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A cost management system (CMS) consists of a set of formal methods developed
for planning and controlling an organization’s cost-generating activities relative to
its short-term objectives and long-term strategies. Business entities face two major
challenges: achieving profitability in the short run and maintaining a competitive
position in the long run. An effective cost management system must provide managers
the information needed to meet both of these challenges.
Exhibit 2–4 summarizes the differences in the information requirements for organizational
success in the short run and long run. The short-run requirement is
that revenues exceed costs—the organization must make efficient use of its resources
relative to the revenues that are generated. Specific cost information is
needed and must be delivered in a timely fashion to an individual who is in a position
to influence the cost. Short-run information requirements are often described
as relating to operational management.

Meeting the long-run objective, survival, depends on acquiring the right inputs
from the right suppliers, selling the right mix of products to the right customers,
and using the most appropriate channels of distribution. These decisions require
only periodic information that is reasonably accurate. Long-run information requirements
are often described as relating to strategic management.
The information generated from the CMS should benefit all functional areas of
the entity. Thus, the system should integrate the areas shown in Exhibit 2–5 and
should “improve the quality, content, relevance, and timing of cost information that
managers use for short-term and long-term decision making.”4
Crossing all functional areas, a cost management system can be viewed as having
six primary goals: (1) develop reasonably accurate product costs, especially
through the use of cost drivers (activities that have direct cause-and-effect relationships
with costs); (2) assess product/service life-cycle performance; (3) improve
understanding of processes and activities; (4) control costs; (5) measure performance;
and (6) allow the pursuit of organizational strategies.
First and foremost, a CMS should provide the means to develop accurate product
or service costs. This requires that the system be designed to use cost driver
information to trace costs to products and services. The system does not have to
be the most accurate, but it should match benefits of additional accuracy with expenses
of achieving additional accuracy.

The product/service costs generated by the cost management system are the
input to managerial processes. These costs are used to plan, prepare financial statements,
assess individual product/service profitability and period profitability, establish
prices for cost-plus contracts, and create a basis for performance measurements.
If the input costs generated by the CMS are not reasonably accurate, the
output of the preceding processes will be inappropriate for control and decisionmaking
purposes.
Although product/service profitability may be calculated periodically as a requirement
for external reporting, the financial accounting system does not reflect
life-cycle information. The cost management system should provide information
about the life-cycle performance of a product or service. Without life-cycle information,
managers will not have a basis to relate costs incurred in one stage of the
life cycle to costs and profitability of other stages. For example, managers may not
recognize that strong investment in the development and design stage could provide
significant rewards in later stages by minimizing costs of engineering changes
and potential quality-related costs. Further, if development/design cost is not traced
to the related product or service, managers may not be able to recognize organizational
investment “disasters.”
A cost management system should help managers comprehend business
processes and organizational activities. Only by understanding how an activity is accomplished
and the reasons for cost incurrence can managers make cost-beneficial
improvements in the production and processing systems. Managers of a company
desiring to implement new technology or production systems must recognize what
costs and benefits will flow from such actions; these assessments can be made only
if the managers understand how the processes and activities will differ after the
change.
The original purpose of a cost accounting system was to control costs. This is
still an important function of cost management systems given the current global
competitive environment. A cost can be controlled only when the related activit