Basic Cost Management Concepts

Dr. M. Venkateshwarlu

PGPM - IIM I - MANAGEMENT ACCOUNTING

What is Management Accounting?

Management Accounting is the process of
Identifying Measuring Analyzing Interpreting Communicating information

Managerial accounting is an integral part of the management process

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How Management Accounting Adds Value?

1. Providing information for decision making and planning. 2. Assisting managers in directing and controlling activities. 3. Motivating managers and other employees towards organizations goals. 4. Measuring performance of activities, managers, and other employees. 5. Assessing the organizations competitive position.
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Accounting System (part of Organizations Management Information System) Accumulates data for use in both financial and management accounting
Cost Accounting System One Part of organizations over all accounting system

Management Accounting Information for decision making, planning, directing, and controlling an organizations operations and assessing competitive position.

Financial Accounting Published financial statements and other financial reports

Managers are the end users of the Information

External Users stockholders, financial analysts, trade unions ,consumer groups, suppliers and government agencies PGPM - IIM I - MANAGEMENT
ACCOUNTING

Management Accounting Vs Financial Accounting

Management Accounting Users of Information Sources of Information and data Regulation Managers within the organization Financial Accounting Interested parties, stakeholders outside the organization Drawn from organizations accounting system only. Required and must confirm to GAAP, Accounting Standards , and some extend SEBI and RBI. Reports focus on overall enterprise, and based on historical transaction data.

The Organizations basic accounting system and other operating activities information Not regulated and it is intended only for management . Regulated in terms of cost Audit for process manufacturing firms. Reports often focus on sub units within the organization, based on historical data, estimates and projection of future events.
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Reports

Role of Management Accountant in an Organization

Chief Executive Officer (CEO)
Chief Financial Officer (CFO) Vice President for Marketing Vice President for Operations

Controller

Treasurer

Chief Information Officer (CIO)

Cost Management Financial Reporting Financial Information Systems Other Reporting Obligations (e.g., tax)

Evolution and Adaption of Management Accounting

Service Vs Manufacturing Firms. Global Competition. Customer Focus. Cross Functional Teams. Computer Integrated Manufacturing. Product Life Cycles and Diversity. Time Based Completion. Just in Time (JIT) Systems. Total Quality Management Systems. Continuous Improvement.
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Cost Management Systems

Cost Management System is a management planning and control system with the following objectives.
To measure the cost of resources consumed in performing organizations significant activities. To identify and eliminate non value adding activities. To determine the efficiency and effectiveness of all major activities performed in organization. To identify and evaluate new activities that can improve the future performance of the organization.
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Strategic Cost Management and Value Chain

The set of linked, value- creating activities, ranging from securing basic raw materials and energy to the ultimate delivery of products and services, is called the value chain. Managers should carefully examine the chain of linked activities in order to identify any constraints that prevent the organization from reaching a higher level of achievement.

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Contemporary Management Techniques

The Balanced Scorecard and Strategy Map The Value Chain Activity Based Costing and Management Business Intelligence Target Costing Life Cycle Costing Benchmarking Business Process Improvement Total Quality Management Lean Accounting The Theory of Constraints Enterprise Sustainability Enterprise Risk Management

Many of these techniques aims at improving operating and cost performance of a firm

Theory of Constraints
Identifying the constraints that prevent the organization from reaching a higher level of achievement is often called the theory of constraints. The most cost effective ways to ease the most limiting constraints are sought. When these constraints are relaxed, the organization can reach a higher level of goal attainment.
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Thank You

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