ACT1107 - STRATEGIC COST MANAGEMENT

DEFINITION OF BUSINESS AND BUSINESS OWNERS

A business is an organization engaged in manufacturing, trading, or services activity (or a combination of these
activities) to earn a profit. However, as the global business environment evolves, a business is already defined as an
organization sharing a vision and mission working for a common goal.

Individual who invested capital into a business are called Investors or business owners. More ofter, than not, business
owners are usually misunderstood as management. However, in its real sense, business owners are usually
contributors of capital, unless they are actively involvd in the operations of the business. Business owners, who do not
want to actively participate in the operations of the business, normally entrust the future of the business organization
to its management.

DEFINITION OF MANAGEMENT AND THE MANAGEMENT FUNCTION

Management, as the recipient of trust from the business owners, should ensure that the organization operates
effectively and efficiently and that business owners will receive favorable return from its investments. According to
Peter Drucker, management is a multi-purpose organ that manages business, managers, workers and work. Mary
Parker Follet, on the other hand, defined management as the art of getting things done through people. These
definition, as it may be seen, pertains to management as a process of attaining objectives through managing people.

However, as the global business environment changes, the military definition of management ( is directing people )
has evolved and has become more dynamic. Today, management is composed of four basic process namely planning,
organizing, leading and controlling. Specifically, the following functions are defined below.

1. Planning- is the process of setting goals for the organizational ensuring that the company is prepared for its
day to day operations. Common activities under this are budgeting, cost volume profit analysis and
forecasting.
2. Organizing- is the process of developing an organizational structure and assigning people to ensure the
accomplishment of objectives, Common activities under this are departmentalization or decentralization.
3. Leading- is the process of empowering an organization, including its people. Common activities under this
are human resource development, training and team building activities.
4. Controlling- is the process of ensuring that the organization is performing well, in reference to their chosen
standard and/or benchmark. Common activities under this are variance analysis, performance report and
responsibility accounting.

In general, all of these four functions are performed by management to ensure that organizational objectives are met
and the business owners are receiving return from their investment.

THE VALUE OF INFORMATION

Management, in performing its function, requires information to ensure that business is working effectively and
efficiently. Without information, management cannot assess if the plan they have prepared worked out well, if the
organizing and leading process is working effectively and if the control process is still being implemented. Thus
information, whether financial or non-financial is required in order to assist management in performing their basic
functions

DEFINITION OF MANAGEMENT ACCOUNTING

As discussed above, managers require relevant and reliable information which would serve as the basis of their day to
day decisions, Due to this need for information , accountants are assigned to prform management accounting.
Management accounting is defined to be the branch of accounting that aims to identify, accumulate, analyze, interpret
and acommunicate various information to support the management function.

MAIN OBJECTIVES OF MANAGEMENT ACCOUNTING

The main objectives of management accounting are the following:

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• Make information available and understandable to management

• Assist management in performing its function
• And help organization in achieving its shor-term and long term goals.

SCOPE OF MANAGEMENT ACCOUNTING

• Information gathering
• Data analysis and reporting
• Decision making

FINANCIAL ACCOUNTING AND ITS DIFFERENCE FROM MANAGEMENT ACCOUNTING

Business organization, apart from management , also have various stakeholders such as customers, investors ,
government, suppliers, and etc, which demand relevant and reliable information about the business operations
specifically its profit and current financial position. Depsite this information need, this stakeholders have no direct
access to the company’s accounting records. Due to this demand, accountants are required to performed financial
accounting which involves the preparation of general purpose financial statements for various stakeholders.

According to the framework, stakeholders are investors (potential and current) -concerned with the risk inherent and
the return provided by their investment. It is also an important venue to know whether the investor should hold, sell
or buy an investment, employees -main concern is the profitability of their employers and the capacity to provide
remuneration, retirement benefits and employee opportunities : lenders – main concern is the capacity to pay the
loan due to them: suppliers (other trade creditors) – capacity to pay the debt due to them but normally on a short
term planning horizon: customers – continuance and dependence theory: and governments – concerned with public
regulation, levy of taxes, allocation or resources.
Area Management Accounting Financial Accounting
End User Internal User-Management Various Stakeholders
Frequency Frequently, Depending on Annual or depending on rules and
Management Needs regulation
Reports Management Needs Pertains to Reports are limited to financial
part/entire company Future aspect Pertains to the entire
Oriented company Past oriented/historical
Regulation Optional and not Regulated Required by various government
agencies and is regulated
Types of Accounting System Unrestricted (not based on double Restricted (based on double entry
entry bookkeeping) bookkeeping)
Measurement Not limited to monetary value Limited to monetary value (
(maybe financial, nonfinancial or historical peso value )
statistical

LINKAGE BETWEEN FINANCIAL AND MANAGEMENT ACCOUNTING: COST ACCOUNTING

Cost pertains to a resource ‘given up’ or ‘to be given up’ to attain a specific objective. Usually, costs are driven by
various activities within an organization (cost driver). Accounting , on the other hand , is simply defined as the language
of business because it identifies , analyzes, interprets , and communicates business information to various users.
Combining the two definitions together, cost accounting is a branch of accounting that deals with the process of
identifying, analyzing, interpreting and communicating cost information to various users.

COST ACCOUNTING AND VARIOUS USERS OF COST INFORMATION

Cost information has various uses depending on the objective of the user. Generally, information stakeholders can be
classified as external and internal.

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INTERNAL USERS OF COST
INFORMATION
Managers, at different levels, are the most common internal users of cost information.
As defined in our basic management courses, managers are task to perform the process
of planning, leading, organizing and controlling task in order to achieve company’s
objectives. Due to this, managers are expected to use cost
information in order to plan and control business operations.

EXTERNAL USERS OF COST
INFORMATION
There are various external user of cost information such as investors, employees,
governments and other parties. Take note that the primary characteristics common to
all external users is that they have limited access to information. As such, they only rely
on published reports regarding cost information. However, kindly take note that these
stakeholders have various objectives in dealing with cost information.

Both financial and management accounting pertains to accumulation of information and communicating these
information to its various uses and the most common source of their information is Cost Accounting.

ACCOUNTANTS IN ORGANIZATION

Note that accountants assist management in performing its various function. As such, accountants may be strategically
positioned in various departments to obtain a more vivid understanding of the entity’s operations. The position of
accountants, although deployed in various departments are still usually considered as staff function and not a line
function.

Staff Function supports the organization although not directly involved in its front operations line positions are those
directly dealing with customers (that is front operations)

CONTROLLERSHIP VERSUS TREASURERSHIP

Controllership is a science of control which is the process by which management assures itself that the resources
acquired are used effectively and efficiently. Specifically, the controller has the following, but not limited to, functions:

1. Planning for control

2. Financial Reporting
3. Management audit
4. Tax administration
5. Government reporting
6. Economic appraisal

Treasurership is a science of management of funds/finances. Specifically, the treasurer has the following functions:

1. Provision of capital
2. Investor relations
3. Short term financing
4. Banking and custody of fund
5. Investments
6. Insurance

In a traditional environment, the controller is normally the Chief Finance Officer of the company . However, as the
organization evolves, the chief finance officer is already different in the controller as it occupies a seat in the top
management team, capable of making financial decisions.

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ETHICAL STANDARDS IN ACCOUNTING

In performing our function following ethical standards must be observed by all accountants, regardless of area/subject
matter.

1. Integrity- avoid being associated with incorrect, incomplete, misleading statements

2. Objectivity- it means being fair, honest, and free from conflict of interest, disclose all information relevant
to decision making(e.g. bias)
3. Competence and Due Care- a consultant should strive to improve his knowledge and skills to ensure that
client receive a competent service. Due care encompasses compliance with technical and professional
standards, through examination and on a timely basis.
4. Confidentiality- the consultant must not disclose or use for own personal advantage any information
acquired in the course of the professional relationship, unless with authority, required by law (evidence in
court, infringement) right, or duty to disclose (quality review, self-protection, comply with ethics) This
standard extends to social environment, prospective client , each staff, and expert used, as well as after
business relationship.
5. Professional Behavior- refrain from actions that will discredit the profession. A consultant must not make
exaggerated claims and comparisons.

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