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Design of Cost Management Systems: An Introduction

Imanuel Goestaman

Financial Accounting vs. Management Accounting

Cost Accounting in FA vs. MA

Financial Accounting
Uses cost accounting information for external reporting

Conforms to GAAP Highly aggregated Historical

Management Accounting
Uses cost accounting information for internal purposes planning, controlling, decision, ma ing, and performance e!aluation

"egmented Current #ele!ant

$hen cost accounting is shaped and dominated %y financial accounting needs, the information generated may %e of limited !alue to managers

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Management Information System

& A structure of interrelated elements that & collects, organi'es, and communicates data so managers may & plan, control, e!aluate performance, and ma e decisions & (mphasi'es satisfying internal demands for information rather than external demands

& )ecause one of the managerial functions re*uiring information is control, the MI" is part of the Management Control "ystem +MC",-

Information Flows and Type of Informations

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Control System Components

A Control "ystem has the follo.ing four primary component/
0etector or sensor, .hich is a measuring de!ice that identifies .hat is actually happening in the process %eing controlledAssessor, .hich is de!ice for determining the significance of .hat is happening- Usually, significance is assessed %y comparing the information on .hat is actually happening .ith some standard or expectation of .hat should %e happening(ffector, .hich is a de!ice that alters %eha!ior if the assessor indicates the need for doing so- 1his de!ice is often called 2feed%ac 3 Communications net.or , .hich transmits information %et.een the detector and the assessor and %et.een the assessor and the effector-

Management Control Systems

For example/ "ource documents +detectors, gather information a%out sales that is compared to the %udgets +assessor,- If sales re!enues are %elo. %udget, management may issue +communication net.or , a !ariance report +effector, to encourage the sales staff to increase !olume-

Cost Management System (CMS

Formal methods to plan and control an organi'ation4s cost5 generating acti!ities .ith ma6or challenges of/ Achie!ing profita%ility in the short run Maintaining a competiti!e position in the long run Primary functions of cost management systems/ Measure cost of good sold and !alue in!entory for the financial reporting function (stimate costs of acti!ities, products, ser!ices, and customers Pro!ide economic feed%ac to employees and operators a%out process efficiency

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Integrated Cost Management System

Marketing Quality Control Financial Accounting Production Reporting

Cost Accounting
Inventory Management

Research and Development

Production Planning and Scheduling

Dual Focus of CMS

CMS !alue to Management

Critics to management accounting practices/
7ac of rele!ance Cost distortions Inflexi%ility Incompati%ility .ith .orld5class approaches Inappropriate lin s to financial accounts

1he inherent connnections %et.een cost accounting and operations, .here%y a CM" %rings !alue to management, can %e explored in terms of/
#ele!ance Cost !isi%ility Flexi%ility "upport for ad!anced approaches Appropriate lin s to financial accounts

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Cost Management System "oals

0e!elop product costs Assess product8ser!ice life5cycle performance Impro!e understanding of processes and acti!ities Control costs Measure performance Allo. pursuit of organi'ational strategies CM" informations ena%le managers to perform analyses on/
determining core competencies and organi'ational constraints positi!e and negati!e financial and non5financial factors of strategic and operational plans

Designing a Cost Management System

ANALYZE DETERMINE desired outputs PERFORM gap analysis Improve ASSESS gap reduction

Designing A Cost Management System

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Designing A Cost Management System

A generic cost management system cannot %e 2pulled of the shelf 3 and applied to any organi'ation- (ach firm .arrants a cost management system that is tailored to its situation0esigning a CM" %egin .ith analy'e/ 9rgani'ational form, structure, and culture 9rgani'ational mission and core competencies 9perations +including suppliers, and competiti!e en!ironment and strategies-

#rgani$ational Form% Form% Structure% Culture

Choice of form affects
Cost of raising capital Cost of operating %usiness Cost of litigating "tatutory authority to ma e decisions

Forms of %usiness include

Corporations, Partnerships, 77Ps, 77Cs

#rgani$ational Form% Structure% Structure% Culture

0istri%ute authority and responsi%ility
Centrali'ed, decentrali'ed decision ma ing

Group su%units
geographically %y similar missions %y natural product clusters

0etermine accounta%ility for cost management and organi'ational control

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#rgani$ational Form% Structure% Culture

Underlying set of assumptions a%out entity and goals, processes, practices, and !alues that are shared %y its mem%ers

#rgani$ational Mission and Core Competencies

)usiness mission regarding competition
A!oid competition

0ifferentiation Cost 7eadership

Confront competition

)usiness mission in relation to product life cycle

#rgani$ational Mission and Core Competencies

1imeliness :uality Customer ser!ice (fficiency and cost control #esponsi!eness to change Cost management system gathers data and reports a%out core competencies

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#perating and Competitive &nvironment and Strategies

Fe.er costs suscepti%le to short5run control Cost management efforts targeted to.ard
the longer term capacity management

0ecreased flexi%ility .hen responding to a change in short5 term conditions

#perating and Competitive &nvironment and Strategies

)eing first to mar et 5 pricing flexi%ility increase

mar et share or large per5unit profit

#educe product cost su%stantially
de!elop ne. production processes capture learning cur!e effects increase capacity utili'ation create a focused factory arrangement design for manufactura%ility, logistical support, relia%ility, maintaina%ility

#perating and Competitive &nvironment and Strategies

"upplier relations
lin electronically

Integration of entire information system

payroll in!entory %udgeting costing

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CMS &lements
Moti!ational elements Informational elements #eporting elements

CMS &lements
& Moti!ational elements
Performance measurements #e.ard structure "upport of organi'ational mission and competiti!e strategy

CMS &lements
& Moti!ational elements

& Informational elements

"upport %udgeting process Identify cost dri!ers #educe8eliminate non5!alue5added acti!ities (mphasi'e product life cycle Adapt to changing competiti!e conditions #elate cost to product8process design Focus on capital spending Minimi'e cost distortions

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CMS &lements
& Moti!ational elements & Informational elements & #eporting elements
Prepare financial statements Implement responsi%ility accounting system

Implement CMS
Perform GAP analysis Information ;eeds +Information A!aila%le, Gap to 9!ercome

GAP

Implement CMS
Gap Analysis Identify gap to o!ercome Prioriti'e differences 0e!elop and deploy impro!ements
GAP

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Four' Four'Stage Model of Cost System Design

&valuating Costing Maturity (evel

GAP

D#CMS as A (earning )rocess

..... how companies can migrate from inadequate,

traditional cost systems to a destination where cost and performance measurement systems are explicitly designed to produce the right information at the right time for essential managerial learning, decisions, and control. +<aplan and Cooper, =>>?,

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*eferences
)arfield, @esse 1-, Cecily A- #ai%orn, and Michael #- <inney- ABBB- Cost Accounting:Traditions & nno!ations, Ced- "outh5$estern Colloge Pu%lishing/ Mason, 9hioCooper, #o%in and #o%ert "- <aplan- =>>?- Cost & "ffect: #sing ntegrated Cost $ystems to %ri!e &rofita'ility and &erformance- Har!ard )usiness "chool Press/ )oston, MassachusettsCooper, #o%in and #o%ert "- <aplan- =>>>- The %esign of Cost (anagement $ystems, Aed- Prentice5Hall, Inc-/ Upper "addle #i!er, ;e. @erseyInternational Federation of Accountants- ABB>- nternational )ood &ractice )uidance: "!aluation and mpro!ing Costing in *rgani+ations- Professional Accountants in )usiness Committee, International Federation of Accountants/ ;e. Dor , ;e. Dor "ten'el, Catherine and @oe "ten'el- ABBE- "ssentials of Cost (anagement@ohn $iley F "ons/ Ho%o en, ;e. @ersey-

Course Topics (Tentative

Week Topic

= A E C G H I ? > =B == =A =E5=C

0esign of Cost Management "ystems/ An Introduction (!aluating and Impro!ing Costing in 9rgani'ations "tage II/ "tandard Cost F Flexi%le )udgeting "ystems "tage III "ystem for 7earning F Impro!ement/ Upgrading F "upplementing "ystems "tage III "ystem for 7earning F Impro!ement / <ai'en Costing F Pseudo5Profit Centers Measuring the Cost of #esource Capacity/ Acti!ity5)ased Costing F 1heory of Costraints 9perational A)M/ "uccess F Failure of Implementation A)C "ystems 1ime 0ri!en Acti!ity5)ased Costing F #esource Consumption Accounting "trategic A)M for Customers and "uppliers "trategic A)M for Product 0e!elopment/ 1arget Costing Applying A)C F A)M in "er!ice Industries and "mall )usiness "tage IJ/ Integrated Cost "ystems Final Pro6ect/ Consultation and Presentation

Assessment
Components of Assessment INDIVIDUAL PERFORMANCE $rittenAssignment +personal feed%ac , Participation in Class 0iscussion $ritten (xamination +open %oo , Indi!idual 1eam.or A%ility +peer assessment, GROUP PERFORMANCE Case and @ournal Assignment Final Pro6ect TOTAL 100 EGK 5 EGK AGK AGK GBK 100 GK =GK EBK =BK HGK GK =GK ABK =BK GBK MID FINAL

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