Introduction and basic concepts of Cost management

Changes in the manufacturing environment brought about by global competition, the advanced manufacturing environment, customer focus, total quality management, time as a competitive factor, and efficiency are having a significant effect on the management accounting environment. Many traditional management accounting practices will be altered because of the revolution taking place among many manufacturing firms. Management accounting aids managers in their efforts to improve the economic performance of the firm. Managers use accounting information to identify problems, solve problems and evaluate performance. The cost management system is a subsystem of the accounting information system and must be designed to satisfy costing, planning, controlling and decision-making. One of the major objectives of the cost management system is the accurate assignment of cost to cost object. This assignment process is achieved by three subprocesses: direct tracing, driver tracing and allocation. “Traceability” means that costs can be assigned accurately by using a causal (cause and effect) relationship. Allocation is the least accurate and it distorts the cost information and its use should be avoided where possible. There are two cost management systems: Functional-based cost management systems uses only unit-base activity drivers and it is allocation-intensive. An activity-based cost management system emphasizes tracing over allocation. This system uses both unit and non-unit-based activity drivers. Hence, activity-based cost management increases the accuracy of the cost assignments and the overall quality and relevance of the cost information.