Quiz 1: Introduction to Cost Management

Business

Cost management: Cost management is the process of effective planning and controlling the costs incurred by a business. It means the collection, analyzation and evaluation of cost statistics to the management for budgeting purposes to plan and control the costs involved in the business. It is an integral part of the management. Management accounting: Financial and non-financial data analyzed by the management to take decisions and plan the organizational strategy. It is a profession that helps management in decision making, planning and providing the expert skill in financial reporting. Cost accounting: It is the process that helps manager to understand the costs of running a business. It aims on the calculation of cost of production or service to provide information about the cost control and cost reduction. In this process, the costs are classified basing on the functions, activities carried on by the company. Cost management differs from management accounting and cost accounting in the following aspects: 1.Cost management deals with collection, analyzation and evaluation of cost statistics whereas management accounting deals with the financial data and also non-financial data. 2.Cost management is closely related to cost accounting. Cost accounting is a part of management accounting because the management accounting considers financial data for organizational strategy. 3.Cost accounting deals with the historical data whereas management accounting is a process that predicts future with the help of budgets. 4.Management accounting is an information tool for the management at top-level but the cost management information is used internally and externally used by the management. 5.Cost accounting and financial accounting are parts of management accounting whereas cost management considers only cost accounting.

The classifications of the following actions associated with either financial accounting information system (FS) or the cost management information system (CMS) is shown as below: a. CMS: Determining the compensation of CEO is a cost and management decision which depends on the responsibility of the job, decisions to be taken and the funds available with the company. b. FS: Quarterly earnings report is the record of the expenditure and the total earnings of the company. c.CMS: Determining the unit product cost using Time Driven Activity Based Costing is Cost and Management information Systems. The demand will be more if the cost of the product is less. d. CMS: The number of units to be sold to get the break-even point so that some vital future decisions can be taken. e.FS: Report for SEC is a financial statement for information. f.CMS: Preparing sales budget to procure and utilize the funds for the future sales. g.CMS: Cost and revenue information for a vital decision whether to extend or stop product line. h.FS: Preparing the financial statement according to GAAP for public information. i.CMS: Cost and revenue information for a vital decision whether to invest in a new production system. j.CMS: Decision to reduce cost and improve quality is a cost effective decision. k.CMS: Using debt- equity and liquidity ratios to take major financial decisions of the company. l.FS: Investor decides whether to invest or not by looking at the financial statements of the company.

Cost management: Cost management provides the detailed cost information that management needs to control current operations and plan for the future and financial accounting is used to prepare accounting information for people outside the organization and not involved in the day-to-day running of the company. List the aspects that differs Cost management and financial accounting: 1. Cost management is an internal management tool whereas financial accounting involves the preparation of set of final accounts for each accounting period. 2. Cost management can provide day to day decision by applying the cost concepts such as marginal costing and budgetary control whereas financial accounting cannot provide information for day to day decision making. 3. Cost management aims at computing true and fair view of cost of production and reducing the cost whereas financial accounting aims at presenting true and fair view of transactions, profit and loss and balance sheet on a given date. 4. Cost management rules are set within the organization to produce information relevant to the needs of the organization whereas financial accounting follows generally accepted accounting principles. 5. Cost management output is used by management, customers, auditors, suppliers and others involved in the organization where as the financial reports are used by shareholders, creditors, prospective investors and public.

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