27/08/2012

1

Imanuel Goestaman

Design of Cost Management

Systems: An Introduction

Financial Accounting vs. Management AccountingFinancial Accounting vs. Management AccountingFinancial Accounting vs. Management AccountingFinancial Accounting vs. Management Accounting

Cost Accounting in FA vs. MACost Accounting in FA vs. MACost Accounting in FA vs. MACost 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, making, and performance evaluation

� Segmented� Current� Relevant

� When cost accounting is shaped and dominated by financial accounting needs, the information generated may be of limited value to managers

27/08/2012

2

Management Information SystemManagement Information SystemManagement Information SystemManagement Information System

• A structure of interrelated elements that

• collects, organizes, and communicates data so managers may

• plan, control, evaluate performance, and make decisions

• Emphasizes satisfying internal demands for information rather than external demands

• Because one of the managerial functions requiring information is control, the MIS is part of the Management Control System (MCS).

Information Flows and Type of InformationsInformation Flows and Type of InformationsInformation Flows and Type of InformationsInformation Flows and Type of Informations

27/08/2012

3

Control System ComponentsControl System ComponentsControl System ComponentsControl System Components

� A Control System has the following four primary component:� Detector or sensor, which is a measuring device that identifies

what is actually happening in the process being controlled.� Assessor, which is device for determining the significance of

what is happening. Usually, significance is assessed by comparing the information on what is actually happening with some standard or expectation of what should be happening.

� Effector, which is a device that alters behavior if the assessor indicates the need for doing so. This device is often called “feedback”

� Communications network, which transmits information between the detector and the assessor and between the assessor and the effector.

Management Control SystemsManagement Control SystemsManagement Control SystemsManagement Control Systems

For example:

Source documents (detectors) gather information about sales that is compared to the budgets (assessor). If sales revenues are below budget, management may issue (communication network) a variance report (effector) to encourage the sales staff to increase volume.

Cost Management System (CMS)Cost Management System (CMS)Cost Management System (CMS)Cost Management System (CMS)

� Formal methods to plan and control an organization’s cost-generating activities with major challenges of:

� Achieving profitability in the short run

� Maintaining a competitive position in the long run

� Primary functions of cost management systems:

� Measure cost of good sold and value inventory for the financial reporting function

� Estimate costs of activities, products, services, and customers

� Provide economic feedback to employees and operators about process efficiency

27/08/2012

4

Integrated Cost Management SystemIntegrated Cost Management SystemIntegrated Cost Management SystemIntegrated Cost Management System

Marketing

Quality Control

Financial Accounting

Production Planning and Scheduling

Research and Development

Cost Accounting

Inventory Management

Production Reporting

Dual Focus of CMSDual Focus of CMSDual Focus of CMSDual Focus of CMS

CMS Value to ManagementCMS Value to ManagementCMS Value to ManagementCMS Value to Management� Critics to management accounting practices:

� Lack of relevance� Cost distortions� Inflexibility� Incompatibility with world-class approaches� Inappropriate links to financial accounts

� The inherent connnections between cost accounting and operations, whereby a CMS brings value to management, can be explored in terms of:� Relevance� Cost visibility� Flexibility� Support for advanced approaches� Appropriate links to financial accounts

27/08/2012

5

Cost Management System GoalsCost Management System GoalsCost Management System GoalsCost Management System Goals

� Develop product costs

� Assess product/service life-cycle performance

� Improve understanding of processes and activities

� Control costs

� Measure performance

� Allow pursuit of organizational strategies

� CMS informations enable managers to perform analyses on:� determining core competencies and organizational constraints

� positive and negative financial and non-financial factors of strategic and operational plans

Designing a Cost Management SystemDesigning a Cost Management SystemDesigning a Cost Management SystemDesigning a Cost Management System

ANALYZE

DETERMINEdesired outputs

PERFORMgap analysis

ASSESSgap reduction

Improve

Designing A Cost Management SystemDesigning A Cost Management SystemDesigning A Cost Management SystemDesigning A Cost Management System

27/08/2012

6

Designing A Cost Management SystemDesigning A Cost Management SystemDesigning A Cost Management SystemDesigning A Cost Management System

� A generic cost management system cannot be “pulled of the shelf ” and applied to any organization. Each firm warrants a cost management system that is tailored to its situation.

� Designing a CMS begin with analyze:

�Organizational form, structure, and culture

�Organizational mission and core competencies

�Operations (including suppliers) and competitive environment and strategies.

Organizational Organizational Organizational Organizational FormFormFormForm, Structure, Culture, Structure, Culture, Structure, Culture, Structure, Culture

� Choice of form affects� Cost of raising capital

� Cost of operating business

� Cost of litigating

� Statutory authority to make decisions

� Forms of business include� Corporations, Partnerships, LLPs, LLCs

Organizational Form, Organizational Form, Organizational Form, Organizational Form, StructureStructureStructureStructure, Culture, Culture, Culture, Culture

� Distribute authority and responsibility � Centralized, decentralized decision making

� Group subunits� geographically

� by similar missions

� by natural product clusters

� Determine accountability for cost management and organizational control

27/08/2012

7

Organizational Form, Structure, Organizational Form, Structure, Organizational Form, Structure, Organizational Form, Structure, CultureCultureCultureCulture

Underlying set of assumptions about entity and goals, processes, practices, and values that are shared by its

members

Organizational Organizational Organizational Organizational MissionMissionMissionMission and Core Competenciesand Core Competenciesand Core Competenciesand Core Competencies

� Business mission regarding competition� Avoid competition

� Differentiation

� Cost Leadership� Confront competition

� Business mission in relation to product life cycle

Organizational Mission and Organizational Mission and Organizational Mission and Organizational Mission and Core CompetenciesCore CompetenciesCore CompetenciesCore Competencies

� Timeliness

� Quality

� Customer service

� Efficiency and cost control

� Responsiveness to change

Cost management system gathers data and reports about core competencies

27/08/2012

8

Operating and Competitive Operating and Competitive Operating and Competitive Operating and Competitive EnvironmentEnvironmentEnvironmentEnvironment and Strategiesand Strategiesand Strategiesand Strategies

� Fewer costs susceptible to short-run control

� Cost management efforts targeted toward� the longer term

� capacity management

� Decreased flexibility when responding to a change in short-term conditions

Operating and Competitive Environment and Operating and Competitive Environment and Operating and Competitive Environment and Operating and Competitive Environment and StrategiesStrategiesStrategiesStrategies

� Being first to market - pricing flexibility increase market share or large per-unit profit

� Reduce product cost substantially� develop new production processes

� capture learning curve effects

� increase capacity utilization

� create a focused factory arrangement

� design for manufacturability, logistical support, reliability, maintainability

Operating and Competitive Environment and Operating and Competitive Environment and Operating and Competitive Environment and Operating and Competitive Environment and StrategiesStrategiesStrategiesStrategies

� Supplier relations� link electronically

� Integration of entire information system� payroll

� inventory

� budgeting

� costing

27/08/2012

9

CMS Elements

�Motivational elements

� Informational elements

�Reporting elements

CMS ElementsCMS ElementsCMS ElementsCMS Elements

• Motivational elements– Performance measurements

– Reward structure

– Support of organizational mission and competitive strategy

CMS ElementsCMS ElementsCMS ElementsCMS Elements• Motivational elements

• Informational elements– Support budgeting process

– Identify cost drivers

– Reduce/eliminate non-value-added activities

– Emphasize product life cycle

– Adapt to changing competitive conditions

– Relate cost to product/process design

– Focus on capital spending

– Minimize cost distortions

27/08/2012

10

CMS Elements

• Motivational elements

• Informational elements

• Reporting elements– Prepare financial statements

– Implement responsibility accounting system

Implement CMSImplement CMSImplement CMSImplement CMS

Perform GAP analysis

Information Needs

(Information Available)

Gap to OvercomeGAP

Implement CMSImplement CMSImplement CMSImplement CMS

�Gap Analysis�Identify gap to overcome�Prioritize differences�Develop and deploy improvements

GAP

27/08/2012

11

FourFourFourFour----Stage Model of Cost System DesignStage Model of Cost System DesignStage Model of Cost System DesignStage Model of Cost System Design

Evaluating Costing Maturity LevelEvaluating Costing Maturity LevelEvaluating Costing Maturity LevelEvaluating Costing Maturity Level

GAP

DOCMS as A Learning ProcessDOCMS as A Learning ProcessDOCMS as A Learning ProcessDOCMS as A Learning Process

“..... 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.”

(Kaplan and Cooper, 1998)

27/08/2012

12

ReferencesReferencesReferencesReferences

� Barfield, Jesse T., Cecily A. Raiborn, and Michael R. Kinney. 2000. Cost Accounting: Traditions & Innovations, 4ed. South-Western Colloge Publishing: Mason, Ohio.

� Cooper, Robin and Robert S. Kaplan. 1998. Cost & Effect: Using Integrated Cost Systems to Drive Profitability and Performance. Harvard Business School Press: Boston, Massachusetts.

� Cooper, Robin and Robert S. Kaplan. 1999. The Design of Cost Management Systems, 2ed. Prentice-Hall, Inc.: Upper Saddle River, New Jersey.

� International Federation of Accountants. 2009. International Good Practice Guidance: Evaluation and Improving Costing in Organizations. Professional Accountants in Business Committee, International Federation of Accountants: New York, New York.

� Stenzel, Catherine and Joe Stenzel. 2003. Essentials of Cost Management. John Wiley & Sons: Hoboken, New Jersey.

Course Topics (Tentative)

Week Topic

1 Design of Cost Management Systems: An Introduction

2 Evaluating and Improving Costing in Organizations

3 Stage II: Standard Cost & Flexible Budgeting Systems

4 Stage III System for Learning & Improvement: Upgrading & Supplementing Systems

5 Stage III System for Learning & Improvement : Kaizen Costing & Pseudo-Profit Centers

6 Measuring the Cost of Resource Capacity: Activity-Based Costing & Theory of Costraints

7 Operational ABM: Success & Failure of Implementation ABC Systems

8 Time Driven Activity-Based Costing & Resource Consumption Accounting

9 Strategic ABM for Customers and Suppliers

10 Strategic ABM for Product Development: Target Costing

11 Applying ABC & ABM in Service Industries and Small Business

12 Stage IV: Integrated Cost Systems

13-14 Final Project: Consultation and Presentation

AssessmentAssessmentAssessmentAssessment

Components of Assessment MID FINAL

INDIVIDUAL PERFORMANCE

•WrittenAssignment (personal feedback) 5% 5%

• Participation in Class Discussion 15% 15%

•Written Examination (open book) 30% 20%

• Individual Teamwork Ability (peer assessment) 10% 10%

65% 50%

GROUP PERFORMANCE

• Case and Journal Assignment 35% 25%

• Final Project - 25%

35% 50%

TOTAL 100% 100%