Basic Concepts of Cost Management_Management

LECTURE NOTES BASIC CONCEPTS OF COST MANAGEMENT As you know, no matter what competitive strategy is adopted, a successful company needs to implement effective cost control and understand the key concepts and terms of cost control. In fact, a successful strategy usually needs to focus on the image of a particular market, and mergers can diminish and destroy the good reputation of a consumer products company. The end result is that the strategy is simple and straightforward. The first step that is very important to gain a competitive advantage is to identify the main costs and cost drivers within a company or organization. There are many different ways to classify costs, including by type of cost (labor costs in one pool and raw material costs in another), by source of origin, or by accountability. Cost objects are the products, services, customers, activities, or organizational units that incur costs; in addition, products, services, and customers are usually cost objects, but the production department may treat them as aggregates. cost object, depending on management focus on product cost or, you can treat production department based on cost pool or cost object depending on management focus, This is the responsibility of product or manufacturing department, where in payer concept is very broad, this concept includes products, product groups (so-called value stream), services, projects, and departments, besides that you can also include customers or sales between decision making, performance evaluation and strategy execution, reports financial and tax reports. The first set of concepts includes four cost factors based on the following factors: 1. Activities carried out at a detailed operational level, for example preparation of equipment, handling of raw materials and management tasks or other tasks. 2. Quantity is the total level, usually the number of units produced. 3. A structure that contains plans and decisions that have long-term implications. 4. Implementation using a short-term decision-making framework. An important concept for calculating product cost is product cost cost. This means that the costs of direct materials, direct labor and indirect production are required for products and manufacturing processes. Non-product costs are selling, controlling, and other costs that are not part of the production process. For manufacturers and trading companies recurring costs are sometimes called operating costs or sales management costs.  Cost Assignment and Allocation: Direct and Indirect Costs With cost allocation, the types of costs are allocated from the pool of costs. There are two types of imports; live tracking and mapping. Direct tracking is used to track direct costs and assignments are used to track indirect costs. Direct costs can be easily and economically tracked directly and cost pools or cost objects. Indirect costs are calculated using a cost driver, because they cannot be traced back to a cost adjustment or to a cost object.  Direct and Indirect Material Costs Direct material costs are the costs of raw materials for products or other cost objects. (less the purchase discount plus any associated shipping costs) and usually includes a reasonable waste and defective unit price. Raw materials lost in the process are considered as part of the direct materials cost of the product. In addition, the cost of raw materials used in the production process (and not part of the finished product) is called production costs. The raw materials are indirect (indirect material costs).  Direct and Indirect Labor Costs Direct labor costs include labor used to produce products and services as well unavoidable unproductive hours such as leisure/rest and prayer time. Indirect labor costs include monitoring, quality control, inspection, purchasing and receiving, material handling, cleaning work, spare time, training and cleaning.  Indirect Costs Usually, all indirect costs (indirect raw materials, indirect labor and other indirect costs) are grouped into a set of costs called indirect costs. In manufacturing companies this is called operating overhead. For simplicity and convenience, three types of fees can be combined; direct material costs, direct labor costs, and indirect costs. Direct material and direct labor costs can be combined, which is known as prime cost. Likewise, direct labor costs and overhead costs are grouped together, which is called conversion costs.  Cost Drivers and Cost Behavior Cost drivers serve two important functions for management accountants; firstly costs can be assigned to cost objects and secondly the behavior of costs, i.e. how the total cost changes when the cost drivers change. You can use cost drivers to determine the role of cost accounting and the behavior of costs at the same time together. There are four types of cost drivers; activity-based costs, quantity-based costs, structure-based costs, an execution-based cost drivers, which are developed at the detailed operational level and related to specific production (or service delivery) activities. On the other hand, quantitybased cost drivers are developed at an aggregate level such that the production rate is the quantity of units produced. Strategy analysis based on structure-based factor costs helps companies become more competitive. The implementation cost factor is a factor used by companies to make short-term operational decisions to reduce costs. These factors are: 1. Strengthening the workforce. 2. Manufacturing process design 3. Relationship with suppliers. The difference between trading companies and manufacturing companies is that trading companies purchase consumables while manufacturing companies produce raw materials, labor and overhead. The manufacturing company uses her three inventory accounts: 1. Inventory of materials (raw materials), which stores the cost of shipping raw materials used in the production process. 2. Inventory of goods in process (work-in-process inventory), which includes all costs that are ongoing during the production process but have not been completed at the time of completion. 3. Inventory of finished goods (finished goods inventory) including the cost of goods available for sale. Each account has its own opening balance and ending balance. Attributes of Cost Information  Accuracy The main way to ensure accurate data for decision making is to design and oversee an effective internal accounting management system. Internal accounting consists of a set of policies and procedures designed to limit and control the processing of financial data to prevent or detect errors and fraud.  Punctuality To make effective decisions, decision makers make timely access to cost management information. In many decisions, cost delays may be important. When placing an urgent order, if the required information cannot be obtained in time, it may be lost.  Cost Information and Value Information Cost management information has a certain cost and value, but management accountants are information professionals, and other financial professionals. There are several important concepts for management accountants which can be divided into two groups, the first is cost objects, cost drivers, cost recovery and cost accounting and the second is calculating the cost of products or services for depreciation of financial statements.