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Cost Management

Cost Management. Introduction. Learning Objectives. 1. S imilarities and differences between financial accounting and cost accounting Cost accounting’s support to MA & FA Business functions in the value chain Dimensions of performance from customer’s perspective

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Cost Management

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  1. Cost Management Introduction

  2. Learning Objectives 1. Similarities and differences between financial accounting and cost accounting Cost accounting’s support to MA & FA Business functions in the value chain Dimensions of performance from customer’s perspective Planning & control decisions of managers

  3. Learning objectives 6. Different roles of management accounting 7. Guidelines followed by management accountants 8. Management accounting & organisation structure 9. Professional ethics & MA

  4. Limitations of FA • No operating details of particular departments • Does not ensure control over material use; does not help in wastage avoidance • Costs are not assigned to products, departments, divisions, etc. • No standards for comparison • Loss is not analysed taking idle time, defective material, etc. • Does not help in pricing decisions • No information for managerial decisions such as shut down or continue, deciding about product-mix, buy or manufacture, etc.

  5. Management accounting • Extension of managerial aspect of cost accounting. • Uses tools of both financial a/c & cost a/c for decision making and control. • Cost accounting- cost control is of prime importance. • Management accounting- primary emphasis is on decision making (Mgt. a/c employs many techniques from OR, statistics, etc.)

  6. Strategic decisions & MA Strategy formulation Building resources and capabilities Implementing strategy

  7. Building resources and capabilities • Current assets • Long term productive assets • Intangibles

  8. Planning and Controlling Management Decision Management Accounting System Planning Budgets Feedback Accounting System Control Performance Evaluation Performance Reports

  9. Planning and Controlling What is planning? Setting goals Predicting results Deciding how to attain goals

  10. Planning and Controlling What is control? Deciding and taking actions Deciding on performance evaluation and feedback

  11. Roles of MA- Problem solving This involves comparative analysis for decision making. This role asks: Of the several alternatives available, which is the best?

  12. Scorekeeping This involves accumulating data and reporting reliable results to all levels of management. This role asks: How is the business doing?

  13. Attention Directing This involves helping managers properly focus their attention. This role asks: Which opportunities and problems should be emphasized first. Attention directing should focus on all opportunities to add value to an organization, not just cost-reduction opportunities.

  14. Cont…. • Strategic decisions and planning decisions: problem solving role is most important • Control decisions: the later two roles are important

  15. Key Themes in ManagementDecision Making Customer Focus Value Chain and Supply Chain Analysis Key Success Factors: Cost and Efficiency, Time, Quality, Innovation Continuous Improvement and Benchmarking

  16. Customer Focus continue investing sufficient (but not excessive) resources in customer satisfaction such that profitable customers are attracted and retained.

  17. Value Chain andSupply Chain Analysis 1. Treat each of the business functions in the value chain as an essential and valued contributor. 2. Integrate and coordinate the efforts of all business functions in addition to developing the capabilities of each individual business function.

  18. Key Success Factors operational factors that directly affect the economic viability of the organization Cost –continuous pressure to reduce costs. Quality – customers are expecting higher levels of quality

  19. Key Success Factors Time – organizations are under pressure to complete activities faster and to meet promised delivery dates more reliably. Innovation – continuing flow of innovative products or services is a prerequisite to the ongoing success of most organizations.

  20. Continuous Improvementand Benchmarking Continuous improvement by competitors creates a never-ending search for higher levels of performance within many organizations.

  21. Value Chain The term “value chain” refers to the sequence of business functions in which usefulness is added to the products or services of an organization. The term “value” is used because as the usefulness of the product or service is increased, so is its value to the customer. MA provides decision support across value chain

  22. Value Chain R & D Design Production Management Accounting Marketing Distribution Service

  23. MA’s support to managers- Key Guidelines 1. Cost-benefit approach 2. Full recognition of behavioral as well as technical considerations 3. Using different costs for different purposes

  24. Partial Organization Chart, Manufacturing Company Line Function Staff Function Production Vice-President Financial Vice-President Production Supervisor Controller Treasurer Machining Foreman Assembly Foreman Internal Audit Cost Financial Systems Tax President

  25. Current Factors Affecting Cost Management A. Global Competition • demand for more cost information but also for more accurateinformation quickly

  26. Current Factors Affecting Cost Management B. Growth of the Service Industry • service sector of the economy has increased in importance • deregulation of many services has increased competition in the service industry

  27. Current Factors Affecting Cost Management C. Advances in Information Technology • Computer aided operations – information accumulation and supply of information to management instantaneously. • The emergence of e-commerce allowing buyers and sellers to come together electronically

  28. Current Factors Affecting Cost Management D. Advances in Management Environment Just-in-time manufacturing Computer-integrated manufacturing

  29. Current Factors Affecting Cost Management E. Customer Orientation • value to the customer for establishing competitive advantage • Companies to compete in technology, manufacturing, speed of delivery and response

  30. Current Factors Affecting Cost Management F. New Product Development • high proportion of production costs are committed during the development and design stage • cost control- use of target costing and activity-based management

  31. Current Factors Affecting Cost Management G. Total Quality Management • Continual improvement and elimination of waste • A philosophy of total quality management

  32. Current Factors Affecting Cost Management H. 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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