Cost management pdf file

A1: There are different definition for the word meaning of Cost. Below mentioned are some of the definition of cost. Vote count: No votes so far!

Be the first to rate this post. Tags cost management Cost Management Notes cost management pdf cost management pdf free download. Carousel Previous. Carousel Next. What is Scribd? Explore Ebooks. Bestsellers Editors' Picks All Ebooks. Explore Audiobooks. Bestsellers Editors' Picks All audiobooks. Explore Magazines. Editors' Picks All magazines. Explore Podcasts All podcasts. Difficulty Beginner Intermediate Advanced. Explore Documents. Uploaded by Vanita Ganthade.

Did you find this document useful? Is this content inappropriate? Report this Document. Flag for inappropriate content. Download now. Related titles. Carousel Previous Carousel Next. Implementation of Earned Value Management in U. Jump to Page. Search inside document. Project Cost Management 1 Project Cost Management includes all of the following processes except: a Estimate Costs b Evaluate costs c Determine Budget d Control Costs 2 Which of the following choices indicates that a project has a burn rate of 1.

Related Interests Business. Documents Similar To 18 Cost Management. You will see according to a variety of dimensions. These that with the ABC system the Enterprise Company has established nine activity Source: Corbis include number of chips per module, speed, life cost centres and seven different second-stage cost drivers. Note also that the cost expectancy, and temperature tolerance. To emphasize the point that ABC systems use cause-and-effect second stage allocations the term cost driver tends to be used instead of allocation base.

Cost drivers should be significant determinants of the cost of activities. For example, if the cost of processing purchase orders is determined by the number of purchase orders that each product generates, then the number of purchase orders would represent the cost driver for the cost of processing purchase orders.

Other cost Real World View Real-world cases are Advanced Reading The more advanced provided throughout the text, they help to material that is not essential for those readers demonstrate the theory in practice and practical not requiring an in-depth knowledge of a topic application of accounting in real companies has been highlighted.

These should be read internationally. It is unlikely that examination questions will be set that refer to the content of an intro- The following items relate to the learning objectives listed at the beginning of the chapter. Note that the examiner may not distinguish between cost accounting and management accounting. Your discussion of different situations. Therefore, a preceding term must be added to clarify the a cost accounting system should therefore include a description with illustrations of assumptions that underlie a measurement.

Make sure that you draw off your experience from the whole of a first-year course and A cost object is any activity for which a separate measurement of cost is required. In not just this introductory chapter. Examples of cost objects include the cost of a new product, the cost of operating a sales outlet and the cost of operating a specific machine.

You should check your understanding of each of the terms listed in the key terms and concepts section below by referring to the page numbers that are shown in the parentheses following each key term. In the short term some costs and revenues may remain unchanged for all alterna- tives under consideration. For example, if you wish to determine the costs of driving to work in your own car or using public transport, the cost of the road fund taxation licence and insurance will remain the same for both alternatives, assuming that you intend to keep your car for leisure purposes.

Therefore the costs of these items are not relevant for assisting you in your decision to travel to work by public transport or using your own car. Costs that remain unchanged for all alternatives under consideration are not relevant for decision-making. A job costing system relates to a costing system where each unit or batch of output of product s or service s is unique.

This creates the need for the cost of each unit or batch to be calculated separately. In contrast a process costing system relates to situations where masses of identical units or batches are produced thus making it unnecessary to assign costs to individual units or batches of output. Instead, the average cost per unit or batch of output is calculated by dividing the total costs assigned to a product or service for the period by the number of units or batches of output for that period.

A cost and management accounting system should generate information to meet the following requirements: a to allocate costs between cost of goods sold and inventories for internal and external profit reporting and inventory valuation; b to provide relevant information to help managers make better decisions; c to provide information for planning, control and performance measurement.

A database should be maintained with costs appropriately coded or classified, so that relevant information can be extracted for meeting each of the above requirements. Summary Bulleted list at the end of each Key Examination Points Important chapter reviewing briefly the main concepts and examination tips are presented at the end of key points covered in each chapter, linked back each chapter.

They show the main concepts to to the Learning Objectives. Provide examples of costs for each of the four categories. Give some examples. The numbers in the paren- theses provide you with the page numbers to refer to if you cannot answer a Review problems specific question. The review problems are more complex and require you to relate and apply 2. The problems are graded by fixed SF or semi-variable SV : their level of difficulty. The multiple-choice questions are the least demanding and normally take less than 10 minutes to complete.

Fully worked solutions to a direct labour; the review problems are provided in a separate section at the end of the book. A list of these cases is i royalty payments. The Electronic Boards case is a case study that is 2. Page numbers next to the various business problems. Fully worked questions show where the answers can be solutions are found in the back of the text. This CD-based product is only available from your Thomson sales representative.

Virtual Learning Environment All of the web material is available in a format that is compatible with virtual learning environments such as Blackboard and WebCT. This version of the product is only available from your Thomson sales representative.

In Chapter 1 we define accounting and distinguish between financial, management and cost accounting. This is followed by an examination of the role of management accounting in providing information to managers for decision-making, planning, control and performance measurement. In addition, the important changes that are taking place in the business environment are considered.

Progression through the book will reveal how these changes are influencing management accounting systems. In Chapter 2 the basic cost terms and concepts that are used in the cost and management accounting literature are described. It describes accounting as the process of identifying, measuring and communicating economic information to permit informed judgements and decisions by users of the information.

In other words, accounting is concerned with providing both financial and non- financial information that will help decision-makers to make good decisions. An understanding of accounting therefore requires an understanding of the decision- making process and an awareness of the users of accounting information. During the past two decades many organizations in both the manufacturing and service sectors have faced dramatic changes in their business environment.

Deregulation combined with extensive competition from overseas companies in domestic markets has resulted in a situation where most companies are now competing in a highly competitive global market. They have also adopted new management approaches, changed their manufacturing systems and invested in new technologies. These changes have had a significant influence on management accounting systems.

Progression through the book will reveal how these changes have influenced cost and management accounting systems, but first of all it is important that you have a good background knowledge of some of the important changes that have occurred in the business environment. This chapter aims to provide such knowledge.

The objective of this first chapter is to provide the background knowledge that will enable you to achieve a more meaningful insight into the issues and problems of cost and management accounting that are discussed in the book. We begin by looking at the users of accounting information and identifying their requirements. This is followed by a description of the decision-making process and the changing business and manufacturing environment.

Finally, the different functions of management accounting are described. The users of accounting information Accounting is a language that communicates economic information to people who have an interest in an organization — managers, shareholders and potential investors, employees, creditors and the government.

Shareholders require information on the value of their investment and the income that is derived from their shareholding.

Employees require information on the ability of the firm to meet wage demands and avoid redundancies. Government agencies like the Central Statistical Office collect accounting information and require such information as the details of sales activity, profits, investments, stocks, dividends paid, the proportion of profits absorbed by taxation and so on.

In addition the Inland Revenue needs information on the amount of profits that are subject to taxation. All this information is important for deter- mining policies to manage the economy. Accounting information is not confined to business organizations. Accounting information about individuals is also important and is used by other individuals; for example, credit may only be extended to an individual after the prospective borrower has furnished a reasonable accounting of his private financial affairs.

Non-profit- making organizations such as churches, charitable organizations, clubs and government units such as local authorities, also require accounting information for decision-making, and for reporting the results of their activities.

For example, a tennis club will require information on the cost of undertaking its various activities so that a decision can be made as to the amount of the annual subscription that it will charge to its members.

Similarly, local authorities need information on the costs of undertaking specific activities so that decisions can be made as to which activities will be under- taken and the resources that must be raised to finance them. The foregoing discussion has indicated that there are many users of accounting information who require information for decision-making. Obviously, the benefit derived from using an information system for decision-making must be greater than the cost of operating the system.

An examination of the various users of accounting information indicates that they can be divided into two categories: 1 internal parties within the organization; 2 external parties such as shareholders, creditors and regulatory agencies, outside the organization. It is possible to distinguish between two branches of accounting, that reflect the internal and external users of accounting information.

Management accounting is concerned with the provision of information to people within the organization to help them make better decisions and improve the efficiency and effectiveness of existing operations, whereas financial accounting is concerned with the provision of infor- mation to external parties outside the organization.

Thus, management accounting could be called internal accounting and financial accounting could be called external accounting. This book concentrates on management accounting. There is a statutory requirement for public limited companies to produce annual financial accounts regardless of whether or not management regards this information as useful.

Management accounting, by contrast, is entirely optional and information should be produced only if it is considered that the benefits from the use of the information by management exceed the cost of collecting it. Financial accounting reports describe the whole of the business whereas management accounting focuses on small parts of the organization, for example the cost and profitability of products, services, customers and activities. In addition, management accounting information measures the economic performance of decentralized operating units, such as divisions and departments.

These requirements are essential to ensure the uniformity and consistency that is needed for external financial statements. Outside users need assurance that external statements are prepared in accordance with generally accepted accounting principles so that the inter- company and historical comparisons are possible. In contrast, management accountants are not required to adhere to generally accepted accounting principles when providing managerial information for internal purposes.

Financial accounting reports what has happened in the past in an organization, whereas management accounting is concerned with future information as well as past information. Decisions are concerned with future events and management therefore requires details of expected future costs and revenues. A detailed set of financial accounts is published annually and less detailed accounts are published semi-annually.

Management requires information quickly if it is to act on it. Consequently management accounting reports on various activities may be prepared at daily, weekly or monthly intervals. The decision-making process Because information produced by management accountants must be judged in the light of its ultimate effect on the outcome of decisions, a necessary precedent to an understanding of management accounting is an understanding of the decision- making process.

Figure 1. The first five stages represent the decision-making or the planning process. Planning involves making choices between alternatives and is primarily a decision-making activity. The final two stages represent the control process, which is the process of measuring and correcting actual performance to ensure that the alternatives that are chosen and the plans for implementing them are carried out.

Let us now examine each of the items listed in Figure 1. Identifying objectives Before good decisions can be made there must be some guiding aim or direction that will enable the decision-makers to assess the desirability of favouring one course of action over another.

Hence, the first stage in the decision-making process should be to specify the goals or objectives of the organization. Considerable controversy exists as to what the objectives of firms are or should be. Various arguments have been used to support the profit maximization objective. There is the legal argument that the ordinary share- holders are the owners of the firm, which therefore should be run for their benefit by trustee managers.

Another argument supporting the profit objective is that profit maximization leads to the maximization of overall economic welfare. That is, by doing the best for yourself, you are unconsciously doing the best for society. Moreover, it seems a reasonable belief that the interests of firms will be better served by a larger profit than by a smaller profit, so that maximization is at least a useful approximation.

Some writers e. Simon, believe that businessmen are content to find a plan that provides satisfactory profits rather than to maximize profits. Because people have limited powers of understanding and can deal with only a limited amount of infor- mation at a time Simon uses the term bounded rationality to describe these constraints , they tend to search for solutions only until the first acceptable solution is found. Identify objectives 2.

Search for alternative courses of action Planning 3. Gather data about alternatives process 4. Select alternative courses of action 5. Implement the decisions 6. Compare actual and planned outcomes Control process 7. Respond to divergencies from plan search until the best solution is discovered. Such behaviour, where the search is termi- nated on finding a satisfactory, rather than optimal solution, is known as satisficing.

Cyert and March have argued that the firm is a coalition of various different groups — shareholders, employees, customers, suppliers and the government — each of whom must be paid a minimum to participate in the coalition. Any excess benefits after meeting these minimum constraints are seen as being the object of bargaining between the various groups.

In addition, a firm is subject to constraints of a societal nature. Maintaining a clean environment, employing disabled workers and providing social and recreation facilities are all examples of social goals that a firm may pursue.

Clearly it is too simplistic to say that the only objective of a business firm is to maximize profits. Some managers seek to establish a power base and build an empire; another goal is security; the removal of uncertainty regarding the future may override the pure profit motive. Nevertheless, the view adopted in this book is that, broadly, firms seek to maximize the value of future net cash inflows that is, future cash receipts less cash payments or to be more precise the present value of future net cash inflows.

The concept of present value is explained in Chapter The reasons for choosing this objective are as follows: 1 It is unlikely that any other objective is as widely applicable in measuring the ability of the organization to survive in the future. If the management of a company concentrates entirely on its present product range and markets, and market shares and cash flows are allowed to decline, there is a danger that the company will be unable to generate sufficient cash flows to survive in the future.

To maximize future cash flows, it is essential that management identifies potential opportunities and threats in its current environment and takes specific steps immediately so that the organization will not be taken by surprise by any develop- ments which may occur in the future. In particular, the company should consider one or more of the following courses of action: 1 developing new products for sale in existing markets; 2 developing new products for new markets; 3 developing new markets for existing products.

The search for alternative courses of action involves the acquisition of information concerning future opportunities and environments; it is the most difficult and important stage of the decision-making process. Ideally, firms should consider all alternative courses of action, but, in practice they consider only a few alternatives, with the search process being localized initially.

If this type of routine search activity fails to produce satis- factory solutions, the search will become more widespread Cyert and March, Gather data about alternatives When potential areas of activity are identified, management should assess the potential growth rate of the activities, the ability of the company to establish adequate market shares, and the cash flows for each alternative activity for various states of nature.

These uncontrollable factors are called states of nature. Some examples of possible states of nature are economic boom, high inflation, recession, the strength of competition and so on. The course of action selected by a firm using the information presented above will commit its resources for a lengthy period of time, and how the overall place of the firm will be affected within its environment, that is, the products it makes, the markets it operates in and its ability to meet future changes.

These decisions are normally referred to as long-run or strategic decisions. Because of their importance, strategic decisions should be the concern of top management.

Such decisions are known as short-term or operating decisions and are normally the concern of lower-level managers. Short-term decisions are based on the environment of today, and the physical, human and financial resources presently available to the firm. Examples of short-term decisions include the following. When the data have been gathered, management must decide which courses of action to take. Select appropriate alternative courses of action In practice, decision-making involves choosing between competing alternative courses of action and selecting the alternative that best satisfies the objectives of an organi- zation.

Assuming that our objective is to maximize future net cash inflows, the alter- native selected should be based on a comparison of the differences between the cash flows. Consequently, an incremental analysis of the net cash benefits for each alter- native should be applied. The alternatives are ranked in terms of net cash benefits, and those showing the greatest benefits are chosen subject to taking into account any qual- itative factors.

We shall discuss how incremental cash flows are measured for short- term and long-term decisions and the impact of qualitative factors in Chapters 9— Implementation of the decisions Once alternative courses of action have been selected, they should be implemented as part of the budgeting process.

The budget is a financial plan for implementing the various decisions that management has made. The budgets for all of the various deci- sions are expressed in terms of cash inflows and outflows, and sales revenues and expenses. This statement is known as a master budget. The master budget consists of a budgeted profit and loss account, cash flow statement and balance sheet. Chapter 16 focuses on the budgeting process. Comparing actual and planned outcomes and responding to divergencies from plan The final stages in the process outlined in Figure 1.

In other words, the objective of the control process is to ensure that the work is done so as to fulfil the original intentions. Performance reports consisting of a comparison of actual outcomes actual costs and revenues and planned outcomes budgeted costs and revenues should be issued at regular intervals.

Performance reports provide feedback infor- mation by comparing planned and actual outcomes. Such reports should highlight those activities that do not conform to plans, so that managers can devote their scarce time to focusing on these items. This process represents the application of management by exception. Effective control requires that corrective action is taken so that actual outcomes conform to planned outcomes.

Alternatively, the plans may require modification if the comparisons indicate that the plans are no longer attainable. The process of taking corrective action so that actual outcomes conform to planned outcomes, or the modification of the plans if the comparisons indicate that actual outcomes do not conform to planned outcomes, is indicated by the arrowed lines in Figure 1. They signify that the process is dynamic and stress the interdependencies between the various stages in the process.

The second loop stresses the corrective action taken so that actual outcomes conform to planned outcomes. Chapters 16—18 focus on the planning and control process. Changing competitive environment Prior to the s many organizations in Western countries operated in a protected competitive environment.

Barriers of communication and geographical distance, and sometimes protected markets, limited the ability of overseas companies to compete in domestic markets. There was little incentive for firms to maximize efficiency and improve management practices, or to minimize costs, as cost increases could often be passed on to customers.

During the s, however, manufacturing organizations began to encounter severe competition from overseas competitors that offered high- quality products at low prices. By establishing global networks for acquiring raw mate- rials and distributing goods overseas, competitors were able to gain access to domestic markets throughout the world.

To be successful companies now have to compete not only against domestic competitors but also against the best companies in the world. Virtually all types of service organization have also faced major changes in their competitive environment. Before the s many service organizations, such as those operating in the airlines, utilities and financial service industries, were either government-owned monopolies or operated in a highly regulated, protected and non- competitive environment.

These organizations were not subject to any great pressure to improve the quality and efficiency of their operations or to improve profitability by eliminating services or products that were making losses. Furthermore, more efficient competitors were often prevented from entering the markets in which the regulated companies operated. Prices were set to cover operating costs and provide a predeter- mined return on capital.

Hence cost increases could often be absorbed by increasing the prices of the services. Little attention was therefore given to developing cost systems that accurately measured the costs and profitability of individual services.

Privatization of government-controlled companies and deregulation in the s completely changed the competitive environment in which service companies operated. Pricing and competitive restrictions were virtually eliminated. Many service organizations have only recently turned their attention to management accounting.

Customers are demanding ever-improving levels of service in cost, quality, reliability, delivery, and the choice of innovative new products. In order to provide customer satis- faction organizations must concentrate on those key success factors that directly affect it.

In addition to concentrating on these factors organizations are adopting new management approaches in their quest to achieve customer satisfaction. These new approaches are illustrated in Figure 1. They are continuous improvement, employee empowerment and total value-chain analysis.

Let us now examine each of the items shown in Figure 1. The first item listed in Figure 1. Since customers will buy the product with the lowest price, all other things being equal, keeping costs low and being cost efficient provides an organization with a strong competitive advantage. Increased competition has also made decision errors due to poor cost information more probable and more costly.

If the cost system results in distorted product costs being reported, then over- costed products will lead to higher bid prices and business lost to those competitors who are able to quote lower prices purely because their cost systems produce more accurate cost information.

Alternatively, there is a danger that undercosted products will result in the acceptance of unprofitable business. These developments have made many companies aware of the need to improve their cost systems so that they can produce more accurate cost information to determine the cost of their products, pinpoint loss-making activities and analyse profits by products, sales outlets, customers and markets. In addition to demanding low cost product customers are demanding high quality products and services.

Most companies are responding to this by focusing on total quality management TQM. The goal of TQM is customer satisfaction. TQM is a term used to describe a situation where all business functions are involved in a process of continuous quality improvement that focuses on delivering products or services of consistently high quality in a timely fashion.

The emphasis on TQM has created fresh demands on the management accounting function to expand its role by becoming involved in measuring and evaluating the quality of products and services and the activities that produce them. For these reasons management accounting systems now place more emphasis on time-based measures, which have beome an important competitive variable.

Cycle time is one measure that management accounting systems have begun to focus on. It consists of the sum of processing time, move time, wait time and inspection time. Move time is the amount of time it takes to transfer the product during the production process from one location to another.

Wait time is the amount of time that the product sits around waiting for processing, moving, inspecting, reworking or the amount of time it spends in finished goods stock waiting to be sold and despatched.

Inspection time is the amount of time making sure that the product is defect free or the amount of time actually spent reworking the product to remedy identified defects in quality. Organizations are therefore focusing on minimizing cycle time by reducing the time spent on such activities. The management accounting system has an important role to play in this process by identifying and reporting on the time devoted to value added and non-value added activities.

The final key success factor shown in Figure 1. To be successful companies must develop a steady stream of innovative new products and services and have the capability to adapt to changing customer requirements. It has already been stressed earlier in this chapter that being later to the market than competitors can have a dramatic effect on product profitability. Companies have therefore begun to incorporate performance measures that focus on flexibility and innovation into their management accounting systems.

Flexibility relates to the responsiveness in meeting customer requirements. Flexibility measures include the total launch time for new products, the length of development cycles and the ability to change the production mix quickly. Innovation measures include an assessment of the key characteristics of new products relative to those of competitors, feedback on customer satisfaction with the new features and characteristics of newly introduced products, and the number of new products launched and their launch time.

You can see by referring to Figure 1. Operators were expected to follow the standard procedures and management accountants developed systems and measurements that compared actual results with predetermined standards.

This process created a climate whereby the predetermined standards represented a target to be achieved and maintained rather than a policy of continuous improvement.

To compete successfully companies must adopt a philosophy of continuous improvement, an ongoing process that involves a continuous search to reduce costs, eliminate waste, and improve the quality and performance of activities that increase customer value or satisfaction. Benchmarking is a technique that is increasingly being adopted as a mechanism for achieving continuous improvement. The objective is to ascertain how the processes and activities can be improved.

Ideally, benchmarking should involve an external focus on the latest developments, best practice and model examples that can be incorporated within various operations of business organizations. It therefore represents the ideal way of moving forward and achieving high competitive standards. In their quest for the continuous improvement of organizational activities managers have found that they have had to rely more on the people closest to the operating processes and customers to develop new approaches to performing activ- ities.

This has led to employees being provided with relevant information to enable them to make continuous improvements to the output of processes. Allowing employees to take such actions without the authorization by superiors has come to be known as employee empowerment. It is argued that by empowering employees and giving them relevant information they will be able to respond faster to customers, increase process flexibility, reduce cycle time and improve morale.

Management accounting is therefore moving from its traditional emphasis on providing infor- mation to managers to monitor the activities of employees to providing information to employees to empower them to focus on the continuous improvement of activities. Increasing attention is now being given to value-chain analysis as a means of increasing customer satisfaction and managing costs more effectively.

The value chain is illustrated in Figure 1. It is the linked set of value-creating activities all the way from basic raw material sources for component suppliers through to the ultimate end- use product or service delivered to the customer. Coordinating the individual parts of the value chain together to work as a team creates the conditions to improve customer satisfaction, particularly in terms of cost efficiency, quality and delivery. If each link in the value chain is designed to meet the needs of its customers, then end-customer satisfaction should ensue.

Furthermore, by viewing each link in the value chain as a supplier—customer relationship, the opinions of the customers can be used to provide useful feedback information on assessing the quality of service provided by the supplier. Opportunities are thus identified for improving activities throughout the entire value chain.

The aim is to manage the linkages in the value chain better than competitors and thus create a competitive advantage. Finally, there are other aspects of customer satisfaction that are not specified in Figure 1.

Customers are no longer satisfied if companies simply comply with the legal requirements of under- taking their activities. They expect company managers to be more proactive in terms of their social responsibility. Company stakeholders are now giving high priority to social responsibility, safety and environmental issues, besides corporate ethics.

A code of ethics has also become an essential part of corporate culture. In addition, profes- sional accounting organizations play an important role in promoting a high standard of ethical behaviour by their members. Both of the professional bodies representing management accountants in the UK Chartered Institute of Management Accountants and the USA Institute of Management Accountants have issued a code of ethical guidelines for their members and established mechanisms for moni- toring and enforcing professional ethics.

The guidelines are concerned with ensuring that accountants follow fundamental principles relating to integrity not being a party to any falsification , objectivity not being biased or prejudiced , confidentiality and professional competence and due care maintaining the skills required to ensure a competent professional service.

The impact of information technology During the past decade the use of information technology IT to support business activities has increased dramatically with the development of electronic business communication technologies known as e-business, e-commerce or internet commerce.

These developments are having a big impact on businesses. For example, consumers are becoming more discerning when purchasing products or services because they are able to derive more information from the internet on the relative merits of the different product offerings.

E-commerce has provided the potential to develop new ways of doing things that have enabled considerable cost savings to be made from streamlining business processes and generating extra revenues from the adept use of on-line sales facilities e. The ability to use e-commerce more proficiently than competitors provides the potential for companies to establish a competitive advantage.

One advanced IT application that has had a considerable impact on business infor- mation systems is enterprise resource planning systems ERPS. The number of adopters of ERPS has increased rapidly throughout the world since they were first intro- duced in the mids. An ERPS comprises a set of integrated software applications modules that aim to control all information flows within a company. They cover most business functions including accounting.

Standard ERPS accounting modules incor- porate many menus including bookkeeping, product profitability analysis and budgeting. All the modules are fully integrated in a common database and users can access real- time information on all aspects of the business.