COST MANAGEMENT

Accounting & Control

Hansen▪Mowen▪Guan

Chapter 1
Introduction to Cost Management

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 1

Cengage Learning and South-Western are trademarks used herein under license.
 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.

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Accounting Information System

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Accounting Information System
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.

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 Subsystems of the
Accounting Information System

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 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.

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 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.

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 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

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 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

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 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.

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 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

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 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

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 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.

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 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.

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 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.

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 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.

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 Accounting Systems
L.O. 2 Distinguish between the uses and users of cost
accounting and financial accounting information.

Reports Financial
Financial
position and
accounting
income

Cost Reports Information

accounting about costs

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 Managerial Decisions
L.O. 3 Explain how cost accounting information is used
for decision making and performance evaluation
in organizations.

• Individuals make decisions.

• Decisions determine the performance

of the organization.

• Managers use information from the accounting

system to make decisions.

• Owners evaluate organizational and managerial

performance with accounting information.

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 Costs for Decision Making
LO3

• Carmen’s Cookies has been making and selling

cookies through a small store downtown.

• One of her customers suggests that she expand

operations and sell to wholesalers and retailers.

• Should Carmen expand operations?

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 Carmen’s Cost Drivers
LO3

Cost Driver

Rent

Insurance

Labor
Number of cookies
Ingredients

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LO3

Differential Costs, Revenues, and Profits

Carmen’s Cookies
Projected Income Statement for One Week
(1) Status Quo (2) Alternative
Original Shop Wholesale & Retail
Sales Only Distribution (3) Difference
Sales revenue $6,300 $8,505a $2,205
Costs:
Food 1,800 2,700b 900
Labor 1,000 1,500b 500
Utilities 400 600b 200
Rent 1,250 1,250 -0-
Other 1,000 1,200c 200
Total costs $5,450 $7,250 $1,800

Operating profits $ 850 $1,255 $ 405

(a) 35 percent higher than status quo

(b) 50 percent higher than status quo
(c) 20 percent higher than status quo

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LO3 Responsibility Centers,
Revenues, and Costs

Carmen Diaz
President

Ray Adams Cathy Peterson

Vice-President Vice-President
Retail Operations Wholesale Operations

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LO3 Responsibility Centers, Revenues, and Costs
Carmen’s Cookies
Income Statement
For the Month Ending April 30
Retail Wholesale
Operations Operations Total
Sales revenue $28,400 $23,600 $52,000
Department costs:
Food 13,500 9,800 23,300
Labora 4,500 3,200 7,700
Utilities 1,800 2,100 3,900
Rent 5,000 2,500 7,500
Total department costs $24,800 $17,600 $42,400
Center marginb $ 3,600 $ 6,000 $ 9,600
General and admin. costs:
General manager’s salaryc 5,000
Other (administrative) 3,200
Total general and admin. costs $ 8,200
Operating profit $ 1,400
(a) Includes department managers’ salaries but excludes Carmen’s salary
(b) The difference between revenues and costs attributable to a responsibility center
(c) Carmen’s salary
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LO3 Responsibility Centers, Revenues, and Costs
Carmen’s Cookies
Retail Responsibility Center
Budgeted versus Actual Costs
For the Month Ending April 30
Actual Budget Difference
Food:
Flour $ 2,100 $ 2,200 $ (100)
Eggs 5,200 4,700 500
Chocolate 2,000 1,900 100
Nuts 2,000 1,900 100
Other 2,200 2,200 -0-
Total food $13,500 $12,900 $ 600
Labor:
Manager 3,000 3,000 -0-
Other 1,500 1,500 -0-
Total labor $ 4,500 $ 4,500 $ -0-
Utilities 1,800 1,800 -0-
Rent 5,000 5,000 -0-
Total cookie costs $24,800 $24,200 $ 600
Number of cookies sold 32,000 32,000 -0-

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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

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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.

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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

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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

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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

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

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COST MANAGEMENT
Accounting & Control
Hansen▪Mowen▪Guan

End Chapter 1

COPYRIGHT © 2009 South-Western Publishing, a division of Cengage Learning. 33

Cengage Learning and South-Western are trademarks used herein under license.