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What are Cost Management Systems?

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  • Written By: Osmand Vitez
  • Edited By: C. Wilborn
  • Last Modified Date: 03 November 2016
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    Conjecture Corporation
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Cost management systems represent a broad range of tools a company will use to track the costs found within its operations. The starting point is a cost accounting system, which represents the accounts used to capture and allocate costs. Procedures are another part of cost management systems; these represent the guidelines a company will follow to allocate costs and price the goods produced by their system. The system will also produce a tracking system where the company can compare actual costs to the predetermined estimates for an accuracy analysis.

Most companies will use an accounting ledger to set up the accounts needed to track internal financial information. The ledger will contain accounts specific to the items used in the production process, such as raw materials, labor, overhead, finished goods, and the cost of goods sold. Managerial accountants will post information relating to cost management systems into these accounts and ensure the flow of information is accurate and matches the activities within the company.

Detailed procedures are another aspect of cost management systems. These procedures dictate how a company will record information and recognize the costs associated with the production system. For example, managerial accountants will record purchases when made by the company; the items will remain in the specific accounts until transferred to the production system. Companies will implement these procedures to ensure they accurately report inventory items and do not account for costs prior to being incurred by the production department.

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Companies use cost management systems to provide information for making decisions. The information provided typically relates to individual products produced and the production capacity associated with the company. This information helps owners and managers determine if they should increase or decrease production based on internal and external factors. Internal factors can include the ability to improve production quality by producing more goods or lowering overhead costs through more individual goods.

External factors that may drive decisions based on cost management systems include competitive products, higher consumer demand, or the ability to provide a substitute good. Each of these factors can indicate the company can produce goods cheaper or at a better quality than another company. Cost management systems can provide the information necessary to indicate the company has a cost advantage compared to other firms. This allows the company to improve its market share by using its competitive advantage in the market and outselling competitors.

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