Cornerstones of cost

management, 4e
Chapter 1
Introduction to Cost management

© 2019 Cengage. All rights reserved.

 Learning Objectives

• Describe cost management and explain how it differs

from financial accounting
• Identify the current factors affecting cost management
• Describe how management accountants function within
an organization
• Understand the importance of ethical behavior for
management accountants
• Identify the three forms of certification available to
internal accountants

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Financial accounting versus cost
management: a systems framework
• Accounting information system
– Consists of interrelated manual and computer parts
– Uses processes such as collecting, recording,
summarizing, analyzing, and managing data to
transform inputs into information provided to users
• Has two major systems with the targeted user being
the major difference
– Financial accounting information system
– Cost management accounting information system

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Financial accounting information system

• Produces outputs for external users

• Uses well-specified economic events as inputs
• Follows rules and conventions set by the Securities
and Exchange Commission (SEC) and the Financial
Accounting Standards Board (FASB)
• Provides outputs such as financial statements
• Used for investment decisions, stewardship evaluation,
activity monitoring, and regulatory measures

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Cost management information system
• Produces outputs for internal users
• Has three broad objectives that provide information for:
– Costing out services, products, and other objects of
interest to management
– Planning and control
– Decision making
• Cost management is concerned with factors that drive
costs
– Cycle time
– Quality
– Process productivity

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Cost Accounting Information System

• Assigns costs to individual products and services and

other objects as specified by management
• Assists external financial reporting
– By assigning costs to products in order to value
inventories and determine cost of sales
• Conforms to the rules and conventions set by the SEC
and the FASB

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Operational Control Information System

• Provides accurate and timely feedback concerning the

performance of managers and others relative to their
planning and control of activities
– Focuses on identifying opportunities for improvement
and helping to find ways to improve
• Improves profit by increasing customer value

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Factors affecting cost management

• Global competition
– Increased the demand for more accurate cost
information
• Growth of the service industry
– Deregulation has increased competition
 Led to the need to have accurate cost information for
planning, controlling, continuous improvement, and
decision making

Introduction
© 2019to Cost management
Cengage. All rights reserved.
Advances in information technology (1 of 3)

• Use of computers to monitor and control operations

– Results in the integration of manufacturing data with
marketing and accounting data
• Enterprise resource planning (ERP) software:
Provides an integrated system capability
• Use of tools such as personal computers (PCs), online
analytic programs (OLAP), and decision-support
systems (DSS)
• Development of business analytics

Introduction
© 2019to Cost management
Cengage. All rights reserved.
Advances in information technology (2 of 3)

– Key differences between the use of PCs, OLAP, and

DSS and the use of business analytics
 Expansion of business analytics to include external data
sets and the integration of the analysis with an
organization’s internal databases
 Emergence of very large data sets
• Emergence of electronic commerce (e-commerce)
– Internet trading
– Electronic data interchange
– Bar coding

Introduction
© 2019to Cost management
Cengage. All rights reserved.
Advances in information technology (3 of 3)

• Electronic data interchange (EDI): Exchange of

documents between computers using telephone lines
• Supply chain management: Management of products
and services from the acquisition of raw materials
through manufacturing, warehousing, distribution,
wholesaling, and retailing

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Advances in manufacturing environment

• Theory of constraints: Method used to continuously

improve manufacturing and nonmanufacturing activities
• Just-in-time manufacturing: Produces a product only
when it is needed and only in the quantities demanded
– Focuses on continual improvement by reducing
inventory costs and dealing with other economic
problems

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Lean manufacturing and computer-
integrated manufacturing
• Lean manufacturing: Persistent pursuit and
elimination of waste that simultaneously embodies
respect for people
• Computer-integrated manufacturing
– Automation of the manufacturing environment allows
firms to:
 Reduce inventory
 Increase productive capacity
 Improve quality and service
 Decrease processing time
 Increase output

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Computer-integrated manufacturing

• Computer-integrated manufacturing system (CIM)

implies the following capabilities:
– Products are designed through the use of a computer-
assisted design (CAD) system
– Computer-assisted engineering (CAE) system is used to
test the design
– Product is manufactured using a computer-assisted
manufacturing (CAM) system
– An information system connects the various automated
components

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Customer Orientation

• Firms establish competitive advantage by delivering

value to the customer
• Value chain: Set of activities required to design,
develop, produce, market, and deliver products and
services to customers
• Customer driven accounting departments assess the
value of cost reports
– To ensure effective communication of significant
information

Introduction
© 2019to Cost management
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 New Product Development

• High proportion of production costs is involved during

the development and design stage of new products
• Cost management procedures
– Target costing: Encourages managers to assess the
overall cost impact of product designs over the product’s
life cycle
– Activity-based management: Identifies the activities
produced at each stage of the development process and
assesses their costs

Introduction
© 2019to Cost management
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Sustainable Development and Total Quality
Management (1 of 2)
• Sustainable development
– Development that meets the needs of the present
without compromising the ability of future generations to
meet their own needs
• Total quality management
– Managers create an environment that will enable
organizations to produce defect-free products and
services
– Has replaced the acceptable quality attitudes of the past

Introduction
© 2019to Cost management
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Sustainable Development and Total Quality
Management (2 of 2)
– Continuous improvement and elimination of waste are
the two foundation principles
– Objectives - Producing products and services that
actually perform according to specifications and with
little waste

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Time as a competitive element and
Efficiency
• Time as a competitive element
– Crucial element in all phases of the value chain
– Decrease in non-value-added time increases quality
• Efficiency
– Improving efficiency is a vital concern
– Cost is a critical measure of efficiency

Introduction
© 2019to Cost management
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 Line and staff positions

• Line positions: Positions that have direct

responsibility for the basic objectives of an organization
• Staff positions: Positions that are supportive in nature
and have only indirect responsibility for an
organization’s basic objectives

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 The controller

• Chief accounting officer

• Supervises all accounting departments
• Participates in planning, controlling, and decision-
making activities
• Responsible for both internal and external accounting
requirements

Introduction
© 2019to Cost management
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 The treasurer

• Responsible for the finance function

• Raises capital and manages cash, investments, and
investor relations
• In charge of credit and collections as well as insurance

Introduction
© 2019to Cost management
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 Exhibit 1.1 - Partial organizational chart:
manufacturing company (1 of 2)
• President
• Line Function
– Production Vice President
– Production Supervisor
 Machining Foreman
 Assembly Foreman
• Staff Function
– Financial Vice President
 Controller
 Treasurer
o Internal Audit

Introduction
© 2019to Cost management
Cengage. All rights reserved.
Exhibit 1.1 - Partial organizational chart:
manufacturing company (2 of 2)
o Cost
o Financial
o Systems
o Tax

Introduction
© 2019to Cost management
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Information for planning, controlling, continuous
improvement, and decision making (1 of 2)
• Planning: Detailed formulation of future actions to
achieve a particular end
– Requires setting objectives and identifying methods to
achieve those objectives
• Controlling: Managerial activity of monitoring a plan’s
implementation and taking corrective action
– Achieved with the use of feedback
– Performance reports: Accounting reports that provide
feedback by comparing planned data with actual data

Introduction
© 2019to Cost management
Cengage. All rights reserved.
Information for planning, controlling, continuous
improvement, and decision making (2 of 2)
• Continuous improvement: Relentless pursuit of
improvement in the delivery of value to customers
– Required to remain competitive or to establish a
competitive advantage
• Decision making: Process of choosing among
competing alternatives

Introduction
© 2019to Cost management
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 Accounting and ethical conduct

• Business ethics: Learning what is right or wrong in

the work environment and choosing what is right
• Benefits of ethical behavior
– Creates customer and employee loyalty
– Avoids litigation costs

Introduction
© 2019to Cost management
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 Standards of ethical conduct for
management accountants
• Institute of Management Accountants (IMA) has
established ethical standards for management
accountants
• Major divisions of the code
– Competence
– Confidentiality
– Integrity
– Credibility
– Resolution of ethical conflict

Introduction
© 2019to Cost management
Cengage. All rights reserved.
 Certification

• Certificate in management accounting

– Establishes management accounting as a recognized,
professional discipline, separate from the profession of
public accounting
• Certificate in public accounting
– Provides evidence of a minimal professional qualification
for external auditors
• Certificate in internal auditing
– Recognizes competency in internal auditing

Introduction
© 2019to Cost management
Cengage. All rights reserved.