Learning Objectives
1. Why do organizations have management control systems?
2. What is a cost management system?
3. What are the organizational roles of a cost management system?
INTRODUCTION TO COST
MANAGEMENT SYSTEMS
CHAPTER
12
Chapter 12: Introduction to Cost Management Systems IM 2
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Terminology
Black box: an operation whose exact nature cannot be observed
Cost management system (CMS): a set of formal methods developed for planning and controlling
Cost structure: the relative composition of an organization’s fixed and variable costs and, thus, how
Enterprise resource planning (ERP) systems: packaged business software systems usually
Gap analysis: the study of the differences between two information systems, often a current system
and a proposed system
Management control system (MCS): an information system that helps managers gather
information about actual organizational occurrences, make comparisons against plans, effect
Management information system (MIS): a structure of interrelated elements that collects,
Organizational culture: the underlying set of assumptions about the entity and the goals,
Organizational form: an entity’s legal nature (for example, sole proprietorship, partnership,
corporation)
Profit sharing: an incentive payment to employees that is contingent on the level of organizational
profit generated
Radio frequency identification (RFID): a process that uses exceptionally small “flakes” of silicon to
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Lecture Outline
LO.1: Why do organizations have management control systems?
A. Introduction
benefits.
3. Even though directly linked to the managerial functions of planning, controlling, decision
financial reporting demands.
5. This chapter introduces management information and control systems, which offer a
a system first introduced in Chapter 2.
a. The chapter also discusses concepts and approaches to designing information systems
compose the system.
control system.
2. Text Exhibit 12.1 (p. 475) illustrates the types of information needed in an organization to
3. A management information system (MIS) is a structure of interrelated elements used to
external demands.
b. In most modern organizations, the MIS is computerized for ease of access to
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4. The accounting function is charged with the task of providing information to interested
5. Managers use internally and externally generated information to manage their organizations.
6. The MIS is part of the management control system.
a. As illustrated in text Exhibit 12.2 (p. 476), a control system has the following four
primary components:
happening in the process being controlled;
ii. an assessor, which is a device for determining the significance of what is happening.
Usually, significance is assessed by comparing the information on what is actually
the assessor and between the assessor and the effector.
b. A management control system is not merely a mechanical process, it also requires the
application of judgment.
LO. 2: What is a cost management system?
C. Defining a Cost Management System
1. A cost management system (CMS) consists of a set of formal methods developed for
objectives and long term strategies.
2. An effective CMS helps managers face two major challenges:
a. achieving profitability In the short-run; and
b. maintaining a competitive position in the long-run.
organizational success in the short-run and long-run.
5. Text Exhibit 12.5 (p. 478) illustrates how a CMS should integrate information from all areas
Chapter 12: Introduction to Cost Management Systems IM 5
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LO.3: What are the organizational roles of a cost management system?
D. The Roles of a Cost Management System
1. A CMS can be viewed as having six primary goals:
a. to develop reasonably accurate product costs, especially through the use of cost drivers;
b. to assess product/service life-cycle performance;
c. to improve understanding of processes and activities;
d. to control costs;
e. to measure performance; and
products and services.
b. Traceability has been made easier by improved information technology, including bar
3. The product/service costs generated by the CMS constitute the input to managerial
incurred in one part of the life cycle to costs and profitability of other parts.
5. A CMS should help managers understand business processes and organizational activities
so that they can make cost-beneficial improvements in production and processing systems.
6. The cost accounting system’s original purpose was to control costs, and in today’s global
known, and the information is available.
performance.
8. To maintain its competitive position, a firm must generate information necessary to define
and implement its organizational strategies. Therefore, the CMS must be flexible.
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LO.4: What factors influence the design of a cost management system?
E. Designing a Cost Management System
1. The CMS must be tailored to the unique characteristics of the firm.
a. Some overriding factors important in designing a CMS are shown in text Exhibit 12.6 (p.
2. Organizational form, structure, and culture
a. An entity’s legal nature is reflected in its organizational form. A firm may operate in the
b. Organizational structure refers to how authority and responsibility for decision making
are distributed in an entity.
i. Although the current competitive environment is conducive to a high degree of
ii. In designing the organizational structure, top managers normally try to group
iii. Text Exhibit 12.7 (p. 481) describes the three generic missions that business
subunits can pursue (build, harvest, or hold).
Subunits pursuing a “build” mission use more cash than they generate. Such
At the other extreme, subunits pursuing a “harvest” mission are expected to
Between the build and harvest missions is the hold mission which applies to
iv. The extent to which managers delegate also determines who will be held
accountable for cost management and organizational control. Thus, the CMS must
continuous improvement.
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3. Organizational mission and core competencies
designing a CMS.
i. The mission provides a long-term goal toward which the organization wishes to
move.
b. In pursuing their mission, companies can either avoid or confront competition.
i. Differentiation is the most common approach to avoiding competition.
served.
ii. Another way to avoid competition is to establish a position of cost leadership by
iii. Confrontation is a strategy in which companies still try to differentiate their products
prices.
c. Text Exhibit 12.8 (p. 482) illustrates how the strategy of the firm, together with the life
cycle stages of products, determines what a firm must do well to be successful at any
point in time.
i. The exhibit also illustrates how the information requirements of managers change
pursued.
d. An organization can clarify its mission by identifying core competencies.
i. Core competencies are the operational dimensions that are key to an organization’s
survival.
ii. Most organizations consider timeliness, quality, customer service, efficiency and
parties.
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4. Operations and Competitive Environment and Strategies
organizational “big picture” has been established.
b. The firm’s cost structure is a primary consideration.
i. Cost structure has traditionally been defined in terms of relative proportions of fixed
use of automated technology.
iii. The cost management implications of this shift in cost structure are significant.
iv. The management of fixed costs is partially a matter of capacity management: high
higher levels of technological investment.
c. In pursuing either a differentiation or cost leadership strategy, the management of high
d. Monitoring the external environment is a key activity to managing revenues and costs
surface.
ii. Faster time to market and shorter product life cycles are pushing companies into
iii. Reducing time to market is one way a company can cut costs. Text Exhibit 12.9 (p.
484) describes other techniques.
product innovation and superior product design.
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i. A firm may have to incur costs associated with design flaws (such as the cost of
during development.
g. Time to market is important because of the competitive advantages it offers and
because of compressed product life cycles. The faster a product gets to market, the
evaluated to determine answers to the following questions:
i. What input data are being gathered and in what form?;
ii. What outputs are being generated and in what form?;
iii. How do the current systems interact with one another and how effective are those
interactions?;
desired?; and
v. What significant information issues (such as yield, spoilage, and cycle time) are not
j. With knowledge of the previous information, management must analyze the cost-benefit
management systems are required.
ii. As companies focus on customer satisfaction and their product and service offerings
expand, the generation of better cost information is essential to long-run
organizational survival and short-run profitability.
k. Proper incentives and reporting systems must be incorporated into the CMS to motivate
LO.5: What are the three groups of elements that comprise a cost management system, and
what are the purposes of these elements?
F. Determine Desired Components of CMS