Cost Management

ACCOUNTING AND CONTROL

HANSEN & MOWEN

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Introduction to Cost
Management 1

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Financial Accounting
Versus Management 1
Accounting
 Financial accounting is devoted to providing
information for external users; these users
include investors, government agencies, and
banks.
 Cost management identifies, collects,
measures, classifies, and reports information
that is useful to managers in costing
(determining what something costs),
planning, controlling, and decision making.

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Financial Accounting
Versus Management 1
Accounting
 Cost accounting attempts to satisfy costing
objectives for both financial and management
accounting.
 Management accounting is concerned
specifically with how cost information and
other financial and nonfinancial information
should be used for planning, controlling, and
decision making.

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Factors Affecting
Cost Management
2

Global Competition
 The new competitive environment
has increased the demand not
only for more cost information but
also for more accurate
information.
 Vastly imported transportation and
communication has led to a global
market for many manufacturing
and service firms.

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Factors Affecting
Cost Management
2

Growth of the Service Industry

 As the traditional industries has
declined in importance, the service
sector of the economy has
increased in importance.
 Deregulation of many services has
increased competition in the service
industry.

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Factors Affecting
Cost Management
2

Advances in Information Technology

 Computers are used to monitor and control
operations. The result is an operational system
that is fully integrated with marketing and
accounting data.
 Increased ability to accurately cost products
because of advances in tools.
 Emergence of e-commerce
 Internet trading
 Electronic data interchange
 Bar coding

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Factors Affecting
Cost Management
2

Advances in Management Environment

 The theory of constraints is a method used to
continuously improve manufacturing activities and
nonmanufacturing activities.
 Just-in-time manufacturing is a demand-pull
system that strives to produce a product only when
it is needed and only in the quantities demanded by
customers.
 Computer-integrated manufacturing is the
automation of the manufacturing environment.

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Factors Affecting
Cost Management
2

Customer Orientation
 Firms are competing not only in
terms of technology and
manufacturing, but in the speed of
delivery and response to deliver
value to the customer.
 Companies must also satisfy the
needs of internal customers, such
as staff functions exist to support
line functions.

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Factors Affecting
Cost Management
2

New Product Development

 Management recognizes that a high
proportion of production costs are
committed during the development
and design stage of a new product.
 The requirement to control cost
encourages the use of target costing
and activity-based management.

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Factors Affecting
Cost Management
2

Total Quality Management

 Continual improvement and elimination of
waste are the two foundation principles
that govern a state of manufacturing
excellence.
 A philosophy of total quality
management, in which managers strive
to create an environment that will enable
organizations to manufacture perfect
products, has replaced the acceptable
quality attitudes of the past.
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Factors Affecting
Cost Management
2

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.

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Factors Affecting
Cost Management
2

Efficiency
While quality and time are
important, improving these
dimensions without
corresponding improvements
in financial performance may
be futile, if not fatal.

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Traditional Accounting 3
System

Transactions

Journal Entries

Posting to
Accounts
Financial
Reports

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 Data-Based Relationship
3
Accounting System

Transactions
Custom
Report

Custom
Report

Custom Custom 1-15

Report Report
Cost Management:
A Cross-Functional Perspective
4

 Product costing must take into account costs associated

with other functions, such as marketing, management
and logistics.
 A cost management system must be flexible enough to
provide the appropriate cost for the circumstance.
 Today’s accountant must be an expert at valuing
methods of
 Costing and achieving quality
 Differentiating between value-added and non-value-added
activities
 Measuring and accounting for productivity

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The Role of Today’s Cost and
Management Accountant
5

Line positions are positions

that have direct
responsibility for the basic
objectives of an
organization.
Staff positions are
positions that are supportive
in nature and have only
indirect responsibility for an
organization’s basic
objectives.
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The Role of Today’s Cost and
Management Accountant
5

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The Role of Today’s Cost and
Management Accountant
5

The Controller
 Financial reports
 SEC reporting
 Tax planning and reporting
 Performance reporting
 Internal auditing
 Budgeting
 Accounting systems and
internal controls

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The Role of Today’s Cost and
Management Accountant
5

The Treasurer
 Collection of cash
 Monitoring of cash
payments
 Monitors cash availability
 Short-term investments
 Short and long-term
borrowing
 Issuing of capital stock

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The Role of Today’s Cost and
Management Accountant
5

Planning is the detailed

formulation of future
actions to achieve a
particular end. Planning
requires setting
objectives and identifying
methods to achieve
those objectives.

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The Role of Today’s Cost and
Management Accountant
5

Controlling is the
managerial activity of
monitoring a plan’s
implementation and
taking corrective action
as needed.

Feedback is information that can be used to evaluate or

correct the steps being taken to implement a plan.

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The Role of Today’s Cost and
Management Accountant
5

Continuous
improvement is
required in a dynamic
environment if a firm is
to remain competitive
or to establish a
competitive advantage.

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The Role of Today’s Cost and
Management Accountant
5

Decision making is
the process of
choosing among
competing alternatives.

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 Accounting and
6
Ethical Conduct

Benefits of Ethical Behavior

 Can create customer and
employee loyalty
 Avoid litigation costs

Standards of Ethical Conduct for Management

Accountants
 Competence
 Confidentiality
 Integrity
 Objectivity
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 Certification 7

 CMA: One of the main purposes of the CMA was to

establish management accounting as a recognized,
professional discipline, separate from the profession
of public accounting.
 CPA: The responsibility of a CPA is to provide
assurance concerning the reliability of financial
statements.
 CIA: The focus of the CIA is to recognize
competency in internal auditing rather than external
auditing as with the CPA.

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Certification 7

Four areas emphasized on the CMA exam:

1) Economics, finance, and

management
2) Financial accounting and
reporting
3) Management report, analysis, and
behavioral issues
4) Decision analysis and information
systems
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 End of
Chapter
1

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