ACCT20001 Chap.1 Why Cost Information Drives Management Decisions
Why Cost Information Drives Management Decisions
This subject sits inside accounting but faces the opposite way from the accounting most students meet first. Financial accounting and auditing report outward to people who want to compare one company with another, and external rules discipline what they may say.
Cost accounting reports inward to a manager who has to choose something, so no external rule forces a single answer and the same factory can legitimately produce several different unit costs depending on the question being asked. The subject states its own aim as the design and implementation of cost management systems together with the use of the information they produce, and both halves are examined.
A cost number earns its keep only at the point where it changes a decision: setting a price, choosing a product mix, judging a segment, valuing inventory or planning next year.
The chapter also introduces the organisational value chain, which locates a cost before anyone argues about it, and the distinction between structural cost management, meaning decisions about where the firm chooses to sit in the industry chain at all, and executional cost management, meaning the measurement tools used inside whatever structure the firm has chosen.
Nearly every later chapter is an executional tool, which is precisely why the structural half is the half students forget to mention.
What this chapter covers
- 01
Where cost accounting sits among financial accounting, auditing and management accounting
- 02
Why an internal reader changes what counts as a good number
- 03
The five uses of an assigned cost, and what a wrong number does to each
- 04
The six value-chain functions and how a cost is located before it is classified
- 05
Three different product costs, for financial statements, for contracts and for pricing
- 06
Why a price built on factory cost alone recovers less than the product consumed
- 07
Structural cost management: participation, scale, process design, product design
- 08
Executional cost management: product costing, activity based costing, budgets, customer profitability
- 09
How to write a value-chain classification that earns the reasoning mark
Place a cost on the value chain and name what would move it
- 1Freight on inbound motors is a production cost, because it is incurred to bring an input into a condition where it can be used.
- 1The fact that would move it is the direction of the movement: freight carrying finished bicycles outward would be distribution.
- 1The engineer's salary is a design cost, because the work shapes a product already in the range.
- 1The fact that would move it is whether a committed product depends on the work: testing whether a technology is viable at all would be research and development.
Key terms
- Cost object
- Anything the organisation wants a cost measured separately for, from one unit of output up to the whole business.
- Value chain
- The sequence of business functions that add usefulness to a product: research and development, design, production, marketing, distribution and customer service.
- Structural cost management
- Decisions about where the firm chooses to sit in the industry chain, covering vertical integration, scale, process design and product design.
- Executional cost management
- Measurement and analysis tools used to evaluate performance inside an existing structure, such as product costing and variance analysis.
- Vertical integration
- The extent to which one firm owns successive stages of its own value chain rather than buying them from others.
- Full value chain cost
- Inventoriable cost plus the research, design, marketing, selling and administration a product consumes, used for pricing and product-mix decisions.
- Cost assignment
- The general term covering both tracing a cost to an object and allocating it, as distinct from merely recording it in an account.
Why Cost Information Drives Management Decisions FAQ
Why does this subject insist a cost number has to be attached to a decision?
Because the reader is internal. No outside party ever sees a product cost, so nothing forces a single correct figure, and the only test available is whether the number improved a choice. That is why an examiner rewards a calculation followed by a recommendation and marks down a calculation left standing on its own, and why the same physical factory can honestly report several different unit costs at once.
Is a value-chain classification just vocabulary?
No, and treating it that way is how marks are lost. In a typical list of eight items, two can be defended in two different functions, so the answer that earns full marks names the function, gives the reason the cost was incurred there, and identifies the fact that would move it. The prescribed text and the lecture slides also use slightly different chains, and either may be used provided one chain is used consistently.
How do I tell a structural decision from an executional one?
Ask whether the firm's own position in the chain changes. Buying the supplier that makes your input, changing how large your operations are, or redesigning the product all change the structure the business will live inside for years. Running a customer profitability report changes nothing structural; it measures performance inside the arrangement that already exists.
Executional tools act faster, structural decisions reach further.
Exam move
Read this chapter before the first tutorial rather than after it, because the value-chain task arrives in week 2 and rewards preparation more than cleverness. Build one habit here that pays for the whole semester: whenever a question mentions a cost, write down the cost object before you write anything else.
Then practise the three-part classification shape on costs from a business you know well, naming the function, the reason and the fact that would move it. Finally, learn the structural and executional lists as lists. They are short, they are directly quotable, and a question asking you to classify a management decision is worth easy marks if you can produce four examples of each without hesitating.
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