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Introduction to Cost Introduction to Cost ManagementManagement 1

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Financial Accounting Versus Financial Accounting Versus Management Accounting: A Management Accounting: A Systems FrameworkSystems Framework

• Accounting information systems• Financial accounting

• Produces outputs for external users. Follows rules and conventions such as those set by the SEC and FASB. Creates outputs such as financial statements.

• Cost management accounting• Produces outputs for internal users. Designed to

cost services, products and other objects. Is used in planning and control and decision making. Criteria and formats set internally. Outputs include reports, schedules and analyses.

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Cost management Cost management accounting information accounting information systemsystem

• Two major subsystems• Cost accounting information system

• Assigns costs to individual products and services. Assists external financial reporting by valuing inventories and determining cost of sales. These assignments must conform to external rules.

• Operational control information system• Provides accurate and timely feedback

concerning performance. Improve profit by increasing customer value.

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Factors Affecting Factors Affecting Cost ManagementCost ManagementAdvances in Information Technology

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• 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

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Factors Affecting Factors Affecting Cost ManagementCost ManagementAdvances in Management Environment

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• 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.

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Factors Affecting Factors Affecting Cost ManagementCost ManagementCustomer Orientation

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• 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.

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 Factors Affecting Cost ManagementCost ManagementTime as a Competitive Element

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• 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.

Efficiency

While quality and time are important, improving these dimensions without corresponding improvements in financial performance may be futile, if not fatal.

The Role of Today’s Cost and The Role of Today’s Cost and Management AccountantManagement AccountantThe ControllerFinancial reportsSEC reportingTax planning and reportingPerformance reporting Internal auditingBudgeting Accounting systems and

internal controls

The TreasurerCollection of cashMonitoring of cash

paymentsMonitors cash availabilityShort-term investmentsShort and long-term

borrowingIssuing of capital stock

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Information for Planning, Information for Planning, Controlling, Continuous Controlling, Continuous Improvement, and Decision Improvement, and Decision MakingMaking

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Planning is the detailed formulation of future actions to achieve a particular end. Planning requires setting objectives and identifying methods to achieve those objectives.

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.

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Information for Planning, Information for Planning, Controlling, Continuous Controlling, Continuous Improvement, and Decision Improvement, and Decision MakingMaking

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Continuous improvement is required in a dynamic environment if a firm is to remain competitive or to establish a competitive advantage.

Decision making is the process of choosing among competing alternatives

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CertificationCertification 5

• 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.

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CertificationCertification 5

1) Business analysis

2) Management accounting and reporting

3) Strategic management

4) Business applications

Four areas emphasized on the CMA exam: