Understanding Cost Management Systems in Modern Organizations

1. Chapter 12:Introduction to Cost Management Systems Cost Accounting: Foundations & Evolutions, 8e Kinney and Raiborn

2. Learning Objectives • Why do organizations have management control systems? • What is a cost management system? • What are the organizational roles of a cost management system? • What factors influence the design of a cost management system? • What are the three groups of elements that comprise a cost management system, and what are the purposes of these elements? • What is gap analysis, and how is it used in the evolution of a cost management system?

3. FINANCIAL ACCOUNTING COST ACCOUNTING MANAGEMENT ACCOUNTING Relationship of Financial, Management, and Cost Accounting

4. Cost Accounting • Financial Accounting • Uses cost accounting information for external reporting • Conforms to GAAP • Highly aggregated • Historical • Management Accounting • Uses cost accounting information for internal purposes—planning, controlling, decision making, and performance evaluation • Segmented • Current • Relevant for specific purposes

5. Cost Management System (CMS) Formal methods to plan and control an organization’s cost-generating activities with major challenges of • Achieving profitability in the short run • Maintaining a competitive position in the long run

6. Short Run Organizational efficiency Specific costs: manufacturing, service, marketing, administration Timely, accurate, highly specific, short term Long Run Survival Cost categories: customers, suppliers, products, distribution channels Periodic, reasonably accurate, broad focus, long term Cost Management System (CMS) Objective Focus Information Characteristics IMA 1998

7. Cost Management System Goals • Develop product costs • Assess product/service life-cycle performance • Improve understanding of processes and activities • Control costs • Measure performance • Allow pursuit of organizational strategies

8. Cost Management System Design • The design of the CMS is influenced by • Organizational form, structure, and culture • Organizational mission and core competencies • Operations and competitive environment and strategies

9. Organizational Form • Choice of form affects • Cost of raising capital • Cost of operating business • Cost of litigating • Statutory authority to make decisions • Forms of the business include • Corporations, Partnerships, LLPs, LLCs

10. Organizational Structure • Distribute authority and responsibility • Centralized or decentralized decision making • Group subunits • Geographically • By similar missions (build, harvest, or hold) • By natural product clusters • Determine accountability for cost management and organizational control • Determine the information needed by the decision maker

11. Organizational Culture Organizational culture is: • An underlying set of assumptions about the entity and the goals, processes, practices, and values that are shared by its members • How people interact with each other • The extent to which individuals take authority and assume responsibility for organizational outcomes

12. Organizational Mission and Core Competencies • Business mission regarding competition • Avoid competition • Product Differentiation • Cost Leadership • Confront competition by identifying and exploiting temporary opportunities • Business mission in relation to product life cycle

13. Organizational Mission and Core Competencies • Timeliness • Quality • Customer service • Efficiency and cost control • Responsiveness to change • The cost management system gathers data and reports about core competencies

14. Operations and Competitive Environment and Strategies Management needs to assess: • Cost structure, including the proportion of fixed and variable costs • Level of technology costs, which tends to be fixed and not susceptible to short-run control • Production capacity • Flexibility to respond to a change in short-term conditions

15. CMS Elements • Motivational elements • Information elements • Reporting elements

16. Implement CMS • Gap Analysis • Identify gap to overcome • Prioritize differences • Develop and deploy improvements • Repeat process to ensure continuous improvement

17. Enterprise Resource Planning • For a truly integrated CMS • Standardize information systems/replace legacy systems • Automate and integrate transfer of data among systems • Improve the quality of information • Improve timeliness of information • Real-time, on-line reporting Oracle SAP PeopleSoft

18. Questions • Why do companies have management control systems? • How does the external operating environment affect the cost management system? • What is gap analysis?

19. Potential Ethical Issues • Using the financial accounting system rather than a cost management system to support management functions • Not balancing long- and short-run concerns in the design of the cost management system • Using motivational elements to create high payoffs for fraudulent behavior • Designing motivational elements that donot align with manager’s authority