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In designing and revising a cost management system, managers and accountants
must be attuned to the unique characteristics of their firms. A generic cost management
system cannot be “pulled off the shelf” and applied to any organization.
Each firm warrants a cost management system that is tailored to its situation. However,
some overriding factors are important in designing a cost management system.
These factors are depicted in Exhibit 2–6 and are described in this section.
Organizational Form, Structure, and Culture
An entity’s legal nature reflects its organizational form. Selecting the organizational
form is one of the most important decisions business owners make. This
choice affects the costs of raising capital, operating the business (including taxation
issues), and, possibly, litigating. The available organizational form alternatives
have increased remarkably in recent years.
The most popular form for large, publicly traded businesses is the corporation.

However, smaller businesses or cooperative ventures between large businesses also
use general partnerships, limited partnerships, limited liability partnerships (LLPs),
and limited liability companies (LLCs). These latter two forms have recently emerged
due to new federal, state, and international legislation. Both the LLP and LLC provide
more protection for a partner’s personal assets than a general partnership in
the event of litigation that leads to firm liquidation. Accordingly, LLPs and LLCs
may offer better control for legal costs than general partnerships.
Organizational form also helps determine who has the statutory authority to
make decisions for the firm. In a general partnership, all partners are allowed to
make business decisions as a mere incidence of ownership. Alternatively, in a corporation,
individual shareholders must act through a board of directors who, in
turn, typically rely on professional managers. This ability to “centralize” authority
is regarded as one of the primary advantages of the corporate organizational form
and, to some extent, is available in limited partnerships, LLPs, and LLCs.
Once the organizational form is selected, top managers are responsible for creating
a structure that is best suited to achieving the firm’s goals and objectives. Organizational
structure, introduced in Chapter 1, refers to how authority and responsibility
for decision making are distributed in the entity.5 Top managers make

judgments about how to organize subunits and the extent to which authority will
be decentralized. Although the current competitive environment is conducive to
strong decentralization, top managers usually retain authority over operations that
can be performed more economically centrally because of economies of scale. For
example, financing, personnel, and certain accounting functions may be maintained
“at headquarters” rather than being delegated to organizational subunits.
In designing the organizational structure, top managers normally will try to
group subunits either geographically or by similar missions or natural product clusters.
These aggregation processes provide effective cost management because of
proximity or similarity of the units under a single manager’s control.
For example, relative to similarity of mission, Chapter 1 introduced three generic
missions (build, harvest, and hold) for business subunits. Subunits pursuing a “build”
mission are using more cash than they are generating. Such subunits are investing
cash with an expectation of future returns. At the other extreme, subunits pursuing
a “harvest” mission are expected to generate excess cash and have a much
shorter investment horizon. If one manager were responsible for subunits that represented
both build and harvest missions, it would be difficult for top management

to design proper incentives and performance evaluation measures for the subunit
manager or to evaluate his or her cost management effectiveness and efficiency.
Different cost management tools are used for different subunit missions. If a specific
cost management tool is to be applied to an entire subunit but there is a mix
of missions across that subunit’s components, there is greater potential for making
poor decisions.
The extent to which managers decentralize also determines who will be held
accountable for cost management and organizational control. An information system
must provide relevant and timely information to persons who are making decisions
that have cost control implications, and a control system must be in place
to evaluate the quality of those decisions.
An entity’s culture also plays an important role in setting up a cost management
system. Organizational culture refers to the underlying set of assumptions
about the entity and the goals, processes, practices, and values that are shared by
its members. To illustrate the effect of organizational culture on the cost management
system, consider AT&T prior to its divestiture. It was an organization characterized
by “bureaucracy, centralized control, nepotism, a welfare mentality in
which workers were ‘taken care of,’ strong socialization processes, [and] little concern
for efficiency. . . .”6 In such a culture, the requirements of a cost management
system would have been limited because few individuals needed information, decisions
were made at the top of the organization, and cost control was not a consideration
because costs were passed on to customers through the rate structure.
After divestiture, the company’s culture changed to embrace decentralized decision
making, cost efficiency, and individual responsibility and accountability. Supporting
such a changed culture requires different types, quantities, and distributions of
cost management information.
The values-based aspects of organizational culture are also extremely important
in assessing the cost management system. For example, one part of Birmingham
Steel Corporation’s mission statement is “to be the lowest-cost, highest-quality manufacturer
of steel products in the markets served.”7 Without a well designed cost
management system, Birmingham Steel could not evaluate how well it is progressing
toward the accomplishment of that mission. Thus, the cost management system is
instrumental in providing a foundation for companies with an organizational culture
that emphasizes total quality management.