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CHAPTER 12
INTRODUCTION TO COST MANAGEMENT SYSTEMS
QUESTIONS
1. The only realistic method of evaluating whether costs are being effectively man-
be accomplished from incurring the costs.
2. A control system is a tool to aid managers in steering an organization to the
3. Organizations typically have goals and objectives for both the short and long
viable.
4. Every organization is unique in its objectives, constraints, culture, strategies, and
management system.
5. Organizational form influences the cost management system design in several
those costs affect other costs such as the cost of acquiring public or private capital.
6. Core competencies are activities a firm must execute well to survive. Information
performance in areas of core competencies.
7. Organizational culture can be an effective control device. A culture is a reflection
that are consistent with the culture. In this manner, the culture is perpetuated and
the employees have homogeneous beliefs regarding behaviors.
8. The life-cycle stage determines which costs are important and which costs are
controllable. For example, in the design stage, no production costs are being in-
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9. Cost management has risen to the top of concerns because it has become a prima-
ry determinant of profitability. Because competition is increasingly a contest
among equals, the balance of power in the marketplace has been shifted to the
consumer, who now has many choices of competitive products and services. With
10. CAM-I is a consortium organized to develop a framework for the design of cost
management systems in advanced manufacturing settings. One outcome of CAM-I
was a set of principles for designing cost management systems. Although compat-
ible with existing cost accounting systems, the set of principles as a whole sug-
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EXERCISES
11. Without management controls, firms lack the necessary coordination between
their strategies and the management and application of scarce resources such as
Preparing a budget would have forced the group to consider how to deal with cash
shortages and would have been a valuable benchmark for evaluating actual costs
and revenues.
12. a. The assessor is the device that compares actual results with expectations and
calculates variances.
c. The effector implements changes that act on the differences between expecta-
tions and actual results to cause the actual results to align with expectations.
13. Two observations arise from an examination of the data. First, Firm A is generating
more profit per dollar of sales than is the average firm in the industry. Although the
average firm generates profit equal to 10 percent of sales ($0.096 ÷ $0.96), Firm
SPENDING AS A PERCENTAGE OF SALES
Firm A
Industry Average
Advertising
2%
17%
R&D
8%
25%
Facilities investment
10%
25%
engaging in fraudulent financial reporting.
14. a. The focus of management would be on quality and customer satisfaction. Quali-
ty could be assessed from both an internal and external perspective. For exam-
or surveys.
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b. The key to the survival of this business is generating sales from the first prod-
uct and completing the development of the other products. Accordingly, the
c. The focus would be on operating efficiency. Because this industry is charac-
ciency.
15. The paper should, at a minimum, discuss the following points:
zational forms.
The general partnership is the least expensive form to organize.
Outside capital is easier to raise in the corporate form because of the limited
ondary markets for publicly traded stocks.
Separation of ownership and management is most difficult in the general part-
17. The discussion should center on how B2B could increase competition among
crease the competition among potential vendors for the privilege of supplying
the small customer.
19. The old adage “you get what you measure” applies to the use of accounting in-
nonfinancial performance measures may serve to strengthen the tie between
accounting information and goals.
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Only if the accounting information is accurate will it serve to promote goal
congruence and goal achievement.
will affect their welfare if their evaluation, pay, and promotion are based on
accounting measurements.
21. a. The motivational elements create the incentive and reward for managers to
perform at a high level. Because the accounting system is used to measure the
the measurement rather than achieving high performance.
b. The behavior is both unethical and illegal. Manipulating the accounting sys-
results.
22. a. Reporting stock option expense in the footnotes achieves two effects. First,
true management compensation becomes less transparent to stockholders and
note disclosures.
b. The practice was misleading only to financial statement users who were not
c. The research will reveal that “backdating” involves issuing the options on one
monly issued “at the money.”
23. Each student will have a different answer, but the memo should include the fol-
lowing points. Gap analysis begins with specifying the desired CMS. Once the de-
the desired system.
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24. One would begin by identifying the needed components of a CMS given the cur-
that need to be addressed. Because of constrained resources, it is unlikely that all
in step one.