Today’s cost accountant must understand many functions of a business’s value chain, from manufacturing to marketing to distribution to customer service. This need is particularly important when the company is involved in international trade. Definitions of product cost vary. The company’s internal accountants have moved beyond the traditional manufacturing cost approach to a more inclusive approach. This newer approach to product costing may take into account the costs of the value-chain activities defined by initial design and engineering, manufacturing, distribution, sales, and service. An individual who is well schooled in the various definitions of cost and who understands the shifting definitions of cost from the short run to the long run can be invaluable in determining what information is relevant in decision making.
Individuals with the ability to think cross-functionally can shift perspectives, expanding their understanding of problems and their solutions. Japanese automakers got their idea for JIT manufacturing from Taiichi Ohno’s (the creator of Toyota’s JIT production system) 1956 trip to the United States. He toured American automobile factories and American supermarkets. The impressive array of goods in the supermarkets and their constant turnover led to Ohno’s comprehension of the way that grocery customers “pulled” products through the stores. That understanding led to Toyota’s attempt to “pull” parts through production precisely when and where needed.4 Why try to relate cost management to marketing, management, and logistics? Ontime delivery affects costs. Cycle time affects costs. The way orders are received and processed from customers affects costs. The way goods are purchased and delivered affects costs as do the quality of the components purchased and the reliability of suppliers. It is clearly difficult if not impossible to manage costs unless there is interaction and cooperation among all parts of a company.
The Need for Flexibility
No one cost management system exists. Costs important to one firm may be irrelevant to another. Similarly, costs that are important in one context to a firm are unimportant in other contexts.
A member of the board of directors for Stillwater’s Mission of Hope, a nonprofit shelter for the homeless, asked his accountant how to value the building used as the shelter. In other words, what did it cost? The accountant’s answer was: “Why do you want to know? If you need to know the value for insurance purposes to determine how much insurance to buy then perhaps replacement cost would be the answer. If you are trying to set a price to sell the building (and build another one elsewhere), then current market value of the real estate would be the answer. If you need the cost for the balance sheet, then historical cost is required by GAAP.” Different costs are needed for different purposes. The intelligent cost accountant must find the reason for the question in order to suggest an appropriate answer. A good cost management system facilitates these answers.
An understanding of the structure of the business environment in which the company operates is an important input in designing a cost management system. A primary distinction is made between manufacturing and service firms. However, overlap occurs because some manufacturing firms emphasize service to customers while some service firms emphasize the quality of their “product.” Retailing is another classification, and its needs would require still another system.
Behavioral Impact of Cost Information
Cost information is not neutral; it does not stand in the background, merely reflecting what has happened in an unbiased way. Instead, the cost management information system also shapes business. By keeping track of certain information, business owners are saying that these things are important. The ignoring of other information implies that it is not important. An old joke states that an accountant is someone who knows the cost of everything and the value of nothing. Today’s accountant must be an expert at valuing things. This includes methods (1) of costing and achieving quality, (2) of differentiating between value-added and nonvalue- added activities, and (3) of measuring and accounting for productivity. Thus, it is crucial that owners, managers, and accountants be aware of the signals that are being sent out by the accounting information system and ensure that correct signals are being sent.
Individuals with the ability to think cross-functionally can shift perspectives, expanding their understanding of problems and their solutions. Japanese automakers got their idea for JIT manufacturing from Taiichi Ohno’s (the creator of Toyota’s JIT production system) 1956 trip to the United States. He toured American automobile factories and American supermarkets. The impressive array of goods in the supermarkets and their constant turnover led to Ohno’s comprehension of the way that grocery customers “pulled” products through the stores. That understanding led to Toyota’s attempt to “pull” parts through production precisely when and where needed.4 Why try to relate cost management to marketing, management, and logistics? Ontime delivery affects costs. Cycle time affects costs. The way orders are received and processed from customers affects costs. The way goods are purchased and delivered affects costs as do the quality of the components purchased and the reliability of suppliers. It is clearly difficult if not impossible to manage costs unless there is interaction and cooperation among all parts of a company.
The Need for Flexibility
No one cost management system exists. Costs important to one firm may be irrelevant to another. Similarly, costs that are important in one context to a firm are unimportant in other contexts.
A member of the board of directors for Stillwater’s Mission of Hope, a nonprofit shelter for the homeless, asked his accountant how to value the building used as the shelter. In other words, what did it cost? The accountant’s answer was: “Why do you want to know? If you need to know the value for insurance purposes to determine how much insurance to buy then perhaps replacement cost would be the answer. If you are trying to set a price to sell the building (and build another one elsewhere), then current market value of the real estate would be the answer. If you need the cost for the balance sheet, then historical cost is required by GAAP.” Different costs are needed for different purposes. The intelligent cost accountant must find the reason for the question in order to suggest an appropriate answer. A good cost management system facilitates these answers.
An understanding of the structure of the business environment in which the company operates is an important input in designing a cost management system. A primary distinction is made between manufacturing and service firms. However, overlap occurs because some manufacturing firms emphasize service to customers while some service firms emphasize the quality of their “product.” Retailing is another classification, and its needs would require still another system.
Behavioral Impact of Cost Information
Cost information is not neutral; it does not stand in the background, merely reflecting what has happened in an unbiased way. Instead, the cost management information system also shapes business. By keeping track of certain information, business owners are saying that these things are important. The ignoring of other information implies that it is not important. An old joke states that an accountant is someone who knows the cost of everything and the value of nothing. Today’s accountant must be an expert at valuing things. This includes methods (1) of costing and achieving quality, (2) of differentiating between value-added and nonvalue- added activities, and (3) of measuring and accounting for productivity. Thus, it is crucial that owners, managers, and accountants be aware of the signals that are being sent out by the accounting information system and ensure that correct signals are being sent.
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