CHAPTER 1
INTRODUCTION TO COST MANAGEMENT
Chapter 1 can be covered on the first day of class. Students should understand what cost management is
and how it is changing over time. This chapter is also a good place to introduce a discussion on ethical
behavior. The Institute of Management Accountants’ (IMA) code of ethics is presented on page 14 of the
text. There are several good problems on ethics at the end of the chapter.
LEARNING OBJECTIVES
After studying Chapter 1, students should be able to:
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.
KEY TOPICS
The following major topics are covered in this chapter (related learning objectives are listed for each
topic):
1. Financial Accounting versus Cost Management: A Systems Framework (LO 1)
2. Factors Affecting Cost Management (LO 2)
3. The Role of the Management Accountant (LO 3)
4. Accounting and Ethical Conduct (LO 4)
5. Certification (LO 5)
I. FINANCIAL ACCOUNTING VERSUS COST MANAGEMENT: A SYSTEMS
FRAMEWORK
A key difference between the financial accounting system and the cost management accounting system is
the targeted user. Financial accounting provides information for external users such as investors,
creditors, and regulators. Financial information assists external users with business decisions centering on
a variety of issues such as the purchase and sale of stock, issuance of loans, etc. Cost management has an
internal focus. Cost management identifies, collects, measures, classifies, and reports information that is
used by managers for costing purposes, planning, controlling, and decision making.
Cost accounting attempts to satisfy costing objectives for both financial and management accounting.
Management accounting is concerned specifically with how cost information and other financial and
nonfinancial information should be used for planning, controlling, and decision making. Both the cost
management information system and the financial accounting information system are part of the total
accounting information system.
Because most students will have completed a basic course in financial accounting, the differences
between cost management and financial accounting can be discussed.
II. FACTORS AFFECTING COST MANAGEMENT
Students should understand factors that will impact a company’s cost management system.
1. Global competition – Vastly improved transportation and communications have led to a global
market for many manufacturing and service firms. For example, large U.S. companies such as
The Coca-Cola Company are developing sizable markets in China. This global focus highlights
the need for cost information to reduce costs, improve productivity, and assess product-line
profitability.
2. Growth of the service industry – Traditional manufacturing industries have declined in
importance. The service sector comprises approximately three-quarters of the U.S. economy and
employment. Deregulation of many services such as airlines and utilities has increased
competition in the service industry.
3. Advances in information technology – Automation and integration increase the need for timely,
detailed information. Significant advances in technology include computer-integrated
manufacturing and the availability of personal computers, spreadsheet software, and graphics
packages.
4. Advances in the manufacturing environment – Manufacturing management approaches continue
to be utilized to quality, reduce inventories, eliminate waste, and reduce costs.
a. Theory of constraints – A method used to continuously improve manufacturing activities and
nonmanufacturing activities.
b. Just-in-time management – A demand-pull system that strives to produce a product only
when it is needed and only in the quantities demanded by customers.
c. Lean manufacturing – An approach, which incorporates JIT, that seeks to eliminate or
minimize activities that do not add value to the end user (customer). As a result, lead time is
decreased, production processes are streamlined, and costs are decreased.
d. Computer-integrated manufacturing – The automation of the manufacturing environment.
5. Customer orientation – Firms are concentrating on the delivery of value to the customer in order
to establish a competitive advantage.
6. New product development – A significant proportion of production costs are incurred during the
development and design stages. There is a high demand for more sophisticated cost management
tools related to new product development. Activity-based management is introduced as a system
that will allow management to identify and eliminate non-value-added activities to reduce life
cycle costs.
7. Total quality management – Continuous improvement and elimination of waste are the two
foundation principles that govern a state of manufacturing excellence. A philosophy of total
quality management has replaced the acceptable quality attitudes of the past.
8. Time as a competitive element – Time is a crucial element in all phases of the value chain, and
world-class firms reduce time to market by compressing design, implementation, and production
cycles.
9. Efficiency – Cost is a critical measure of efficiency. Activity-based costing and profit-linked
productivity measurement are introduced as methods to evaluate the overall financial effect of
productivity changes.
Pages 4 through 9 in the textbook provide a basic discussion about these topics. These themes are
expanded throughout the text. Students may be overwhelmed by the short presentation of these topics in
Chapter 1. Emphasize that these topics will be covered in much greater detail in other chapters in the
textbook and that students will probably not fully understand these factors until they have been covered in
subsequent chapters.
III. THE ROLE OF THE MANAGEMENT ACCOUNTANT
The cost and management accountant is responsible for collecting, processing, and reporting information
that will help managers in their planning, controlling, and decision-making activities. This is a good time
to discuss what line and staff positions are, as well as the roles of the controller and treasurer in a
corporation.
Line positions are positions that have direct responsibility for the basic objectives of an organization. Staff
positions are positions that are supportive in nature and have only indirect responsibility for an
organization’s basic objectives. Exhibit 1.1 (p. 10) illustrates an organizational chart for a manufacturing
company. Controller and treasurer are staff functions. The controller is the chief accounting officer who
supervises all accounting departments. The controller is responsible for financial reporting, SEC
reporting, tax planning and reporting, performance reporting, internal auditing, budgeting, accounting
systems, and internal controls. The treasurer is responsible for the finance function. This includes
collection of cash, monitoring cash payments, monitoring cash availability, short-term investing, short
and long-term borrowing, and issuing capital stock.
You should include a brief discussion of the management process. The basic functions of management
include planning, controlling, continuous improvement, and decision making. Planning requires setting
objectives and identifying methods to achieve those objectives. Controlling is the managerial activity of
monitoring a plan’s implementation and taking corrective action as needed. Control is usually achieved
with the use of feedback, which is information that can be used to evaluate or correct the steps being taken
to implement a plan. Continuous improvement requires firms to continually improve their performance to
remain competitive or to establish a competitive advantage. Decision making is the process of choosing
among competing alternatives.
IV. ACCOUNTING AND ETHICAL CONDUCT
A. Benefits of Ethical Behavior
Teaching values is considered by many to be an important part of the current educational process. In part,
this feeling stems from a number of unethical practices that have been highly publicized. Some examples
of moral lapses are reported in the chapter. You may want to cite some with which you are familiar.
Types of ethical issues include abuse of accounting information, acceptance of bribes or gifts, conflict of
interest, and disclosure of confidential information. Ten core values of ethical conduct include honesty,
integrity, promise keeping, fidelity, fairness, caring for others, respect for others, responsible citizenship,
pursuit of excellence, and accountability.
Some believe that teaching ethics to college students is a waste of time. Those holding this view generally
believe that by college age it is too late to change the ethical behavior of individuals. Evidence exists,
however, that moral reasoning can be taught and that age is not a barrier. Furthermore, learning what is
considered acceptable in a business environment is certainly a valid objective. Many, if not most, students
will not have a well-developed understanding of “business” ethical issues.
Teaching hint: After discussing the reasons why teaching value judgments is important, ask the students
to define ethical behavior. This usually provokes a lively discussion.
B. Standards of Ethical Conduct for Management Accountants
The role of professional codes of ethics should be discussed. Professional associations often provide a
well-defined set of ethical standards, which helps to define acceptable and unacceptable behavior. A
hallmark of a profession is a code of ethics. Exhibit 1.3 on page 14 of the text presents the IMA Statement
of Ethical Professional Practice. The four standards of the IMA’s code of ethics are (1) competence, (2)
confidentiality, (3) integrity, and (4) credibility. The IMA code of ethics also includes a discussion of the
resolution of ethical conflict. There are problems and cases in this chapter and throughout the book that
provide additional ethical dilemmas.
V. CERTIFICATION
This section briefly discusses the three major certifications available to internal accountants. Most
students are aware of the Certified Public Accountant (CPA) but are probably not as knowledgeable about
the Certified Management Accountant (CMA) or Certified Internal Auditor (CIA). Explaining why these
two certifications are viable alternatives to the CPA should prove to be interesting for those who are
considering a career in accounting.
The responsibility of the CPA is to provide assurance concerning the reliability of financial statements.
The CMA designation was established to help management accounting to be recognized as a professional
discipline separate from the profession of public accounting. The focus of the CIA is to recognize
competency in internal auditing rather than external auditing.
Teaching hint: Ask students why certification is needed. You may wish to point out that other professions
such as engineering and data processing also have certifications.
VI. INFORMATION ABOUT EXERCISES, PROBLEMS, AND CASES
Exercises and problems are described on the following page according to coverage of content, learning
objective(s), and level of difficulty. The time required to solve the problems is roughly proportional to the
level of difficulty.
In general, basic exercises/problems are fairly simple and straightforward. The text material is relatively
brief; only one or two concepts are covered. Basic exercises and problems should take about 15 to 20
minutes each.
Moderate exercises/problems may take longer and involve more concepts. These problems may have a
“twist” and require more thought. Moderate exercises and problems may take 20 to 40 minutes each.
Challenging problems are more comprehensive and may cover more concepts. The text material is
relatively longer and may include some ambiguity. Challenging problems may take 60 to 90 minutes
each.
Exercise/
Problem/Case
Topic
Learning
Objective
Degree of
Difficulty
1.1
Financial Accounting and Cost Management
LO 1
Basic
1.2
Customer Orientation, Quality, Time-Based
Competition
LO 2
Basic
1.3
Identifying Cost Management Information System
Objectives
LO 1
Basic
1.4
Ethical Behavior
LO 3, 4
Basic
1.5
Behavioral Impact of Cost Information
LO 4
Basic
1.6
Managerial Uses of Accounting Information
LO 3
Basic
1.7
Line versus Staff
LO 3
Basic
1.8
Financial Accounting versus Cost Management
LO 1
Moderate
1.9
Ethical Issues
LO 4
Basic
1.10
Ethical Issues
LO 4
Moderate
1.11
Ethical Issues
LO 4
Moderate
1.12
Ethical Issues
LO 4
Moderate
1.13
Ethical Issues
LO 4
Challenging
1.14
Cyber Research Case
LO 5
Moderate
LIST OF ILLUSTRATIONS
Illustration
Topic
Exhibit 1.1
Partial Organizational Chart: Manufacturing Company
Exhibit 1.2
Performance Report Illustrated
Exhibit 1.3
Statement of Ethical Professional Practice: Institute of Management Accountants
(IMA)