Determine The Purpose And Motivation For Managerial Costing © Dale R. Geiger, 2011 Used by Permission 1

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Determine The Purpose And Motivation For Managerial Costing

Principles of Cost Analysis and Management

© Dale R. Geiger, 2011Used by Permission

© Dale R. Geiger, 2011 Used by Permission 2

Would you go into battle without reconnaissance?


Terminal Learning Objective

• Task: Determine The Purpose And Motivation For Managerial Costing

• Condition: You are a cost advisor technician with access to all regulations/course handouts, and awareness of Operational Environment (OE)/Contemporary Operational Environment (COE) variables and actors

• Standard: with at least 80% accuracy:• Demonstrate understanding and awareness of the

purpose and motivations for Managerial Costing


Costing Systems Differ

Internally SpecifiedRequire-ments

Externally SpecifiedRequire-ments

Goals: Consistency Comparability EquityUsers: Shareholders Congress Regulators Tax AuthoritiesMethodology: Laws Rules GAAP

Goals: Fit Functionality Relevance

Users: Managers

Methodology: Situation Dependent

Financial &Regulatory

Managerial


Managerial Cost Accounting

• Seeks to understand true economic cost• Based on cause-effect relationships• Reflecting drivers of resource consumption• With reasonable, but not precise, accuracy

• Enables cost based management for continuous improvement

• Enables better decision making• Enables rational consumption behavior


Why Do Managerial Costing?

1. Enhance decision making2. Provide reconnaissance necessary for

Cost Based Management process3. Influence resource consumption behavior


1. Cost Measurement’s Role in Decision Making

• Which Metal is Best for Transmission?

Metal A Metal B Metal C

Conductivity + ++ +++


2. Cost Managed Organizations Need Cost Measurement

• Cost managers must have cost measurement to fight Cost War

• Cost measurement• Informs Cost Warriors of financial implications of

management decisions• Provides a basis of accountability• Is prerequisite to cost reduction


3. Cost Measurement’s Influence on Consumption

• The Demand Curve - Economics 101

Cost

Quantity Demanded


Not Knowing Cost Makes Everything Appear Free

• Cost influences consumption• Quantity demanded rises as cost falls• Free goods have infinite demand

• Things that aren’t free, but appear free, get overconsumed

• Attempts to prevent overconsumption lead to rules, regulations, restrictions


Check on Learning

• How does demand for a good change as cost decreases?

• What is the logical result of not knowing what something costs?


What should we measure?

Complex Organizations Have Many Potential Views of Cost to Measure:• Organization Views• Process Views• Product/Service Views• Customer Views• Job Order Views• Budgetary Views


Where should we start?

• Many cost accounting textbooks list “Define activities” as the first step

• Activities are meaningless if organizations do not first define:• What are the outputs?• What decisions must be made?• How will the information be used?• What view of cost is useful to management?


What are the outputs?

• What is our mission? • What are the significant inputs?• What are the direct costs of the outputs?• What resources are consumed indirectly by

the outputs?• What activities drive the consumption of

indirect resources?


What decisions must be made?

• Hiring? • Purchasing?• Choosing between alternatives?• Others?• What costs are relevant to the decisions?


How will the information be used?

• Which cost measurement methodology best fits the use?

• Which key elements of information are necessary?

• Which elements of cost require detailed measurement?


What view of cost is useful to management?

• What (or who) are the primary consumers of resources?

• Which costs are most significant?• Which resources tend to be over-consumed?• What do managers need to know in order to

make decisions? • How do decisions affect the consumption of

resources?


What Information will help you Win your Personal Cost War?

• Read Winning the Cost War • Foreword• Introduction• Chapter 1

• Prepare two PowerPoint slides to present to the class:1. Describe a personal Cost War you have

experienced/are experiencing2. Describe the information you needed/need to

meet that challenge


What Information will help your Organization win its Cost War?


Check on Learning

• How do you know if your organization is in a Cost War?

• What is the role of cost information in winning the Cost War?

Documents

Determine The Purpose And Motivation For Managerial Costing © Dale R. Geiger, 2011 Used by Permission 1