Cost Management Systems

Cost Management System(CMS) is a set of formal

Cost Management methods developed for planning and controlling an
organizations cost-generating activities relative to
its goals and objectives (Raiborn, 2009)
Cost Management Systems
Challenges faced by an entity in attaining these
objectives and strategies
1. Gaining profits in the short run, and
2. Having a competitive position in the long run

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Cost Management Systems

Cost Management Systems
The design of a cost management system is influenced
Primary goals: by the:
1. Develop reasonably accurate product costs, 1. Organizational form
2. Assess product/service life cycle performance, 2. Organizational structure
3. Improve understanding of processes and activities, 3. Organizational culture
4. Control costs, 4. Organizational mission
5. Measure performance, and 5. Organizational core competencies
6. Allow the pursuit of organizational strategies 6. External environment
7. Organizational strategies
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 Cost Management Systems Cost Management Systems
Target costing is a tool to manage production costs
in the development stage of the product life cycle.
Elements that affect the design of a cost It is also very much a marketing approach to
management system costing.
Motivational This can be expressed as TC = ESP APM
Reporting Where TC = target cost
Communicating ESP = estimated selling price
APM = acceptable profit margin

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Cost Management Systems Cost Management Systems

The entity has several alternatives, if the expected
For example, if a company normally expects a mark-up on cost is higher than the target cost.
cost of 50% and estimates that a new product will sell
successfully at a price of P18, then the maximum cost of
1. To reduce cost the product design and/or
production should be P12: production process can be changed.
TC = ESP - APM 2. A less-than-desired profit margin can be
100% 150% 50% accepted.
P12 P18 P6
3. The business entity can decide not to enter a
particular product in a market at a current time
since it cannot make the profit margin it desires
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 Cost Management Systems Cost Management Systems
Value engineering is a process that is considered an
important step in successful product development Theory of constraints (TOC)
help management to reduce
Primary reasons to engage in value engineering: cycle time
1. Cost reduction,
The Theory of
2. Shortened production cycles, and Constraints uses a
process known as the
3. Increased quality Five Focusing Steps
to identify and
eliminate constraints
(i.e. bottlenecks).

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Cost Management Systems Cost Management Systems

Step Objective The concept of life cycle costing involves realizing
Identify Identify the current constraint that target costs can be driven down by attacking
Exploit Make quick improvements to the throughput of any of the costs that is related to any part of a
the constraint using existing resources products life
Subordinate Review all other activities in the process Cost phases of product:
Elevate If the constraint still exists, consider what 1. Design phase
further actions can be taken to eliminate it from
2. Manufacture phase
being the constraint
3. Operation phase
Repeat The Five Focusing Steps are a continuous
improvement cycle 4. End of life
F0091
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