(c) 2013 Cengage Learning 1

Introduction to Cost
Management

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 Chapter 1 Objectives

1. Describe cost management and explain how it

differs from financial accounting.
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.
5. Identify the three forms of certification available to
internal accountants.

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 Financial Accounting
vs. Management Accounting:
A Systems Framework
Accounting Information System
• Consists of interrelated manual and computer parts
• Uses processes such as collecting, recording,
summarizing, analyzing, and managing data to
transform inputs into information that is provided to
users.
Two major systems:
• The financial accounting information system
• The cost managerial accounting information system
The biggest difference between the two is the targeted user.

Objective 14
 Financial Accounting
vs. Management Accounting:
A Systems 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
• 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.

Objective 15
 Cost Management
Accounting Information System
• Two major subsystems of the Cost Management
Accounting Information System
• 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.

Objective 16
 Factors Affecting
Cost Management
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.

Objective 27
 Factors Affecting
Cost Management

Growth of the Service Industry

• As the traditional industries have declined in
importance, the service sector of the economy has
increased in importance.
• Deregulation of many services has increased
competition in the service industry.

Objective 28
 Factors Affecting
Cost Management
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

Objective 29
 Factors Affecting
Cost Management
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.
• Lean Manufacturing is the persistent pursuit and
elimination of waste which simultaneously embodies
respect for people.
• Computer-integrated manufacturing is the automation
of the manufacturing environment.
Objective 10
2
 Factors Affecting
Cost Management
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.
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.
Objective 11
2
 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.

Objective 12
2
 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.
Efficiency
• While quality and time are important, improving these
dimensions without corresponding improvements in
financial performance may be futile, if not fatal.

Objective 13
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 The Role of the
Management Accountant

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.

Objective 14
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 The role of today’s
Cost and Management Accountant

Objective 15
3
 The role of today’s
Cost and Management Accountant

The Controller The Treasurer

Financial reports Collection of cash
SEC reporting Monitoring of cash payments
Tax planning and reporting Monitors cash availability
Performance reporting Short-term investments
Internal auditing Short and long-term
Budgeting borrowing
Accounting systems and Issuing of capital stock
internal controls

Objective 16
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Information for Planning, Controlling,
Continuous Improvement,
and Decision Making
Planning is the detailed formulation of future actions to
achieve a particular end.
•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.

Objective 17
3
Information for Planning, Controlling,
Continuous Improvement,
and Decision Making

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

Objective183
Accounting and Ethical Conduct

Benefits of Ethical Behavior

✔ Can create customer and employee loyalty
✔ Avoid litigation costs

Objective194
 Accounting and Ethical Conduct

Standards of Ethical Conduct for Management Accountants

• Competence
• Confidentiality
• Integrity
• Credibility

Objective 20
4
 Certification
• 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.

Objective 21
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 Certification

Four areas emphasized on the CMA exam:

1) Business analysis
2) Management accounting and reporting
3) Strategic management
4) Business applications

Objective 22
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END OF CHAPTER 1
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