The cost information produced by the cost management information system must benefit the organization as a whole. Thus, a high-quality cost management system should have an organization-wide perspective. Managers in many different areas of a business require cost information. For example, an engineering manager must make strategic decisions concerning product design. Costs of production, marketing, and servicing can vary widely, depending on the design. Having reliable and accurate cost information about different designs is clearly critical for sound decision making. To provide this cost information, the cost management system must not only interact with the design and development system but also with the production, marketing, and customer service systems.
Cost information for tactical decision making is also important. For example, a sales manager needs reliable and accurate cost information when faced with a decision concerning an order that may be sold for less than the normal selling price. Such a sale may only be feasible if the production system is reporting idle capacity. In this case, a sound decision mandates interaction among the cost management system, the marketing and distribution system, and the production system. These two examples illustrate that the cost management system should have an organization-wide perspective and that it must be properly integrated with the nonfinancial functions and systems within an organization. In the past, little effort was made to integrate the cost managementsystem with other operational systems. However, the current competitive environment dictates that companies pay much greater attention to cost management in all functional areas.
Cost information for tactical decision making is also important. For example, a sales manager needs reliable and accurate cost information when faced with a decision concerning an order that may be sold for less than the normal selling price. Such a sale may only be feasible if the production system is reporting idle capacity. In this case, a sound decision mandates interaction among the cost management system, the marketing and distribution system, and the production system. These two examples illustrate that the cost management system should have an organization-wide perspective and that it must be properly integrated with the nonfinancial functions and systems within an organization. In the past, little effort was made to integrate the cost managementsystem with other operational systems. However, the current competitive environment dictates that companies pay much greater attention to cost management in all functional areas.
Exhibit 2-3 illustrates the expected interactive relationships Exhibit 2-3 implies that the cost management system receives information from all operational systems and also supplies information to these systems. To the extent possible, the cost management system should be integrated with the organization’s operational systems. Integration reduces redundant storage and use of data, improves the timeliness of information, and increases the efficiency of producing reliable and accurate information. One way of accomplishing this is to implement an enterprise resource planning (ERP) system. ERP systems strive to input data once and make it available to people across the company for whatever purpose it may serve. For example, a sales order entered into an ERP system is used by marketing to update customer records, by production to schedule the manufacture of the goods ordered, and by accounting to record the sale.
Different Systems for Different Purposes
The financial accounting and cost management systems show us that different systems exist to satisfy different purposes. As indicated, these two systems are subsystems of the accounting information system. The cost management information system also has two major subsystems: the cost accounting information system and the operational control information system. The objectives of these two subsystems correspond to the first and second objectives mentioned earlier for the cost management information system (the costing and control objectives). The output of these two cost systems satisfies the third objective (the decision-making objective). The cost accounting information system is a cost management subsystem designed to assign costs to individual products and services and other objects as specified by management. For external financial reporting, the cost accounting system must as-
Different Systems for Different Purposes
The financial accounting and cost management systems show us that different systems exist to satisfy different purposes. As indicated, these two systems are subsystems of the accounting information system. The cost management information system also has two major subsystems: the cost accounting information system and the operational control information system. The objectives of these two subsystems correspond to the first and second objectives mentioned earlier for the cost management information system (the costing and control objectives). The output of these two cost systems satisfies the third objective (the decision-making objective). The cost accounting information system is a cost management subsystem designed to assign costs to individual products and services and other objects as specified by management. For external financial reporting, the cost accounting system must as-
sign costs to products in order to value inventories and determine cost of sales. Furthermore, these assignments must conform to the rules and conventions set by the SEC and the FASB. These rules and conventions do not require that all costs assigned to individual products be causally related to the demands of individual products. Thus, using financial accounting principles to define product costs may lead to under- and overstatements of individual product costs. For reporting inventory values and cost of sales, this may not matter. Inventory values and cost of sales are reported in the aggregate, and the under- and overstatements may wash out to the extent that the values reported on the financial statements are reasonably accurate.
However, at the individual product level, distorted product costs can cause managers to make significant decision errors. For example, a manager might erroneously deemphasize and overprice a product that is, in reality, highly profitable. For decision making, accurate product costs are needed. If possible, the cost accounting system should produce product costs that simultaneously are accurate and satisfy financial reporting conventions. If not, then the cost system must produce two sets of product costs: one that satisfies financial reporting criteria and one that satisfies management decision-making needs.
However, at the individual product level, distorted product costs can cause managers to make significant decision errors. For example, a manager might erroneously deemphasize and overprice a product that is, in reality, highly profitable. For decision making, accurate product costs are needed. If possible, the cost accounting system should produce product costs that simultaneously are accurate and satisfy financial reporting conventions. If not, then the cost system must produce two sets of product costs: one that satisfies financial reporting criteria and one that satisfies management decision-making needs.
The operational control information system is a cost management subsystem designed to provide accurate and timely feedback concerning the performance of managers and others relative to their planning and control of activities. Operational control is concerned with what activities should be performed and assessing how well they are performed. It focuses on identifying opportunities for improvement and helping to find ways to improve. A good operational control information system provides information that helps managers engage in a program of continuous improvement of all aspects of their businesses
Product cost information plays a role in this process, but by itself, is not sufficient. The information needed for planning and control is broader and encompasses the entire value chain. For example, every profit making manufacturing and service organization exists to serve customers. Thus, one objective of an operational control system is to improve the value received by customers. Products and services should be produced that fit specific customer needs. (Observe how this affects the design and development system in the value chain.) Quality, affordable prices, and low post-purchase costs for operating and maintaining the product are also important to customers. A second, related objective is to improve profits by providing this value. Welldesigned, quality products that are affordable can be offered only if they also provide an acceptable return to the owners of the company. Cost information concerning quality, different product designs, and post-purchase customer needs is vital for managerial planning and control.3 Exhibit 2-4 illustrates the various subsystems of the accounting information system that we have been discussing.
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