Langfield-Smith et al (2006:694) define cost management as the improvement of an organisation’s cost effectiveness by understanding and managing the real causes of cost. They contend that although the predominant focus in cost management is on costs, it also endeavours to improve other aspects of performance such as quality and delivery.
Drury (2008:538) defines cost management as those actions that managers take to reduce costs, some of which are prioritised on the basis of information extracted from the accounting system, while other actions are undertaken without the use of accounting information. Where an opportunity has been identified to perform a process more effectively and efficiently, which has obvious cost reduction outcomes, process improvements should be made. The ideal situation is to take action that both reduces costs and enhances customer satisfaction.
Hilton et al (2006:5) state that cost management involves more than measuring and reporting product and service costs. He defines it as a philosophy of seeking increased customer value at a reduced cost, an attitude that all costs are caused by management decisions and a reliable set of techniques that increases value and reduces costs.
According to Hansen and Mowen (2003:993), cost management identifies, collects, measures, classifies and reports information that is useful to managers in costing, planning, control and decision making.
From the above definitions, one may conclude the following:
Cost management involves actions taken by managers to reduce cost on the basis of accounting information as well as other information.
Costs are extracted from the accounting system, while other actions are undertaken without the use of accounting information.
Management should be aware that all costs are caused by decisions.
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Customer value should increase at a reduced cost.
For the purposes of this study, cost management is defined as those actions taken to reduce cost while enhancing customer satisfaction.
It is clear that much information is needed to manage cost. A proper cost management information system is therefore required, and will now be discussed.
4.2.1 Cost management information systems
In the last two decades, worldwide competitive pressures, deregulation, growth in the service industry and advances in information and manufacturing technology have dramatically changed the nature of the economy and the way in which manufacturing and service industries operate. The focus of cost management systems has been broadened to enable managers to provide more customer value at a lower cost. Value should be added in each step of the production process. Today’s cost accountants need to grasp the functions of a business’s value chain (see sec 4.3.2) in order to achieve this.
A cost management information system produces outputs for internal users using the inputs and processes needed to satisfy management’s objectives. It is not bound by external regulation because the criteria are set by people in the organisation. It has three broad objectives that provide information for the following:
costing out services, products and other objects of interest to management
planning and control
decision making
The object being costed and the reason why management need to know the cost will determine the information required for the first objective. Cost information should help managers to plan and control. They should decide
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what has to be done, why it should be done, how it should be done and how well it is being done. Cost information is also crucial for many management decisions.
The cost management information system should produce information that benefits the whole organisation. Managers in many different areas of a business, require cost information and should interact with the design and development system, the production, marketing and customer service systems.
The cost management information system should have an organisation-wide perspective and be integrated with the nonfinancial functions and systems in the organisation. In the current competitive environment, companies should pay greater attention to cost management in all functional areas. Figure 4.1 illustrates the expected interactive relationships.
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Figure 4.1 An integrated cost management system
Source:
Adapted from Hansen and Mowen (2003:30)
Figure 4.1 implies the cost management information system not only receives information from all operational systems, but also supplies information to these systems. If possible, the cost management information system should be integrated with the organisation’s operational systems. Integration reduces redundant storage and use of data, improves the timeliness of information and increases the efficiency of producing reliable and accurate information (Hansen
& Mowen 2003:29-30).
A number of techniques have evolved to manage cost, including activity-based management, just-in-time systems, Kaizen costing, target costing, total quality management, business process re-engineering and life cycle management.
During the course of the literature study, the researcher found that in management accounting textbooks, only a small section is devoted to a discussion of cost management. The major part of these books still discusses
Production system
Cost manage-
ment system
Customer servicing
system
Marketing and distribution
system Design and
develop- ment system
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the management accounting control techniques, while only one or two chapters briefly describe cost management.
The researcher also found, during personal interviews, that much attention in the metallurgical research field is focused on feasibility studies before accepting a project. The net present value and internal rate of return approaches (see secs 3.3.1 and 3.3.2) are the primary investment criteria used by mining companies for acceptance of a project. However, it is assumed that cost management techniques are not used to manage cost once a project has been accepted.
According to Albright and Lam (2006:157), it is necessary to understand the historical context of the development of the various modern cost management techniques. Langfield-Smith (2008:204) provides evidence that these techniques have not been adopted widely. Because cost management techniques are not yet widely used in the industry, and are also not dealt with in depth in cost management textbooks, it is necessary to discuss these techniques in detail in this study.
The following two research objectives in this study relate to cost management:
(1) to examine different methods that can be used to estimate and manage the total costs of a project during its life cycle
(2) to determine whether these cost management methods are being used in metallurgical research projects
The above-mentioned techniques, with the exception of life cycle management will now be discussed in detail. The history, elements, objectives and implementation of each of the techniques will be highlighted. They will be compared with other cost management systems and evaluated. Life cycle costing was discussed in detail in chapter 2. Life cycle management is a derivative of life cycle costing and identifies those areas in which running costs detailed by life cycle costing can be reduced. This was dealt with in section 2.4.2. Section 5.6.13 indicates whether these methods of cost management are actually being used in metallurgical research projects.
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