chapter 2 introduction to cost management systems
TRANSCRIPT
Chapter 2
Introduction to Cost Management Systems
Learning Objectives
1. How do control systems aid managers in
achieving organizational goals and objectives?
2. What is a cost management system and what
major factors influence its design?
C2
3. How are accounting systems influenced by both external and internal reporting
requirements?
4. How are product and period costs differentiated?
5. How can product costing and valuation systems be compared and contrasted?
C2
Continuing . . . Learning Objectives
6. How is an actual costing system different from normal and
standard costing systems?
7. How do the internal and external operating environments
impact cost management systems?
C2
Continuing . . . Learning Objectives
8. How does the product life cycle affect cost management
strategies?
9. What three groups of elements affect the design of a cost
management system and how are these elements used?
C2
Continuing . . . Learning Objectives
10. How is gap analysis used in the implementation
of a cost management system?
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Continuing . . . Learning Objectives
Management InformationCompeting in the global marketplace requires managers to have
access to information that supports effective and efficient operation
of their business.
The Value Chain
and Information Flows
Inputs Outputs
Feedback Feedback
Parts,Materials,Services
Completed Goodsor Services
The Value Chain
CustomersInternal Processes
Suppliers
Control Systems
are managerial tools for implementing plans. A
control system has the following four primary
components:
1. A detector or sensor
2. An assessor
3. An effector
4. A communications network
Elements of Control Systems
ControlDevice
EntityBeing
Controlled
1. Detector (sensor). Information about what is happening
2. Assessor. Comparison with standard
3. Effector. Behavior altering communication, if needed
Continuing . . . Control Systems
A detector or sensor is a measuring device that identifies what is actually happening in the process being controlled.
Continuing . . . Control Systems
An assessor is a device for determining the significance of what is happening.
Usually, significance is assessed by comparing the
information on what is actually happening with some
standard or plan of what should be happening.
Continuing . . . Control Systems
An effector is a device that alters behavior if the assessor indicates the need for doing so.
This device is often called “feedback.”
Continuing . . . Control Systems
A communications network transmits
information between the detector and the
assessor and between the assessor and the
effector.
Cost Management Systems
A cost management system (CMS) is a set of formal methods developed for controlling an organization’s cost-generating activities relative to its goals and objectives. A CMS is not merely a system for minimizing the costs incurred by an organization. Rather, a CMS should help an organization obtain maximum benefits from incurring costs.
Continuing . . .
Cost Management Systems
A CMS should help managers• Identify the cost of resources consumed in performing
significant activities of the firm (accounting systems);
• Determine the efficiency and effectiveness of the activities performed (performance measurement);
• Identify and evaluate new activities that can improve the future performance of he firm (investment management); and
• Accomplish the three previous objectives in an environment characterized by changing technology (manufacturing processes)
An Integrated Cost
Management System
Cost Accounting
Marketing FinancialAccounting
ProductionReporting
InventoryManagementProduction
Planning,Schedule
Researchand
Development
Quality Control
Integrating External
and Internal Information Needs
Financial accounting focuses on external users and is generally required for obtaining loans, preparing tax returns, and reporting to the investment community how well or poorly the business is performing.
Management accounting refers to the gathering and application of information used to plan, make decisions, evaluate performance, and control an organization.
Financial and Management
Accounting Differences
Primary users External Internal
Primary organizational focus Whole Parts (segmented)
Information characteristics Must be May be
Historical Forecasted
Quantitative Quantitative or qualitative
Monetary Monetary or nonmonetary
Accurate Timely and, at a minimum, a reasonable estimate
Overriding criteria GAAP Situational relevance (usefulness)
Consistency Benefits in excess of cost
Verifiability Flexibility
Recordkeeping Formal Combination of formal and informal
Financial Management
Financial, Management, and
Cost Accounting Overlap
Financial Accounting
CostAccounting
ManagerialAccounting
The Conversion Process:
Service Company
PurchaseSupplies
Use Supplies, Labor,Overhead to provide
service
Ready tosell to
customer
The Conversion Process:
Service Company
Supplies Inventory
Work in ProcessInventory
Cost of Services Rendered
The Conversion Process:
Merchandise Company
Purchase
Merchandise
Prepare for sale by putting on display
Ready tosell to
customer
The Conversion Process:
Merchandise Company
Merchandise
Inventory
Cost ofGoodsSold
The Conversion Process:
Manufacturing Company
PurchaseMaterials
Use Materials, Labor,Overhead to make
product
Ready tosell to
customer
The Conversion Process:
Manufacturing Company
MaterialsInventory
Work in ProcessInventory
FinishedGoods
Inventory
Cost ofGoodsSold
Product Costs and Period Costs
• Product (inventoriable)– Carried as an asset
– Expensed when sold
• Period– Generally associated with time
– Has future benefit — asset
– Has no future benefit — expense
Cost Classifications
for Financial Reporting
Examples of Product Costs:
• Purchased materials
• Factory insurance premium
• Factory utility costs
• Depreciation on factory building
• Property taxes on factory
• Supplies used in factory
Cost Classifications
for Financial Reporting
Examples of Period Costs:• Salaries of office personnel
• Depreciation on office building
• Expense of shipping finished goods
• Insurance premium on office building
• Property taxes on office building
• Advertising/Promotion expenses
• Costs of recruiting sales personnel
Distribution Costs
• Any cost incurred to fill an order for a product or service
• Includes warehousing, delivering, and/or shipping
• Expensed
Product Cost for
Merchandising Company
Beginning inventory+ Cost of merchandise purchased - Ending inventory
= COST OF GOODS SOLD
Product Cost for
Service Company
Supplies + Labor+ Overhead
(No Inventories)
= COST OF SERVICES RENDERED
Product Cost for
Manufacturing Company
Beginning work in process inventory+ Materials used+ Direct labor cost+ Overhead incurred or applied- Ending work in process inventory= COST OF GOODS MANUFACTURED+ Beginning finished goods inventory- Ending finished goods inventory
= COST OF GOODS SOLD
Costing Systems
Job order and process costing are the two primary costing systems.
Job order costing is used by entities that produce limited quantities of custom-made goods or services that conform to specifications designated by the purchaser.
Examples: a commercial construction firm that builds skyscrapers or an accountant who has her own tax practice
Continuing . . . Costing Systems
Process costing is used by entities engaged in the continuous, mass production of large quantities of homogeneous goods.
Example: manufacturers of soft drinks, saltwater taffy, and gasoline
Measurement Methods
The three primary methods of measurement are:
1. actual costing
2. normal costing
3. standard costing
Organizational Mission and
Critical Success Factors
Clarification of mission can be served by identifying the organization’s critical success factors (CSFs), which are dimensions of operations that are so important to an organization’s survival that, with poor performance in these areas, the entity would cease to exist.
Continuing . . . Organizational
Mission and Critical Success Factors
Once managers have gained consensus on the entity’s CSFs, the cost management system can be designed to1. gather information related to measurement of those
items and
2. generate output about those CSFs in forms that are useful to interested parties such as top managers.
Classification of Cost by Behavior
Fixed Cost Behavior Variable Cost Behavior
$$ Relevant Range
Number of Units Produced Number of Units Produced
Elements of a Cost
Management System
A cost management system is composed of a set of the following three primary elements:– motivational– informational– reporting
Motivational Elements
• Performance measurements• Reward structure• Support of organizational mission and
competitive strategy
Informational Elements
• Support of budgeting process• Emphasis on product life cycle• Differentiation of value-added and non-value-
added activities• Support of target costing• Focus on cost control• Assessment of core competencies and support
of decision making
Reporting Elements
• Preparation of financial statements• Provision of details for responsibility
accounting system
Design of a Cost
Management System
Analyze
Determine
Perform
Assess
Continuous improvement