COST MANAGEMENT

Don R. Hansen

Maryanne M. Mowen

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Chapter 1

Introduction to
Cost Accounting
and Cost
Management

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 Learning Objectives

Explain the similarities and differences between

financial accounting and cost management.
Describe the evolution of accounting.

Identify and discuss the current focus of cost

management.
Discuss the importance of the accounting system
for internal and external reporting.

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 Learning Objectives (continued)

Explain the need for cross-functional expertise in

todays cost accountant.
Describe the role of cost and management
accountants in an organization.
Explain the importance of ethical behavior for
managers and accountants.
Identify the three forms of certification available
to internal accountants.

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 Financial Accounting Versus
Cost Management
Financial accounting is devoted to providing information for external
users; these users include investors, government agencies, and banks.
Cost management identifies, collects, measures, classifies, and reports
information that is useful to managers in costing (determining what
something costs), planning, controlling, and decision making.
Cost accounting attempts to satisfy costing objectives for both
financial and management accounting.
Management accounting is concerned specifically with how cost
information and other financial and nonfinancial information should
be used for planning, controlling, and decision making.

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 Historical Description of
Management Accounting
1880 - 1925 Most of the product-costing and internal
accounting procedures used in this
century were developed.
1925 Emphasis of inventory costing for
external reporting.
1950s/60s Effort to improve the managerial
usefulness of traditional cost systems.
1980s/90s Significant efforts have been made to
radically change the nature and practice
of management accounting.
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 Todays Economic Environment

Global Competition
Growth of the Service Industry
Advances in Information Technology
Advances in the Manufacturing Environment
Theory of Constraints
Just-in-Time Manufacturing
Computer-Integrated Manufacturing
Customer Orientation
Total Quality Management
Time as a Competitive Element
Efficiency
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 Global Competition

Vastly improved transportation and communications

have led to a global market for many manufacturing
and service firms.

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 Growth of the Service Industry
As the traditional
smokestack industries
have declined in
importance, the service
sector of the economy has
increased in importance.
The service sector
comprises approximately
three-quarters of the U.S.
economy and employment.

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Advances in Information Technology
Two significant advances
relate to information
technology.
1. Computer-integrated
manufacturing
2. The availability of
personal computers,
spreadsheet software, and
graphics packages

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 Advances in the Manufacturing
Environment
The theory of constraints is a method 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.
Computer-integrated manufacturing is the
automation of the manufacturing environment.
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 Customer Orientation
Firms are
concentrating on the
delivery of value to the
customer.
Accountants and
managers refer to the
value chain as the set of
activities required to
design, develop, produce,
market, and deliver
products and services to
customers.
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 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
workers to manufacture perfect (zero-defect) products, has
replaced the acceptable quality attitudes of the past.

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 Time as a Competitive Element
Time is a crucial element in all phases of the value
chain.
World-class firms reduce time to market by compressing
design, implementation, and production cycles.

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 Efficiency
While quality and time are important, improving
these dimensions without corresponding
improvements in financial performance may be
futile if not fatal.

Improving efficiency is
also a vital concern.

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Traditional Accounting System Versus Data-
Based Relationship Accounting System

Transactions Transactions

Journal Entries
Database
Posting to (Sharing of files)
Accounts
Custom
Financial
Reports Reports

Custom
Custom
Reports Reports
Reports
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 Cost Management:
A Cross-Functional Perspective

Manufacturing Technology

Computer Technology International

Marketing Information Technology

Cost Accounting Profession

Legal
Management
Engineering Financial Management

Behavioral Leadership

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 Line and Staff Positions

Line positions are positions that have direct

responsibility for the basic objectives of an
organization.
Staff positions are positions that are supportive in
nature and have only indirect responsibility for an
organizations basic objectives.

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The Role of the Management Accountant

President

Production Financial
Vice-President Vice-President

Machining Assembly Controller Treasurer

Foreman Foreman

Controllers Treasurer's
Functions Functions

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Role of Controller and Treasurer

Controller Treasurer

1. Financial reports 1. Collection of cash

2. SEC reporting 2. Monitoring of cash payments
3. Tax planning and reporting 3. Monitors cash availability
4. Performance reporting 4. Short-term investments
5. Internal Auditing 5. Short and long-term
6. Budgeting borrowing
7. Accounting systems and internal 6. Issuing of capital stock
controls
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 The Management Process

The Management Process is defined by the

following activities:

Planning
Controlling
Decision making

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The Management Process (continued)

Planning requires
setting objectives and
identifying methods to
achieve those
objectives.

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The Management Process (continued)

Controlling is the managerial activity of monitoring

a plans implementation and taking corrective action
as needed.
Control is usually achieved with the use of feedback, which
is information that can be used to evaluate or correct the
steps being taken to implement a plan.

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The Management Process (continued)

Decision making is the

process of choosing
among competing
alternatives.

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Accounting and Ethical Conduct

Some Types of Unethical Conduct

Abuse of accounting information

Acceptance of bribes or gifts
Conflict of interest
Disclosure of confidential information

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Accounting and Ethical Conduct
(continued)

Ten Core Values

Honesty
Integrity
Promise keeping
Fidelity
Fairness
Caring for others
Respect for others
Responsible citizenship
Pursuit of excellence
Accountability

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 Standards of Ethical Conduct for
Management Accountants

Competence

Confidentiality

Integrity

Objectivity

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 Competence

Management Accountants have a

responsibility to

Maintain professional competence.

Perform professional duties in accordance with relevant laws,
regulations, and technical standards.
Prepare complete and clear reports and recommendations.

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 Confidentiality
Management Accountants have a
responsibility to

Refrain from disclosing confidential information.

Inform subordinates as to how to handle confidential information.
Refrain from using confidential information for unethical or illegal
advantage.

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 Integrity

Management Accountants have a

responsibility to

Avoid conflicts of interest

Refrain from activity that would prejudice their ability to carry out their
duties
Refuse gifts, favors, or hospitality that would influence their actions.
Refrain from either actively or passively subverting the attainment of the
organizations legitimate and ethical objectives.

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 Integrity (continued)

Management Accountants have a

responsibility to

Recognize and communicate professional limitations that would

preclude responsible judgment.
Communicate unfavorable as well as favorable information.
Refrain from engaging in or supporting any activity that would discredit
the profession.

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 Objectivity

Management Accountants have a

responsibility to

Communicate information fairly and objectivity

Disclose fully all relevant information that could reasonably be expected
to influence user's understanding of the reports, comments, and
recommendations presented.

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 Resolution of Ethical Conflict

Courses of action

Discuss problems with immediate supervisor except when it appears the

superior is involved.
If the immediate superior is the chief executive officer, or equivalent, the
acceptable reviewing authority may be the audit committee, board of
trustees, or owners.
Clarify relevant concepts by confidential discussion with an objective
advisor to obtain an understanding of possible courses of action.

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 Resolution of Ethical Conflict
(continued)

Courses of action

If the ethical conflict still exist after exhausting all levels of internal
review, the management accountant may have not other recourse but
resign.
Except where legally prescribed, communication of such problems with
external parties is not appropriate.

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 Professional Certifications

CPA-The responsibility of a CPA is to provide assurance concerning the

reliability of financial statements.
CMA-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.
CIA-The focus of the CIA is recognize competency in internal auditing
rather than external auditing as with the CPA.

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End of Chapter 1

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