Cost Management ACCOUNTING AND CONTROL HANSEN & MOWEN

Introduction to Cost Management 1 CHAPTER

Financial Accounting Versus Management Accounting OBJECTIVE 1 Financial accounting is devoted to providing information for external users; these users include investors, government agencies, and banks. Cost management identifies, collects, measures, classifies, and reports information that is useful to managers in costing (determining what something costs), planning, controlling, and decision making.

Financial Accounting Versus Management Accounting OBJECTIVE 1 Cost accounting attempts to satisfy costing objectives for both financial and management accounting. Management accounting is concerned specifically with how cost information and other financial and nonfinancial information should be used for planning, controlling, and decision making.

Factors Affecting Cost Management OBJECTIVE 2 Global Competition The new competitive environment has increased the demand not only for more cost information but also for more accurate information. Vastly imported transportation and communication has led to a global market for many manufacturing and service firms.

Factors Affecting Cost Management OBJECTIVE 2 Growth of the Service Industry As the traditional 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.

Factors Affecting Cost Management OBJECTIVE 2 Advances in Information Technology Computers are used to monitor and control operations. The result is an operational system that is fully integrated with marketing and accounting data. Increased ability to accurately cost products because of advances in tools. Emergence of e-commerce Internet trading Electronic data interchange Bar coding

Factors Affecting Cost Management OBJECTIVE 2 Advances in Management Environment The theory of constraints is a method 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. Computer-integrated manufacturing is the automation of the manufacturing environment.

Factors Affecting Cost Management OBJECTIVE 2 Customer Orientation Firms are competing not only in terms of technology and manufacturing, but in the speed of delivery and response to deliver value to the customer. Companies must also satisfy the needs of internal customers, such as staff functions exist to support line functions.

Factors Affecting Cost Management OBJECTIVE 2 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.

Factors Affecting Cost Management OBJECTIVE 2 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.

Factors Affecting Cost Management OBJECTIVE 2 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.

Factors Affecting Cost Management OBJECTIVE 2 Efficiency While quality and time are important, improving these dimensions without corresponding improvements in financial performance may be futile, if not fatal.

Traditional Accounting System OBJECTIVE 3 Transactions Journal Entries Posting to Accounts Financial Reports

Data-Based Relationship Accounting System OBJECTIVE 3 Transactions Custom Report Custom Report Custom Report Custom Report

Cost Management: A Cross-Functional Perspective OBJECTIVE 4 Product costing must take into account costs associated with other functions, such as marketing, management and logistics. A cost management system must be flexible enough to provide the appropriate cost for the circumstance. Today’s accountant must be an expert at valuing methods of Costing and achieving quality Differentiating between value-added and non-value-added activities Measuring and accounting for productivity

The Role of Today’s Cost and Management Accountant OBJECTIVE 5 Line positions are positions that have direct responsibility for the basic objectives of an organization. Staff positions are positions that are supportive in nature and have only indirect responsibility for an organization’s basic objectives.

The Role of Today’s Cost and Management Accountant OBJECTIVE 5

The Role of Today’s Cost and Management Accountant OBJECTIVE 5 The Controller Financial reports SEC reporting Tax planning and reporting Performance reporting Internal auditing Budgeting Accounting systems and internal controls

The Role of Today’s Cost and Management Accountant OBJECTIVE 5 The Treasurer Collection of cash Monitoring of cash payments Monitors cash availability Short-term investments Short and long-term borrowing Issuing of capital stock

The Role of Today’s Cost and Management Accountant OBJECTIVE 5 Planning is the detailed formulation of future actions to achieve a particular end. Planning requires setting objectives and identifying methods to achieve those objectives.

The Role of Today’s Cost and Management Accountant OBJECTIVE 5 Controlling is 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.

The Role of Today’s Cost and Management Accountant OBJECTIVE 5 Continuous improvement is required in a dynamic environment if a firm is to remain competitive or to establish a competitive advantage.

The Role of Today’s Cost and Management Accountant OBJECTIVE 5 Decision making is the process of choosing among competing alternatives.

Accounting and Ethical Conduct OBJECTIVE 6 Benefits of Ethical Behavior Can create customer and employee loyalty Avoid litigation costs Standards of Ethical Conduct for Management Accountants Competence Confidentiality Integrity Objectivity

Certification OBJECTIVE 7 CMA: 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. CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements. CIA: The focus of the CIA is to recognize competency in internal auditing rather than external auditing as with the CPA.

Certification 7 Four areas emphasized on the CMA exam: OBJECTIVE 7 Four areas emphasized on the CMA exam: Economics, finance, and management Financial accounting and reporting Management report, analysis, and behavioral issues Decision analysis and information systems

End of Chapter 1