1. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Cost Accounting: Foundations & Evolutions, 8e Kinney and Raiborn Chapter 12: Introduction to Cost Management Systems

2. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Relationship of Financial, Management, and Cost Accounting FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING COST ACCOUNTING

4. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. The design of the CMS is influenced by  Organizational form, structure, and culture  Organizational mission and core competencies  Operations and competitive environment and strategies Cost Management System Design

9. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 Organizational Culture

12. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. CMS Elements Motivational elements Information elements Reporting elements

16. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Implement CMS Gap Analysis  Identify gap to overcome  Prioritize differences  Develop and deploy improvements  Repeat process to ensure continuous improvement

17. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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

18. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Questions Why do companies have management control systems? How does the external operating environment affect the cost management system? What is gap analysis?

19. © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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