information Flows


    Intelligence
    Competition
    Government

    Suppliers

    Creditors

    Organization

    Organizational
    communications

    Client
    s

    Management Control Systems

    Management Control Systems (MCS) help to

    Implement strategic and operating plans


    Provide a means for comparison of actual to planned results for
    control purposes

    The MCS is part of the MIS


    An MCS

    Is not a mechanical process


    Requires judgment
    Is a black boxAn operation whose exact nature cannot be
    observed
    Guides the organization in designing and implementing strategies
    to achieve organizational goals and objectives

    MCS Components

    Detector or sensor

    Measuring device that


    identifies what is actually
    happening in the process
    being controlled

    Assessor

    Device for determining the


    significance of what is
    happening

    Comparing the information


    on what is actually
    happening with some
    standard or expectation of
    what should be happening

    Effector

    Device that alters behavior


    if the assessor indicates the
    need for doing so
    Feedback

    Communications network

    Transmits information
    between

    the detector and the


    assessor and
    the assessor and the
    effector

    MCS Overview
    Control device

    Assessor

    Effector

    Detector

    Entity being
    controlled

    MCS Processes

    Information gathered

    Comparisons made

    Comparisons are made to budget (assessor)

    Communication occurs

    Source documents (detectors) gather information


    about sales

    A variance report (effector) is issued


    (communications network)

    Changes made when necessary

    Encourages sales staff to increase sales volume

    CMS Overview
    Short Run
    Objective
    Focus

    Information
    Characteristics

    Long Run

    Organizational
    Efficiency

    Survival

    Specific costs:
    manufacturing,
    service, marketing,
    administration

    Cost categories:
    customers, suppliers,
    products, distribution
    channels

    Timely, accurate,
    highly specific,
    short term

    Periodic, reasonably
    accurate, broad focus,
    long term

    CMS 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

    CMS Goals: Develop Product Costs

    Develop product costs

    Use cost drivers (activities that have a direct cause-andeffect relationship with costs)
    Trace costs when possible using

    Bar coding
    RFID (radio frequency identification)

    Use product costs to

    Plan
    Prepare financial statements
    Assess individual product/service profitability
    Assess period profitability
    Establish prices for cost-plus contracts
    Create a basis for performance measurements

    CMS Goals: Assess Performance


    Assess product/service life-cycle
    performance

    Provides basis to relate costs incurred in one


    stage of the life cycle to costs and profitability of
    other stages

    Strong investment in development and design stages


    might reduce engineering changes and quality costs in
    later stages
    Inability to trace development and design costs to
    related product/services might camouflage disasters

    CMS Goals: Improve Understanding


    Improve understanding of processes and
    activities

    Understanding the process and reasons for cost


    incurrence allows managers to make costbeneficial improvements in the production and
    processing systems

    CMS Goals: Control Costs


    Control costs

    CMS provides information on activities and cost


    drivers

    In the case of spoilage, the CMS provides

    Number of spoiled units


    Cost of spoiled units
    Information to determine the cause of spoilage

    CMS Goals: Assess Performance


    Measure performance

    CMS allows managers to measure and evaluate


    performance

    Human performance
    Equipment performance
    Future investment opportunities

    CMS Goals: Organizational


    Strategies
    Allow pursuit of organizational strategies

    CMS allows managers to

    Effectively manage strategic resources


    Determine core competences and organizational
    constraints
    Assess positive and negative financial and nonfinancial
    factors of strategic and operational plans

    Designing a CMS
    ANALYZE

    DETERMINE
    desired outputs

    PERFORM
    gap analysis
    Improve
    ASSESS
    gap reduction

    CMS Design Influences

    The design of the CMS is influenced by

    Organizational form, structure, and culture


    Organizational mission and core competencies
    Operations and competitive environment and
    strategies

    Organizational Form and Structure

    Organizational form

    Choice of form affects

    Cost of raising capital


    Cost of operating business
    Cost of litigating
    Statutory authority to make
    decisions

    Organizational structure

    Forms of the business


    include

    Corporations
    Partnerships
    LLPs
    LLCs

    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

    Organizational 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

    Organizational Mission and Core


    Competencies

    Organizational mission

    Business mission provides a


    long-term goal toward which
    the organization wishes to
    move

    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

    Core competencies

    Timeliness
    Quality
    Customer service
    Efficiency and cost control
    Responsiveness to change
    The CMS gathers data and
    reports about core
    competencies

    Operations and Competitive


    Environment

    Management needs to assess:

    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

    Strategies

    Strategies include:

    Being first to market

    Allows pricing flexibility

    Increases market share

    Large per-unit profit


    Substantial reduction in 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

    Supplier relations

    Form strategic alliances


    Involve suppliers in product
    design and development
    Link electronically

    Integration of entire information


    system

    Payroll
    Inventory valuation
    Budgeting
    Costing

    CMS Purposes

    A better CMS is essential to long-run


    organizational survival and short-run
    profitability
    More sophisticated CMS are required as
    Cost of gathering, processing, and
    communicating information decreases
    Quantity and intensity of competition
    increases

    CMS Elements: Motivational and


    Reporting

    Motivational elements

    Performance
    measurements

    Reward structure

    Quantitative or
    nonquantitative
    Financial or nonfinancial
    Short term or long term
    Profit sharing

    Support of organizational
    mission and competitive
    strategy

    Reporting elements

    Prepare financial
    statements
    Implement responsibility
    accounting system

    Performance reports for


    subunits focusing on costs
    and activities

    CMS Elements: Information

    Information elements

    Support budgeting process


    Disclose cost drivers of
    activities
    Reduce/eliminate nonvalue-added activities
    Emphasize managing costs
    throughout the product life
    cycle
    Adapt to changing
    competitive conditions
    Support of cost reduction
    initiatives

    Focus on cost control


    Assess core competencies
    Analyze make-or-outsource
    decisions
    Relate cost to
    product/process design
    Focus on capital spending
    Minimize cost distortions

    Implementing CMS

    Gap Analysis

    Identify gap to overcome


    Prioritize differences
    Develop and deploy improvements
    Repeat process to ensure continuous
    improvement
    Information Needs
    <Information Available>
    Gap to Overcome

    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

    Questions
    Why do companies have MCS?
    How does the external operating
    environment affect the CMS?
    What is gap analysis?

    Potential Ethical Issues

    Using the financial accounting system rather


    than a CMS to support management
    functions
    Not balancing long and short-run concerns in
    the design of the CMS
    Using motivational elements to create high
    payoffs for fraudulent behavior
    Designing motivational elements that dont
    align with managers authority

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