Factors affecting cost management

Over the last 25 years, worldwide competitive pressures, deregulation, growth in the service industry, and advances in information and manufacturing technology have changed the nature of our economy and caused many manufacturing and service industries to dramatically change the way in which they operate. These changes, in turn, have prompted the development of innovative and relevant cost management practices. For example, activity-based accounting systems have been developed and implemented in many organizations. Additionally, the focus of cost management accounting systems has been broadened to enable managers to better serve the needs of customers and manage the firm’s business processes that are used to create customer value. A firm can establish a competitive advantage by providing more customer value for less cost than its competitors. To secure and maintain a competitive advantage, managers seek to improve time-based performance, quality, and efficiency. Accounting information must be produced to support these three fundamental organizational goals.

Global Competition
Vastly improved transportation and communication systems have led to a global market for many manufacturing and service firms. Several decades ago, firms neither knew nor cared what similar firms in Japan, France, Germany, and Singapore were producing. These foreign firms were not competitors since their markets were separated by geographical distance. Now, both small and large firms are affected by the opportunities offered by global competition. Stillwater Designs, a small firm that designs and markets Kicker speakers, has significant markets in Europe. The manufacture of the Kicker speakers is mostly outsourced to Asian producers. At the other end of the size scale, Procter & Gamble, The Coca-Cola Company, and Mars, Inc., are developing sizable markets in China. Automobiles, currently being made in Japan, can be in the United States in two weeks. Investment bankers and management consultants can communicate with foreign offices instantly. Improved transportation and communication in conjunction with higher quality products that carry lower prices have upped the ante for all firms. This new competitive environment has increased the demand not only for more cost information but also for more accurate cost information. Cost information plays a vital role in reducing costs, improving productivity, and assessing product-line profitability.'

Growth of the Service Industry
As traditional industries have declined in importance, the service sector of the economy has increased in importance. The service sector now comprises approximately threequarters of the U.S. economy and employment. Many services among them accounting services, transportation, and medical services are exported. Experts predict that this sector will continue to expand in size and importance as service productivity grows. Deregulation of many services (e.g., airlines and telecommunications in the past and utilities in the present) has increased competition in the service industry. Many service organizations are scrambling to survive. The increased competition has made managers in this industry more conscious of the need to have accurate cost information for planning, controlling, continuous improvement, and decision making. Thus, the changes in the service sector add to the demand for innovative and relevant cost management information.

Advances in Information Technology
Three significant advances relate to information technology. One is intimately connected with computer-integrated applications. With automated manufacturing, computers are used to monitor and control operations. Because a computer is being used, a considerable amount of useful information can be collected, and managers can be informed about what is happening within an organization almost as it happens. It is now possible to track products continuously as they move through the factory and to report (on a real-time basis) such information as units produced, material used, scrap generated, and product cost. The outcome is an operational information system that fully integrates manufacturing with marketing and accounting data.

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