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A cost management system is part of an overall management information and control
system. Exhibit 2–2 illustrates the types of information needed in an organization for individuals to perform their managerial functions. The exhibit also demonstrates
the demand from external parties for information from the firm. A management
information system (MIS) is a structure of interrelated elements that collects, organizes,
and communicates data to managers so they may plan, control, make decisions,
and evaluate performance. A MIS emphasizes satisfying internal demands
for information rather than external demands. In most modern organizations, the
MIS is computerized for ease of access to information, reliability of input and processing,
and ability to simulate outcomes of alternative situations.
As Exhibit 2–2 illustrates, the accounting personnel are charged with the task
of providing information to interested external parties such as creditors, the government
(for mandatory reporting to the Internal Revenue Service, Securities and
Exchange Commission, and other regulatory bodies), and suppliers, in regard to
payments and purchases. External intelligence is also gathered from these parties

as well as from competitors. Managers use internally and externally generated information
to govern their organizations.
Because one of the managerial functions requiring information is control, the
MIS is part of the management control system (MCS). As illustrated in Exhibit
2–3, a control system has the following four primary components:

1. A detector or sensor, which is a measuring device that identifies what is actually
happening in the process being controlled.
2. An assessor, which is a device for determining the significance of what is happening.
Usually, significance is assessed by comparing the information on what
is actually happening with some standard or expectation of what should be
happening.
3. An effector, which is a device that alters behavior if the assessor indicates the
need for doing so. This device is often called “feedback.”
4. A communications network, which transmits information between the detector
and the assessor and between the assessor and the effector.2
It is through these system elements that information about actual organizational
ocurrences is gathered, comparisons are made against plans, changes are effected
when necessary, and communications take place among appropriate parties. For
example, source documents (detectors) gather information about sales that is compared
to the budgets (assessor). If sales revenues are below budget, management
may issue (communications network) a variance report (effector) to encourage the
sales staff to increase volume.
However, even given the same information, different managers may interpret
it differently and respond accordingly. In this respect, a management control system
is not merely mechanical, it requires judgment. Thus, a management control
system may be referred to as a black box: an operation whose exact nature cannot
be observed.3 Regardless of the specific actions taken, a management control
system should serve to guide organizations in designing and implementing strategies
such that organizational goals and objectives are achieved.
Most businesses have a variety of control systems in place. For example, a
control system may reflect a set of procedures for screening potential suppliers
or employees, a set of criteria to evaluate potential and existing investments, or
a statistical control process to monitor and evaluate quality. Another important
part of the management information and control systems is the cost management
system.