Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney

1. Chapter 2
Introduction to Cost
Management Systems
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. Learning Objectives (1 of 2)
• Explain why companies have management
control systems
• List cost management system goals
• Describe what factors influence the design
of cost management systems
• Explain why organizational form, structure,
and culture are important to the design of
cost management systems

3. Learning Objectives (2 of 2)
• Explain how the internal and external
operating environments affect cost
management systems
• List the elements that affect the design of
cost management systems
• Describe the use of gap analysis when
implementing cost management systems

4. Management Information System
• A structure of interrelated elements that
• collects, organizes, and communicates data
so managers may
• plan, control, evaluate performance, and
make decisions
• Emphasizes satisfying internal demands for
information rather than external demands

5. Internal Information Flows
Planning
Control
Decision
Performance

6. External Information Flows
Clients
Government
Competition
Suppliers Creditors
Organization
Intelligence
Organizational
communications

7. Control System Components
• Detector or sensor
• Assessor
• Effector
• Communications network

8. Management Control System
Detector
Assessor
Effector
Control
device
Entity
being
controlled

9. Cost Management System (CMS)
• Formal methods to plan and control an
organization’s cost-generating activities with
major challenges of:
– Achieving profitability in the short run
– Maintaining a competitive position in the long run

10. Integrated Cost Management System
Marketing
Quality
Control
Financial
Accounting
Production
Planning and
Scheduling
Research and
Development
Cost Accounting
Inventory
Management
Production
Reporting

11. Cost Management System 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

12. Designing a
Cost Management System
ANALYZE
DETERMINE
desired outputs
PERFORM
gap analysis
ASSESS
gap reduction
Improve

13. CMS Information
• Enables managers to perform analyses on:
– determining core competencies and
organizational constraints
– positive and negative financial and non-
financial factors of strategic and operational
plans

14. 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 business include
– Corporations, Partnerships, LLPs, LLCs

15. Organizational Form, Structure,
Culture
• Distribute authority and responsibility
– Centralized, decentralized decision making
• Group subunits
– geographically
– by similar missions
– by natural product clusters
• Determine accountability for cost
management and organizational control

16. Organizational Form, Structure,
Culture
Underlying set of assumptions about entity
and goals, processes, practices, and values
that are shared by its members

17. Organizational Mission and Core
Competencies
• Business mission regarding competition
– Avoid competition
• Differentiation
• Cost Leadership
– Confront competition
• Business mission in relation to product
life cycle

18. Organizational Mission and Core
Competencies
• Timeliness
• Quality
• Customer service
• Efficiency and cost control
• Responsiveness to change
Cost management system gathers data
and reports about core competencies

19. Operating and Competitive
Environment and Strategies
• Fewer costs susceptible to short-run control
• Cost management efforts targeted toward
– the longer term
– capacity management
• Decreased flexibility when responding to a
change in short-term conditions

20. Operating and Competitive
Environment and Strategies
• Being first to market - pricing flexibility
increase market share or large per-unit profit
• Reduce product cost substantially
– develop new production processes
– capture learning curve effects
– increase capacity utilization
– create a focused factory arrangement
– design for manufacturability, logistical
support, reliability, maintainability

21. Operating and Competitive
Environment and Strategies
• Supplier relations
– link electronically
• Integration of entire information system
– payroll
– inventory
– budgeting
– costing

22. CMS Elements
• Motivational elements
• Informational elements
• Reporting elements

23. CMS Elements
• Motivational elements
– Performance measurements
– Reward structure
– Support of organizational mission and
competitive strategy

24. CMS Elements
• Motivational elements
• Informational elements
– Support budgeting process
– Identify cost drivers
– Reduce/eliminate non-value-added activities
– Emphasize product life cycle
– Adapt to changing competitive
conditions
– Relate cost to product/process design
– Focus on capital spending
– Minimize cost distortions

25. CMS Elements
• Motivational elements
• Informational elements
• Reporting elements
– Prepare financial statements
– Implement responsibility
accounting system

26. Implement CMS
Perform GAP analysis
Information Needs
<Information Available>
Gap to Overcome
GAP

27. Implement CMS
• Gap Analysis
– Identify gap to overcome
– Prioritize differences
– Develop and deploy improvements

28. Enterprise Resource Planning
For a truly integrated CMS
• Automate and integrate business processes
• Share common data and practices
• Produce and access information in real-time

29. Questions
• Why do companies have management
control systems?
• Are organizational form, structure, and
culture important to the design of cost
management systems? Explain.
• How do the internal and external operating
environments affect cost management
systems?