Cost Management Accounting: Concepts, Objectives, and Methods

Vũ Khôi

Author at Wotech Electronics Blog

The cost problem is always a top concern for any entity, organization, or business running production or commercial operations. Optimizing the cost management process is therefore considered a critical factor in a company's success. So what does cost management accounting involve in planning and controlling a company's cost information? Thanks to it, accuracy and effectiveness in cost management are assured, adding value and strengthening the company's business advantage.

An Overview of Cost Management Accounting

What Are Business Costs?

Business costs are the outlays a company must make to operate, grow, and meet all of its production and commercial needs. Examples of business costs include:

• Workplace rental costs.

• Production costs.

• Purchased or outsourced services for management purposes: electricity, water, repair and maintenance of facilities and fixed assets.

• Taxes and fees payable to the State: license tax, land tax, and so on.

• Business travel and meeting costs.

• Wages, allowances, and salary-based deductions payable to employees.

All cost information needs to be compiled and analyzed fully and regularly so that business managers can easily make high-stakes determinations such as break-even analysis, pricing tactics, profit-growth planning, and cost control and forecasting. The business cost management process must therefore be designed and calculated carefully to avoid mistakes that waste the company's money.

>> See more: What Are Business Management Costs? What Do They Include? How Are They Regulated?

What Is Cost Management Accounting?

In essence, cost management accounting is an indispensable component of the management accounting system. It is an important information channel tasked with providing information about business management costs to support financial evaluation and control, and to enable optimal decisions at the management level.

The content of cost management accounting includes the following basic items:

• Recording and classifying costs

• Setting cost norms and estimates

• Accounting for operating costs and calculating product costs

• Tracking and analyzing cost fluctuation information

• Preparing cost management accounting reports

Objectives of Cost Management Accounting

The objective of cost and cost-management accounting is to determine the expenses a business needs in order to operate, as well as to study the pricing strategy for its products and services — providing internal information for management purposes. Cost management accounting is therefore an important basis on which business managers make accurate, sound decisions.

Despite its important role in operations, some limitations of cost management accounting persist in businesses, as follows:

• Cost management accounting in general, and the process of establishing a cost management accounting model in particular, have not received real attention from businesses. The importance of management accounting has not been emphasized, leading to less effective business management and administration strategies.

• The application of cost management accounting is still at a rudimentary stage. In other words, it is merely a simple link between financial accounting and management accounting functions.

• Today, most businesses have only organized a financial accounting apparatus, while the management accounting apparatus — specifically cost management accounting — has not been genuinely invested in.

Guide to Cost Management Accounting in Businesses

Cost Management Accounting Methods

Target Cost Management Accounting Method

Target cost management accounting is a collection of management methods and tools for achieving cost and operational objectives starting from the planning and design stage of a new product. This method provides the basis for controlling the production process and ensuring the profit target set is achieved in line with the product life cycle. It is a cost management tool aimed at cutting total production costs over the product's life cycle, thanks to the mutual support of manufacturing, production, design R&D, marketing, and accounting departments. In short, target cost management accounting is a technique used to calculate production and selling costs by subtracting the expected profit from the estimated price.

The target cost management accounting method brings the following benefits to a company's management system:

• Cost optimization: It helps business management analyze the most effective ways to produce or purchase products at the lowest cost. As a result, the company gains financial flexibility and can focus on achieving high profits or set competitive pricing strategies in the market to attract more customers.

• Product cycle optimization: The product cycle time is the period from the design stage until the product is ready for the market. Shortening the product cycle means managers eliminate unnecessary time wastage that adds no value in the final stage of getting the product into customers' hands. This is a strong competitive advantage for the business.

• Greater profitability: Using the target costing method effectively helps a company become more profitable. The two main elements of profit are price and cost. Target cost management accounting helps the business develop and price products based on underlying costs and market prices, ensuring the company delivers products that are valuable to customers in the market.

Kaizen Cost Management Accounting Method

The Kaizen cost management accounting method focuses on cost reduction. Translated from Japanese, the term Kaizen can be understood as "improvement" or "change for the better." While target cost management accounting aims to meet customer requirements, Kaizen targets the profit requirements for each stage of business that the owner sets. This method therefore focuses on the entire production process, not just the product itself.

The benefits of the Kaizen cost management accounting method include:

• Encouraging improvement and change: The main goal of the Kaizen method is for the business to continuously look for ways to cut costs. To do that, business owners must break objectives down into easily achievable ones — for example, raising labor productivity and limiting material loss and waste. This makes it easy to analyze actual cost changes and production processes to optimize and cut labor and material costs.

• Maximum cost savings: The Kaizen method functions like a budget control system in cost management accounting. Through successive improvement activities, Kaizen saves costs in many ways and sets rules for each different department.

• More comprehensive savings: By combining the target cost management accounting method with Kaizen, a business can optimize costs across the entire cycle — fully, from the design stage through product development and production.

Standard Cost Management Accounting Method

This is a product costing method for businesses that already have a stable production process and can manage norms, consolidate production costs, and maintain the required level of organization. It includes:

• Ideal standards: Standards achievable only under perfect conditions (no allowance for machine breakdown or any production interruption).

• Practical standards: Standards achievable with effort (allowing reasonable machine downtime or employee rest time).

The benefits of the standard cost management accounting method:

• Provides benchmarks for managers to check and compare against actual costs.

• Motivates workers to save costs in production.

• More stable cost and product cost figures.

• A simpler accounting system compared to actual costing.

Notes on Building Cost Management Accounting in a Business

For a business to make sound short-term decisions and wise, effective long-term business strategies, the cost management accounting model must reflect information accurately and optimally. Building cost management accounting in a business therefore has to meet the following basic requirements:

• Ensure comprehensiveness: The cost management accounting model needs to fully reflect the basic content demonstrating the role of cost management (identifying and controlling production and business costs). In addition, the model must ensure information is provided honestly, reasonably, and in a timely manner.

• Ensure simplicity: The accounting proficiency and capabilities of staff and business managers are the leading factors here. Beyond that, the company's production and business processes also need to be streamlined and cost-optimized to avoid overcomplicating the management accounting model.

• Meet managers' information needs: The model must be able to provide consolidated and detailed information according to the company's needs throughout the closed loop — from planning, execution, and management, to checking and evaluation.

Summary

Those are the essentials of cost management accounting. We hope this article has given you useful knowledge about cost management in a business. Today, this work can be made easier with the support of accounting software that collects information and data and processes input and output costs accurately and efficiently. If you need further advice on how to implement an accounting software solution with SimERP and what it costs, contact us right here!

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