Selecting the Right Cost Management Systems

Cost management systems are simply the methods used to evaluate the results of decisions made as a result of cost management strategies. Costing systems have three primary goals:

  • - provide cost information for strategic decision making,
  • - to provide cost information for operational control, and
  • - to measure inventory value and cost of goods.

There are two primary cost management systems:

  • - traditional costing systems and
  • - activity based costing systems.

These competing views of cost management systems have unique advantages and disadvantages.

Traditional Systems

Traditional systems focus on meeting financial reporting requirements. The cost objects are tracked in a general ledger format, yielding periodic profit and loss statements that record both fixed and variable costs.

Cost allocation is handled by starting with direct costs by division, then allocating indirect costs to production units. The resulting total is then attributed versus some unit of production to determine the cost of providing the enterprise goods or services. This assignment of overhead can cause problems for good change management decisions.

As a result of the second phase, cost management is difficult to achieve as products carry the burden of costs they did not incur directly or indirectly. So while traditional costing systems are adequate for financial tracking and reporting needs, they are often inadequate cost management systems for change management.

Activity Based Cost Management Systems

Activity Based Costing (ABC) is a method of attributing only costs that contribute to the production of a product to that product. ABC starts with activity analysis, clearly identifying the processes that support a product and avoiding some of the systemic inaccuracies of traditional costing.

The advantage of ABC is that it allows for Activity Based Management (ABM). In essence, this is a programmed method of using the output data from cost management systems to make sound strategic cost management decisions. It uses determinations of what costs are value-added and what are non-value added.

Conclusion

For most businesses today, meeting investor expectations and surviving in a more competitive marketplace, it is critical to move from traditional cost management systems to ABC. The data available in a well executed ABC costing environment can drive the type of improvements that directly impact bottom-line profit performance.

 

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