COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 1 Chapter 1 Introduction to Cost Management

2 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

3 Accounting Information System

4 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.

5 Subsystems of the Accounting Information System

6 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.

7 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.

8 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

9 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

10 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.

11 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

12 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

13 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.

14 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.

15 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.

16 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.

17 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

18 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.

19 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

20 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

21 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

22 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

23 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.

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

COST MANAGEMENT Accounting & Control Hansen▪Mowen▪Guan COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. Cengage Learning and South-Western are trademarks used herein under license. 25 End Chapter 1