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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.
