MODULE 1

INTRODUCTION TO COST MANAGEMENT

Definition and Scope:

Strategy – is a set of Policies, procedures and approaches to business that produce long-term success
while strategic management involves the development of sustainable competitive position. Strategic
cost management involves the development of cost management information to facilitate the principal
management function which is strategic management. 1

Cost management information – is the information that the manager needs to effectively manage the
firm, profit-oriented as well as not-for-profit organization. This includes both financial information about
cost and revenues as well as relevant nonfinancial information about productivity, quality and other key
success factors for the firm or organization. 2

Cost management – is the practice of accounting in which the accountant develops and uses cost
management information. For competitive success, it is not enough to emphasize only on financial
information. This could lead manager to stress cost reduction while ignoring or even lowering quality
standards.3

Management Functions and the Needs for Management Accounting Information: 4

1. Planning – involves:
a) Setting of immediate, as well as long-range goals for the organization;
b) Predicting future conditions that are expected to prevail;
c) Considering the different means or strategies by which the goals set may be
achieved; and
d) Deciding which of the strategies should be used to attain such goals.

2. Directing and Motivating – involves overseeing the day-to-day activities, seeing to it that the
organization is functioning smoothly and the members of the organization are mobilized to carry
plans.

3. Controlling – involves checking the performance of activities against the plan or standards set
and deciding what corrective actions to take there be any deviation between the actual
planned / standard performance.

Financial Accounting vs. Cost Accounting

Basis of Difference Financial Accounting Cost Accounting

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 1. Purpose Tells about the profit and loss
and financial position of
business.
2. Form of Accounting Meets the requirements of
Financial Reporting Standards.
3. Recording Records the data in a subjective
manner (according to the
nature of expenses)
4. Control Not giving emphasis on the
control
5. Periodicity of Reporting Usually at the end of the given
period
6. Analysis of Profit Disclose the net profit and loss
of the business as a whole
Information to managers for
planning, operating, control,
and decision making.
To meet the requirement of the
managers.
Records the data in an objective
manner (according to the
purpose which the costs are
incurred)
It provides detailed system of
control
Provides information as and
when it is desired by the
managers
It discloses the profit and loss of
each product, job or services.

Importance of Ethical Behavior for Management Accountants

Standards of Ethical Conduct for Management Accountant (From the American Institute of
Management Accountants)5

Management accountants have an obligation to the organizations they serve, their profession, the
public, and themselves to maintain the highest standards of ethical conduct. In recognition of this
obligation, the Institute of Management Accountants, formerly the National Association of Accountants,
has promulgated the following standards and ethical conduct for management accountants. Adherence
to these standards is integral to achieving the Objectiveness of Management Accounting. Management
accountants shall not commit acts contrary to these standards not shall they condone the commission of
such acts by others within their organizations.

COMPETENCE6
Management accountants have the responsibility to:
 Maintain an appropriate level of professional expertise by continually developing knowledge
and skills.
 Perform their professional duties in accordance with relevant laws, regulations, and technical
standards.
 Provide decision support information and recommendations that are accurate, clear, concise ad
timely.
 Recognize and communicate professional limitations or other constraints that would preclude
responsible judgment or successful performance of an activity.

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CONFIDENTIALITY7
Management accountants have the responsibility to:
 Keep information confidential except when disclosure authorized or legally required.
 Inform all relevant parties regarding appropriate use of confidential information. Monitor
subordinates’ activities to ensure compliance.
 Refrain from using confidential information for unethical or illegal advantage.

INTEGRITY8
Management accountants have the responsibility to:
 Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid
apparent conflicts of interest. Advise all parties of any potential conflicts.
 Refrain from engaging in any conduct that would prejudice carrying out duties ethically.
 Abstain from engaging in or supporting any activity that might discredit the profession.

CREDIBILITY9
Management accountants have the responsibility to:
 Communicate information fairly and objectively
 Disclose all relevant information that could reasonably be expected to influence an intended
user’s understanding of the reports, or recommendations.
 Disclose delays or deficiencies in information, timeliness, processing, or internal controls in
conformance with organization policy and applicable laws.

INTERNATIONAL CERTIFICATIONS10

The three certifications available to management accountants are as follows:

 Certificate of Management Accounting (CMA)
 Certificate in Public Accounting (CPA)
 Certificate in Internal Auditing (CIA)

CMA. A Certified Management Accountant is one who has passed the rigorous qualifying examination,
has met an experience requirement, and participate in continuing educations. The CMA Certificate is
granted by the Institute Management Accountants (IMA).

CPA. A Certified Public Accountant is one who has met the pre-qualification educational requirements,
passed the CPA licensure examinations given the Professional Regulatory Board of Accountancy and has
satisfied all other legal and regulatory requirements of public accountant.

CIA. Since one of the management control responsibilities of the management accountant is to develop
effective systems to detect and prevent errors and fraud in the accounting records, it is common for the
management accountant to have strong ties to the control-oriented organization such as the Institute of
Internal Auditors (IIA) granting Certification in Internal Auditing (CIA). To attain the status of Certified

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Internal Auditor and individual must pass a comprehensive examination designed to ensure technical
competence and have the required number of years of work experience.

Sample Quiz

Multiple Choice Questions:11

1. Which of the following statement is false?

a. Cost accounting measures and reports short-term, long-term financial, and nonfinancial
information.
b. Cost management provides information that helps increase value for customers.
c. All strategies should be evaluated regarding the resources and capabilities of the company.
d. A good cost accounting system is narrowly focused on a continuous reduction of costs.

2. Which of the following statement is correct?

a. The best-designated strategies are valuable whether or not they are effectively implemented.
b. To take advantage of the changing market opportunities, the annual budget should be strictly
enforced.
c. Linking rewards to performance is a major deterrent to good management performance.
d. An important strategic decision is making the correct investment in productive assets.

3. All of the following statements are true except

a. A budget is a tool to used to plan and express strategy.
b. Financial accounting reports financial and nonfinancial information that helps managers
implement company strategy.
c. Feedback links planning and control.
d. Control includes deciding what feedback to provide that will help with future decision making.

4. All of the following statement are false except

a. Attention-directing activities should focus on cost-reduction opportunities, and not on value-
adding opportunities.
b. For strategic decisions, scorekeeping is the most prominent role played by management
accounting.
c. A budget may be used as planning tool, but not a as a control tool.
d. Management accountants often are simultaneously doing problem-solving, scorekeeping, and
attention-directing activities.

5. Management accounting
a. Focuses on estimating future revenues, costs, and other measures to forecast activities and their
results.
b. Provides information about the company as a whole.
c. Reports information that has occurred in the past that is verifiable and reliable.
d. Provides information that is generally available only on a quarterly or annual basis.

6. The person most likely to use management accounting information is a(n)

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 a. Banker evaluating a credit card application.
b. Shareholder evaluating stock investment
c. Government taxing authority
d. Assembly department supervisor

7. Which of the following description refers to management accounting information?

a. It is verifiable and reliable
b. It is driven by rules
c. Its is prepared for shareholders
d. It provides reasonable and timely estimates.

8. Which of the following groups would be least likely to receive detailed management accounting
reports?
a. Stockholders
b. Sales representative
c. Production supervisors
d. Managers

9. Management Accounting information includes

a. Tabulated results of customer satisfaction surveys
b. The cost of producing a product
c. The percentage of units produced that are defective
d. All of the above.

10. Which of the following types of information are used in management accounting?
a. Financial information
b. Nonfinancial information
c. Information focused on the long term
d. All of the above

Answer Key
1. D 6. D
2. D 7. D
3. B 8. A
4. D 9. D
5. A 10. D