COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 1
Introduction to Cost Management

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 1

Cengage Learning and South-Western are trademarks used herein under license.
 Study Objectives
1. Describe a cost management system, its
objectives, and its major systems.
2. Identify the current factors affecting cost
management.
3. Describe how management accountants
function within an organization
4. Understand the importance of ethical behavior
for management accountants.
5. Identify the three forms of certification
available to internal accountants

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Accounting Information System

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Accounting Information System
Financial accounting system
follows established rules and conventions to
provide information (financial statements) to
external users such as investors, government
agencies, and banks.
Cost management system
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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 Subsystems of the
Accounting Information System

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 Cost Management System
Cost accounting system
assigns costs to individual products and
services and other cost objects as specified by
management; satisfies financial reporting and
management decision-making needs

Operational control system

provides accurate and timely feedback
concerning performance; concerned with what
activities should be performed and assessing
those activities.

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

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 Factors Affecting
Cost Management
Growth of the Service Industry
– As manufacturing 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
Advances in Information Technology
– Computers are used to continuously monitor
and control system-wide operations.
– Increased ability to accurately cost products
because of advances in available tools.
– Emergence of electronic commerce

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 Factors Affecting
Cost Management
Advances in Management Environment
– Theory Of Constraints is 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.
– Lean Manufacturing is persistent pursuit and
elimination of waste that simultaneously embodies
respect for people
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 Factors Affecting
Cost Management
Computer-Integrated Manufacturing
• Automation allows firms to reduce inventory,
increase productive capacity, improve quality
and service, decrease processing time, increase
output.
• Can produce a competitive advantage for a firm
• Typically follows JIT as a response to increased
needs for quality and shorter response time

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 Factors Affecting
Cost Management
Consumer Orientation
• A key question to be ask about any process or
activity is whether it is important to customer.
– Value chain is the set of activities required to
design, develop, produce, market, and deliver
products and services to customers
– Firms compete not only in terms of technology
and manufacturing, but in the speed of delivery
and response to deliver value to the customer

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 Factors Affecting
Cost Management
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
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
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
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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The Role of Cost and Management
Accountant
• Responsible for generating financial information
required by the firm for
– Internal reporting
– External reporting

• Accounting system information is used by

management to
– Plan
– Control
– Make decisions

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The Role of Cost and Management
Accountant
Planning
– Detailed formulation of future actions to
achieve a particular end.
– Requires setting objectives and identifying
methods to achieve those objectives.

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The Role of Cost and Management
Accountant
Controlling
– 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.
• Performance reports compare budgeted and actual
data

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The Role of Cost and Management
Accountant
Continuous Improvement
– Required in a dynamic environment if a firm is
to remain competitive or to establish a
competitive advantage.
– Searching for ways to increase overall
efficiency through
• Reduction of waste
• Quality improvement
• Cost reduction

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The Role of Cost and Management
Accountant
Decision Making
– The process of choosing among competing
alternatives.
– Decisions are based on information provided
by the accounting system

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Accounting and Ethical Conduct
Benefits of Ethical Behavior
– Can create customer and employee loyalty
– Avoid litigation costs
– Increases likelihood of commercial success

Standards of Ethical Conduct for

Management Accountants
– Competence
– Confidentiality
– Integrity
– Credibility
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 Certification
Certified Public Accountant
– The responsibility of a CPA is to provide assurance
concerning the reliability of financial statements.

Certified Internal Auditor

– The focus of the CIA is to recognize competency in
internal auditing rather than external auditing.

Certified Managerial Accountant

– 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.
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 Certification
• Four areas emphasized on the CMA
exam:
– Business analysis
– Management accounting and reporting
– Strategic management
– Business application

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COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

End Chapter 1

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 25

Cengage Learning and South-Western are trademarks used herein under license.