Cornerstones of cost management 3rd edition hansen mowen chapter 1

FINANCIAL ACCOUNTING VERSUS COST MANAGEMENT: A SYSTEMS FRAMEWORK Accounting Information System • Consists interrelated manual and computer parts • Uses processes such as collecting, reco

CHAPTER 1

INTRODUCTION TO COST

MANAGEMENT

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

FINANCIAL ACCOUNTING VERSUS COST

MANAGEMENT: A SYSTEMS FRAMEWORK

Accounting Information System

• Consists interrelated manual and computer parts

• Uses processes such as collecting, recording,

summarizing, analyzing, and managing data to

transform inputs into information provided to users

Two major systems

• The financial accounting information system

• The cost management accounting information

system

• Major difference is the targeted user

FINANCIAL ACCOUNTING VERSUS COST

MANAGEMENT: A SYSTEMS FRAMEWORK

Financial Accounting Information

System

• Produces outputs for external users

• Follows rules and conventions set by the SEC and

FASB

• Provides outputs such as financial statements

FINANCIAL ACCOUNTING VERSUS COST

MANAGEMENT: A SYSTEMS FRAMEWORK

Cost Management Information System

• Produces outputs for internal users

• Provides information for three broad objectives

• Cost services, products, and other objects

• Planning and control

• Decision making

• Criteria and formats are set internally

FINANCIAL ACCOUNTING VERSUS COST

MANAGEMENT: A SYSTEMS FRAMEWORK

Cost Accounting Information System

• Assigns costs to individual products and services

• Assists external financial reporting

• Conforms to the rules and conventions set by the

SEC and the FASB

Operational Control Information System

• Provides accurate and timely feedback

• Improves profit by increasing customer value

Different Systems for Different Purposes

FACTORS AFFECTING COST MANAGEMENT

Global Competition

• Improved transportation and

communication has led to a global market

• Increased the demand for more accurate

cost information

Growth of the Service Industry

• Service sector of the economy has

increased in importance

• Deregulation has increased competition

FACTORS AFFECTING COST MANAGEMENT

Advances in Information Technology

• Use of computers to monitor and control operations

• Integration of manufacturing with marketing and

accounting data

• Enterprise resource planning (ERP) software

provides an integrated system capability

• Emergence of e-commerce

• Internet trading

• Electronic data interchange

• Bar coding

FACTORS AFFECTING COST MANAGEMENT

Advances in Manufacturing

Environment

• Theory of constraints: method used to

continuously improve manufacturing activities and

nonmanufacturing activities

• Just-in-time manufacturing: strives to produce

a product only when it is needed and only in the

quantities demanded

FACTORS AFFECTING COST MANAGEMENT

Advances in Manufacturing Environment

• Lean manufacturing: a persistent pursuit and

eliminates waste that simultaneously embodies

respect for people

• Computer-integrated manufacturing: an

automation of the manufacturing environment

allowing firms to reduce inventory, increase

productive capacity, improve quality and service,

decrease processing time, and increase output

FACTORS AFFECTING COST MANAGEMENT

Customer Orientation

• Deliver value to the customer

• Value chain: the set of activities required to

design, develop, produce, market, and deliver

products and services to customers

• Satisfy internal customers

FACTORS AFFECTING COST MANAGEMENT

New Product Development

• High proportion of production costs are involved

during the development and design stage of new

products

• Cost management procedures

• Target costing: encourages managers to assess

the overall cost impact of product designs over the

product’s life cycle

• Activity-based management: identifies the

activities produced at each stage of the

development process and assesses their costs

FACTORS AFFECTING COST MANAGEMENT

Total Quality Management

• Continuous improvement and elimination of waste

are the two foundation principles

• Objectives: producing products and services that

actually perform according to specifications and

with little waste

FACTORS AFFECTING COST MANAGEMENT

Time as a Competitive Element

• Crucial element in all phases of the value chain

• Decrease in non-value-added time increases

quality

Efficiency

• Improving efficiency is a vital concern

• Cost is a critical measure of efficiency

THE ROLE OF THE MANAGEMENT

ACCOUNTANT

Line and Staff Positions

• Line positions: positions that have direct

responsibility for the basic objectives of an

organization

• Staff positions: positions that are

supportive in nature and have only indirect

responsibility for an organization’s basic

objectives

THE ROLE OF THE MANAGEMENT

ACCOUNTANT

The Controller

• Supervises all accounting departments

• Participates in planning, controlling, and

decision-making activities

• Responsible for both internal and external

accounting requirements

THE ROLE OF THE MANAGEMENT

ACCOUNTANT

The Treasurer

• Responsible for the finance function

• raises capital and manages cash, investments, and

investor relations

• in charge of credit and collections as well as

insurance

EXHIBIT 1.1—PARTIAL ORGANIZATIONAL CHART:

MANUFACTURING COMPANY

THE ROLE OF MANAGEMENT ACCOUNTANT

Information for Planning, Controlling,

Continuous Improvement, and Decision

Making

• Planning: a detailed formulation of future actions

to achieve a particular end

• Requires setting objectives and identifying methods

to achieve those objectives

• Controlling: a managerial activity of monitoring a

plan’s implementation and taking corrective action

• Achieved with the use of feedback

THE ROLE OF MANAGEMENT ACCOUNTANT

Information for Planning, Controlling,

Continuous Improvement, and Decision

Making

• Continuous improvement: relentless pursuit of

improvement in the delivery of value to customer

• Required to remain competitive or to establish a

competitive advantage

• Decision making: process of choosing among

competing alternatives

ACCOUNTING AND ETHICAL CONDUCT

Benefits of Ethical Behavior

• Creates customer and employee loyalty

• Avoids litigation costs

ACCOUNTING AND ETHICAL CONDUCT

Standards of Ethical Conduct for

Establishes management accounting as a

recognized and professional discipline

Intended for those practicing public accounting

Recognizes competency in internal auditing

END OF CHAPTER 1