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Determine The Purpose And Motivation For Managerial Costing Principles of Cost Analysis and Management © Dale R. Geiger, 2011 Used by Permission 1 Would you go into battle without reconnaissance? © Dale R. Geiger, 2011 Used by Permission 2 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 © Dale R. Geiger, 2011 Used by Permission 3 Costing Systems Differ Goals: Consistency Comparability Equity Users: Shareholders Congress Regulators Tax Authorities Methodology: Laws Rules GAAP Financial & Regulatory Managerial Goals: Fit Functionality Relevance Users: Managers Methodology: Situation Dependent © Dale R. Geiger, 2011 Used by Permission 4 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 © Dale R. Geiger, 2011 Used by Permission 5 Why Do Managerial Costing? 1. Enhance decision making 2. Provide reconnaissance necessary for Cost Based Management process 3. Influence resource consumption behavior © Dale R. Geiger, 2011 Used by Permission 6 1. Cost Measurement’s Role in Decision Making • Which Metal is Best for Transmission? Conductivity Metal A Metal B Metal C + ++ +++ © Dale R. Geiger, 2011 Used by Permission 7 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 • © Dale R. Geiger, 2011 Used by Permission 8 3. Cost Measurement’s Influence on Consumption • The Demand Curve - Economics 101 Cost Quantity Demanded © Dale R. Geiger, 2011 Used by Permission 9 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 © Dale R. Geiger, 2011 Used by Permission 10 Check on Learning • How does demand for a good change as cost decreases? • What is the logical result of not knowing what something costs? © Dale R. Geiger, 2011 Used by Permission 11 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 © Dale R. Geiger, 2011 Used by Permission 12 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? © Dale R. Geiger, 2011 Used by Permission 13 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? © Dale R. Geiger, 2011 Used by Permission 14 What decisions must be made? • • • • • Hiring? Purchasing? Choosing between alternatives? Others? What costs are relevant to the decisions? © Dale R. Geiger, 2011 Used by Permission 15 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? © Dale R. Geiger, 2011 Used by Permission 16 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? © Dale R. Geiger, 2011 Used by Permission 17 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 experiencing 2. Describe the information you needed/need to meet that challenge © Dale R. Geiger, 2011 Used by Permission 18 What Information will help your Organization win its Cost War? © Dale R. Geiger, 2011 Used by Permission 19 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? © Dale R. Geiger, 2011 Used by Permission 20