Transcript Introduction to CM
Cost Management
Introduction
Learning Objectives
1. S imilarities and differences between financial accounting and cost accounting 2.
Cost accounting’s support to MA & FA 3.
Business functions in the value chain 4.
5.
Dimensions of performance from customer’s perspective Planning & control decisions of managers
Learning objectives
6. Different roles of management accounting 7.
Guidelines followed by management accountants 8.
Management accounting structure 9. Professional ethics & MA & organisation
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.
Management accounting
• Extension accounting.
of managerial aspect of cost • 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.)
GROUNDS OF DIFFERENCE FINANCIAL ACCOUNTING COST ACCOUNTING Purpose For Whom?
Coverage Control Principles Need Reporting Time Basis measurement Use of standards Information of
B/S, P&L A/C, CFS General Purpose External Users Total organisation Does not provide for control of elements of cost GAAP Statute demands Accounting Year Monetary terms No standards performance efficiency Historical to and compare evaluate Cost Information for decision making & control planning, Special purpose: Different costs for different purposes Internal Users Segmental (product, process, job, depart., etc.) Provides Need driven Optional, need driven except when cost a/c record rules provide Need based (planning and control) Could be physical also (like labour hours, machine hours,etc.) Standards are used Projects past into future
Strategic decisions & MA
Strategy formulation Building resources and capabilities Implementing strategy
Building resources and capabilities
• Current assets • Long term productive assets • Intangibles
Planning and Controlling
Management Decision Management Accounting System Planning Budgets Control Performance Evaluation Accounting System Performance Reports
Planning and Controlling
What is planning?
Setting goals Predicting results Deciding how to attain goals
Planning and Controlling
Deciding and taking actions What is control?
Deciding on performance evaluation and feedback
Roles of MA- Problem solving
This involves comparative analysis for decision making.
This role asks: Of the several alternatives available, which is the best?
Scorekeeping
This involves accumulating data and reporting reliable results to all levels of management.
This role asks: How is the business doing?
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.
Cont….
• Strategic decisions and planning decisions: problem solving role is most important • Control decisions: the later two roles are important
Key Themes in Management Decision Making
Customer Focus Value Chain and Supply Chain Analysis Key Success Factors: Cost and Efficiency, Time, Quality, Innovation Continuous Improvement and Benchmarking
Customer Focus
continue investing sufficient (but not excessive) resources in customer satisfaction such that profitable customers are attracted and retained.
Value Chain and Supply 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.
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
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.
Continuous Improvement and Benchmarking
Continuous improvement by competitors creates a never-ending search for higher levels of performance within many organizations.
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
Value Chain
R & D Design Management Accounting Production Marketing Distribution Service
MA’s 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
Partial Organization Chart, Manufacturing Company
Line Function President Staff Function Production Vice-President Financial Vice President Production Supervisor Controller Treasurer Machining Foreman Assembly Foreman Internal Audit Cost Financial Systems Ta x
Current Factors Affecting Cost Management
A. Global Competition
• demand for more cost information but also for more
accurate
information quickly
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
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
Current Factors Affecting Cost Management
D. Advances in Management Environment Just-in-time manufacturing Computer-integrated manufacturing
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
Current Factors Affecting Cost Management
high F. New Product Development proportion of production costs are committed during the development and design stage cost control- use of based management target costing and activity-
Current Factors Affecting Cost Management
G. Total Quality Management Continual improvement and elimination of waste A philosophy of total quality management
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