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6 primary goals of Cost Management Systems

Crossing all functional areas, a cost management system can be viewed as having  six  primary  goals:  
(1)  develop  reasonably  accurate  product  costs,  especially through  the use of cost drivers (activities  that have direct  cause-and-effect  relationships with costs); 
(2) assess product/service life-cycle performance; 
(3) improve understanding  of  processes  and  activities;  
(4)  control  costs;  
(5) measure  performance; and 
(6) allow  the pursuit of organizational strategies.
 
A cost management system (CMS) consists of a set of formal methods developed for planning and controlling an organization’s cost-generating activities  relative  to its short-term objectives and long-term strategies. Business entities face two major challenges: achieving profitability  in  the  short  run and maintaining a  competitive position in the long run. An effective cost management system must provide managers the information needed to meet both of these challenges.

Information requirements for organizational  success  in  the  short  run and  long  run. The  short-run  requirement  is that  revenues  exceed  costs—the  organization must make  efficient  use  of  its  resources  relative  to  the  revenues  that  are  generated.  Specific  cost  information  is needed and must be delivered in a timely fashion to an individual who is in a position to influence the cost. Short-run information requirements are often described as relating to operational management.

Meeting the long-run objective, survival, depends on acquiring the right inputs from  the  right  suppliers,  selling  the  right mix of products  to  the  right customers, and using  the most appropriate  channels of distribution. These decisions  require only  periodic  information  that  is  reasonably  accurate.  Long-run  information  requirements are often described as relating to strategic management.

The information generated from the CMS should benefit all functional areas of the entity. Thus,  the  system  should  “improve the quality, content, relevance, and timing of cost information that managers use  for short-term and  long-term decision making.”

First and foremost, a CMS should provide the means to develop accurate product or  service costs. This  requires  that  the  system be designed  to use cost driver information  to  trace costs  to products and services. The system does not have  to be the most accurate, but it should match benefits of additional accuracy with expenses of achieving additional accuracy. Traceability has been made easier by improved  information  technology,  including bar coding.
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