BASIC COST MANAGEMENT CONCEPTS
QUESTIONS FOR WRITING AND DISCUSSION
An accounting information system is a sys-
tem consisting of interrelated manual and
computer parts, using processes such as
collecting, recording, summarizing, analyz-
ing, and managing data to provide output in-
formation to users.
The financial accounting information system
is primarily concerned with producing out-
puts for external users using well-specified
economic events as inputs and processes
that meet certain rules. The cost manage-
ment system, on the other hand, produces
outputs for internal users, and the criteria
that govern inputs and processes are dir-
ectly related to management objectives. The
cost management system, therefore, has
more flexibility than the financial system.
The three broad objectives of a cost man-
agement information system are (1) to cost
out products, services, and other cost ob-
jects; (2) to provide information for planning
and control; and (3) to provide information
for decision making.
The cost accounting information system is a
cost management subsystem designed to
assign costs to products, services, and other
objects as management needs specify. The
operational control information system is a
cost management information subsystem
designed to provide accurate and timely
feedback concerning the performance of
managers and others relative to their plan-
ning and control of activities.
A cost object is any item for which costs are
measured and assigned, including such
things as products, plants, projects, depart-
ments, and activities.
An activity is a basic unit of work performed
within an organization. Examples include
materials handling, inspection, purchasing,
billing, and maintenance.
Direct costs are costs that can be easily and
accurately traced to a cost object. An indir-
cost is a cost that cannot be easily traced to
Traceability is the ability to assign a cost dir-
ectly to a cost object in an economically
feasible way using a causal relationship.
Allocation is the assignment of indirect costs
to cost objects based on convenience or as-
Driver tracing is the use of drivers to trace
costs to cost objects. Often, this means that
costs are first traced to activities using re-
source drivers and then to cost objects us-
ing activity drivers.
Tangible products are goods that are made
by converting raw materials through the use
of labor and capital inputs.
A service is a task or activity performed for a
customer or an activity performed by a cus-
tomer using an organization’s products or fa-
products on three important dimensions: in-
tangibility, perishability, and inseparability.
Intangibility means that buyers of services