Cost Management

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Cost Management

• Introduction

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Learning Objectives

• 1. Similarities and differences between financial
  accounting and cost accounting
• Cost accountings support to MA FA
• Business functions in the value chain
• Dimensions of performance from customers
  perspective
• Planning control decisions of managers

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Learning objectives

• 6. Different roles of management accounting
• 7. Guidelines followed by management accountants
• 8. Management accounting organisation structure
• 9. Professional ethics MA

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Limitations of FA

• No operating details of particular departments
• Does not ensure control over material use does
  not help in wastage avoidance
• Costs are not assigned to products, departments,
  divisions, etc.
• No standards for comparison
• Loss is not analysed taking idle time, defective
  material, etc.
• Does not help in pricing decisions
• No information for managerial decisions such as
  shut down or continue, deciding about
  product-mix, buy or manufacture, etc.

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Management accounting

• Extension of managerial aspect of cost
  accounting.
• Uses tools of both financial a/c cost a/c for
  decision making and control.
• Cost accounting- cost control is of prime
  importance.
• Management accounting- primary emphasis is on
  decision making (Mgt. a/c employs many techniques
  from OR, statistics, etc.)

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GROUNDS OF DIFFERENCE FINANCIAL ACCOUNTING COST ACCOUNTING
Purpose B/S, PL A/C, CFS General Purpose Cost Information for planning, decision making control Special purpose Different costs for different purposes
For Whom? External Users Internal Users
Coverage Total organisation Segmental (product, process, job, depart., etc.)
Control Does not provide for control of elements of cost Provides
Principles GAAP Need driven
Need Statute demands Optional, need driven except when cost a/c record rules provide
Reporting Time Accounting Year Need based (planning and control)
Basis of measurement Monetary terms Could be physical also (like labour hours, machine hours,etc.)
Use of standards No standards to compare performance and evaluate efficiency Standards are used
Information Historical Projects past into future
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Strategic decisions MA

• Strategy formulation
• Building resources and capabilities
• Implementing strategy

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Building resources and capabilities

• Current assets
• Long term productive assets
• Intangibles

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Planning and Controlling
Management Decision
Management Accounting System
Planning
Budgets
Feedback
Control
Accounting System
Performance Evaluation
Performance Reports
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Planning and Controlling
What is planning?
Setting goals
Predicting results
Deciding how to attain goals
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Planning and Controlling
What is control?
Deciding and taking actions
Deciding on performance evaluation and feedback
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Roles of MA- Problem solving
This involves comparative analysis for decision
making.
This role asks Of the several alternatives availa
ble, which is the best?
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Scorekeeping
This involves accumulating data and reporting
reliable results to all levels of management.
This role asks How is the business doing?
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Attention Directing
This involves helping managers properly focus
their attention.
This role asks Which opportunities and problems
should be emphasized first.
Attention directing should focus on
all opportunities to add value to an
organization, not just cost-reduction
opportunities.
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Cont.

• Strategic decisions and planning decisions
  problem solving role is most important
• Control decisions the later two roles are
  important

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Key Themes in ManagementDecision Making
Customer Focus
Value Chain and Supply Chain Analysis
Key Success Factors Cost and Efficiency, Time,
Quality, Innovation
Continuous Improvement and Benchmarking
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Customer Focus
continue investing sufficient (but not
excessive) resources in customer
satisfaction such that profitable customers are
attracted and retained.
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Value Chain andSupply Chain Analysis
1. Treat each of the business functions in the
value chain as an essential and valued
contributor.
2. Integrate and coordinate the efforts of all
business functions in addition to developing
the capabilities of each individual business
function.
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Key Success Factors
operational factors that directly affect the
economic viability of the organization
Cost continuous pressure to reduce costs.
Quality customers are expecting higher levels
of quality
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Key Success Factors
Time organizations are under pressure
to complete activities faster and to
meet promised delivery dates more reliably.
Innovation continuing flow of innovative
products or services is a prerequisite to the
ongoing success of most organizations.
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Continuous Improvementand Benchmarking
Continuous improvement by competitors creates a
never-ending search for higher levels
of performance within many organizations.
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Value Chain
The term value chain refers to the sequence
of business functions in which usefulness is
added to the products or services of an
organization.
The term value is used because as the
usefulness of the product or service is
increased, so is its value to the customer. MA
provides decision support across value chain
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Value Chain
R D
Design
Production
Management Accounting
Marketing
Distribution
Service
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MAs support to managers- Key Guidelines
1. Cost-benefit approach
2. Full recognition of behavioral as well as
technical considerations
3. Using different costs for different purposes
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Partial Organization Chart, Manufacturing Company
President
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Current Factors Affecting Cost Management
A. Global Competition

• demand for more cost information but also for
  more accurate information quickly

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Current Factors Affecting Cost Management
B. Growth of the Service Industry

• service sector of the economy has increased in
  importance
• deregulation of many services has increased
  competition in the service industry

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Current Factors Affecting Cost Management
C. Advances in Information Technology

• Computer aided operations information
  accumulation and supply of information to
  management instantaneously.
• The emergence of e-commerce allowing buyers and
  sellers to come together electronically

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Current Factors Affecting Cost Management
D. Advances in Management Environment
Just-in-time manufacturing Computer-integrated
manufacturing
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Current Factors Affecting Cost Management
E. Customer Orientation

• value to the customer for establishing
  competitive advantage
• Companies to compete in technology,
  manufacturing, speed of delivery and response

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Current Factors Affecting Cost Management
F. New Product Development

• high proportion of production costs are committed
  during the development and design stage
• cost control- use of target costing and
  activity-based management

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Current Factors Affecting Cost Management
G. Total Quality Management

• Continual improvement and elimination of waste
• A philosophy of total quality management

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Current Factors Affecting Cost Management
H. 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