Introduction to Cost Management
I. FINANCIAL ACCOUNTING VERSUS COST MANAGEMENT:
A SYSTEMS FRAMEWORK
A system is a set of interrelated parts that performs one or more processes to accomplish specific objectives.
An accounting information system consists of: objectives, interrelated parts, processes, and outputs. Inputs are generally economic events and the operational model of an accounting system is critically involved with the user of information.
There are two basic accounting information systems:
1) Financial accounting information system - primarily concerned with producing outputs for external users.
2) Cost management information system - primarily concerned with producing outputs for internal users using inputs and processes needed to satisfy management objectives. Because managers in many different areas of a business require cost information, a highquality cost management system should have an organization-wide perspective and be able to interact with other information systems within the organization. Cost Accounting System
Cost accounting attempts to satisfy three broad objectives for both financial and management accounting:
1. Costing of products, services and other objects of interest to management; 2. Planning and control: and
3. Decision making.
The first objective depends on the nature of the object being costed and the reason management wants to know the cost. Product costs include the cost of materials, labor and overhead. Managers want to know costs associated with products associated with products for tactical and strategic purposes. Different Systems for Different Purposes
Cost Accounting Information System: a cost management subsystem designed to assign costs to individual products and services and other objects as specified by management. Operational Control Information System: a cost management subsystem designed to provide accurate and timely feedback concerning the performance of managers and others relative to their planning and control of activities.
II. FACTORS AFFECTING COST MANAGEMENT
1) Global competition – Vastly improved transportation and communications have led to a global market for many manufacturing and service firms. For example, large US companies such as the Coca-Cola Company are developing sizable markets in China. This global focus highlights the need for cost information to reduce costs, improve productivity, and assessing product-line profitability.
2) Growth of the service industry – Traditional manufacturing industries have declined in importance. The service sector comprises approximately three-quarters of the U.S. economy and employment. Deregulation of many services such as airlines and utilities has increased competition in the service industry.
Advances in information technology – Automation and integration increase the need for timely, detailed information. Significant advances in technology include computer-integrated manufacturing and the availability of personal computers, spreadsheet software, and graphics packages.
4) Advances in the manufacturing environment – Manufacturing management approaches continue to be utilized to quality, reduce inventories, eliminate waste, and reduce costs. a). Theory of constraints – A method used to continuously improve manufacturing activities and nonmanufacturing activities.
b). Just-in-time management – A demand-pull system that strives to produce a product only when it is needed and only in the quantities demanded by customers. c) . Computer-integrated manufacturing – The automation of the manufacturing environment.
5). Customer orientation – Firms are concentrating on the delivery of value to the customer in order to establish competitive advantage.
6) New product development – A significant proportion of production costs are incurred during the development and design stages. There is a high demand for more sophisticated cost management tools related to new product development....
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