COST MANAGEMENT

Guan Hansen Mowen

COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
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Chapter 1
Introduction to Cost
Management
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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.
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Factors Affecting
Cost Management
Computer-Integrated Manufacturing
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
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 plans
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
COST MANAGEMENT

Guan Hansen Mowen
COPYRIGHT 2009 South-Western Publishing, a division of Cengage Learning.
Cengage Learning and South-Western are trademarks used herein under license.
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End Chapter 1