Executive Summary

The research aims to better understand the role of cost management in contemporary business
administration. Key roles of cost management are defined based on broad scientific research
methodologies and a survey of industry experts. By identifying key cost management processes,
the authors demonstrate that it is possible to create a comprehensive cost management system.
Important cost-cutting strategies are outlined. To effectively apply cost management procedures,
it is crucial to guarantee steady linkages between the elements of the management system at the
management level of the business's organizational structure. In addition, a method for mutually
regulating costs must be established before, during, and after the development of the complete
business process itself (i.e., during planning, organization, technological process development,
and production). A well-developed general management system, into which the cost
management system can be incorporated, requires coordinated efforts from the enterprise's
structural departments, which should have solid horizontal and vertical logistical connections and
established responsibility centers. The effectiveness of management and control systems
designed to maximize impact from management at the executive level is determined by the tried
and established communication plan for information transmission and coordination between
structural units at an enterprise. Increasing the efficacy of management decisions based on data
from an analytical assessment of the enterprise's expenses is the practical significance of
examining the functions of cost management systems in a modern organization's management
system. The theoretical significance comes from the possibility of applying the findings of the
study to the creation of a generic management system for organizations.

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 Chapter One

Abstract

The standard cost behavior perspective takes for granted a straightforward mechanical
connection between cost drivers and costs. In contrast, recent studies on the topic of cost
management acknowledge that expenses are generated as a result of operating decisions made by
managers who face a wide range of limitations, incentives, and cognitive biases. This theoretical
advancement removes the lid off the "black box" of cost behavior, providing academics with a
novel and powerful lens through which to examine the causes and effects of managerial
operational decisions. A survey of the economic theory of cost behavior and major estimate
challenges was published in 2014 by Banker and Byzalov. In recent years, there has been a
substantial increase in the body of research on cost management, which has improved our ability
to fathom the impact of managerial decisions on actual costs. In this paper, we present a
systematic overview of recent results and insights, focusing on the role of cost management in
clarifying problems in cost, managerial, and financial accounting, as well as the opportunities
and threats that lie ahead for researchers in this area.

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1.1 Introduction

The study of how businesses and organizations behave in regards to costs has become a
prominent new field of study in accounting. When we talk about "cost management," we're using
a wide definition that encompasses any and all managerial actions intended to affect costs in a
tangible way. 1 In the past, cost behavior was seen as a mechanical relationship between a cost
driver and costs, as depicted in textbooks (e.g., Garrison, Noreen, and Brewer 2015). In a more
modern take on things, it was realized that resources are what really drive up prices, and that
they're also the ones you need to do everything (e.g., Cooper and Kaplan 1987, 1992). While
studies on these improvements looked at the predictive ability of different activity cost drivers
(e.g., Miller and Vollman 1985; Foster and Gupta 1990; Banker and Johnston 1993; Banker,
Potter, and Schroeder 1995; and many more), they still assumed a mechanical connection
between activities and costs and failed to investigate the impact of managerial decisions on the
latter's behavior. Costs have been proven to respond to all of these elements. For instance, when
managers anticipate the resource adjustment costs to be high, they often choose to restrict the
size of both upward and downward resource adjustments. Thus, when moving resources up in
response to an activity rise or down in response to an activity decrease, managers are likely to
make different choices for the same activity level (e.g., Anderson, Banker, and Janakiraman
2003). Managers' resource commitment decisions are impacted by adjustment costs, as expected
by Anderson et al. (2003) and Banker, Byzalov, and Chen (2013b). Managers with strong
incentives to avoid reporting a loss (e.g., Dierynck, Landsman, and Renders 2012; Kama and
Weiss 2013) select a lower resource level for the same activity level than managers with an
incentive to engage in empire-building (e.g., Chen, Lu, and Sougiannis 2012). Resource
commitment decisions made by managers have been shown to be influenced by behavioral
biases such overconfidence (Chen, Gores, and Nasev 2015) and arrogance (Qin, Mohan, and
Kuang 2015). (Yang 2015). In order to better understand the underlying features of managerial
decisions, several research analyze the behavior of costs to learn about managers' reactions to a
wide range of constraints, conditions, and occurrences. Earnings = Sales - Expenses, so any
choices made about how to handle expenses will have an effect on how those expenses behave in
the marketplace. Affecting the inferences made in fields that use earnings-based metrics is the
relationship between cost management and earnings properties. Weiss (2010), for instance,
demonstrates that analysts' estimate accuracy is influenced by cost management actions via the

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unpredictability of future profitability generated by sales shocks. It has been demonstrated by
Banker, Basu, Byzalov, and Chen (2016a) that the choices made regarding the management of
costs have an effect on inferences about conditional conservatism that are grounded in the
asymmetric timing of earnings. Earnings projections can benefit from observing cost behavior
due to the time-series features that are affected by management decisions (e.g., Banker and Chen
2006). To the extent that analysts and investors fail to take advantage of its predictive potential,
the bias in their earnings forecasts will vary predictably with changes in sales and other
determinants of costs. Earnings forecasting errors and anomalous trading activity around
earnings announcements are two potential outcomes of this tendency. The fundamental analytical
signals, operational accruals, efficiency measurements, firm borders, and national unemployment
rates are only some of the additional results that may be traced back to managerial operating
decisions that manifest in cost behavior. Therefore, the empirical context of cost behavior has
consequences for other fields of study that need a more in-depth grasp of managers' operational
decisions. When sales are down, managers who are positive about the future are more likely to
hold on to resources even if they aren't being used, according to studies in the field of cost
management (e.g., Anderson et al. 2003). Earnings for the current period are impacted negatively
because of the retention of idle resources, which drives up expenditures (as a percentage of
sales). Accordingly, if management's confidence is warranted, higher costs and poorer earnings
during a sales fall can be indicative of good news about future demand. On the flip side, good
news might be conveyed through fewer expenses and higher earnings despite a decline in sales.
Recent studies corroborate this notion by showing that the SG&A expense ratio and other
common signals in fundamental analysis are read in the opposite direction during sales declines
(Anderson, Banker, Huang, and Janakiraman 2007; Banker, Fang, and Mehta 2016e). Accrual-
based profits management, efficiency assessment, outsourcing decisions, and macroeconomic
outcomes are only few of the current phenomena that have been examined with the help of
insights gained through cost management research on managers' operating decisions (e.g.,
Banker, Byzalov, Fang, and Jin 2016c; Atasoy and Banker 2014; Atasoy, Banker, and Byzalov
2016a; Rouxelin, Wongsunwai, and Yehuda 2016). Banker and Byzalov's (2014) article didn't
try to provide a comprehensive literature review or investigate the wide variety of ramifications
resulting from opening the "black box" of cost behavior; rather, its primary goal was to establish
the economic theory of cost behavior and clarify major empirical implementation issues. Our

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work is grounded in the economic theory of Banker and Byzalov (2014), and we present a
comprehensive, systematic review of the latest findings and insights in the rapidly expanding
literature on cost management. We pay special attention to the implications of cost management
and future research opportunities in addressing questions ranging from financial analysis and
earnings management to the boundaries of the firm. What follows is a discussion of the
theoretical underpinnings of cost management. We then explore some of the methodological
challenges in this research and review the primary findings on cost management and its
determinants. Next, we take a look at what's been discovered about how cost management affects
other areas of study besides just accounting. The final part sums up the whole thing and offers
some recommendations for further study.

1.2 Objectives of the study

The main aim of this study is :

1. To assess the structure of cost management in a business firm

2. To imply the strategic planning about environmental cost management issues
3. To compile a overall guideline for a business organization about cost management

1.3 Significance of the study

The conceptual model of CMQ is information that reliably generates management accounting
data; this is a theoretical contribution explained by the resource-based perspective (Barney,
2001). Resource impact on business performance is the main area of interest. Definition:
Resources are the firm's assets, capabilities, procedures, information, and knowledge. This
research aimed to describe CMQ as a tool for producing accurate, timely, and relevant
management accounting information for efficient internal control execution and sound decision-
making. Internal controls that work and decisions that can be trusted pay off for businesses.
Management's favorable impact on company performance was most strongly and favorably
connected to the quality of internal controls and the consistency of management decision-
making. In addition, there was a strong positive correlation between CMQ and both the
efficiency of internal controls and the reliability of decisions. Therefore, it is imperative that

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those in charge of accounting have a firm grasp of cost management and work to improve it so
that their reports are reliable, accurate, and useful. In order to survive in a competitive market,
this data needs to be: simple to grasp; helpful in implementing plans for improved operations;
and able to surpass the competition. Firms utilizing CMQ will have more reliable decision-
making processes and effective internal controls, leading to better overall performance.
Businesses on the cusp of ASEAN can benefit from CMQ in a number of ways, including
enhanced competitive advantages, increased corporate intelligence, better decision planning,
more streamlined manufacturing processes, and more.

1.4 Limitations

Cost management quality (CMQ) is the subject of this research, namely how it influences
internal control efficiency and the trustworthiness of business decisions. It was discovered that
CMQ strongly and positively correlated with the efficiency of internal controls and the
dependability of decisions. The efficiency and validity of internal controls had a major,
beneficial impact on business performance, as did the consistency of managerial judgment. As an
example, we used data from Thai factories that filed reports with the Department of Industrial
Works. The following were some of the limitations of the study. To begin, the proposed
conceptual model was only field-tested among Department of Industrial Works-approved start-
ups. In addition, research into different businesses is required. Second, it's possible that some of
CMQ's repercussions were overlooked. New variables, such as efficient budgeting, strategic
performance evaluation, and productivity, should be included in future studies of CMQ's effects.
Finally, the influences on CMQ from its precursors like executive vision and IT should be
investigated.

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 Chapter Two
Literature Review

2.1 CONCEPTUAL FOUNDATIONS OF COST BEHAVIOR AND COST

MANAGEMENT

The "black-box" concept of fixed and variable expenses has long dominated accounting research
and textbooks (e.g., Garrison et al. 2015; Horngren, Datar, and Rajan 2015). This model
enumerates the mechanical, linear relationship between a cost driver (such as sales or
manufacturing volume) and the costs that occur at the same time. When looking at the near
future, fixed costs remain constant while variable costs rise and fall with the cost driver. The
standard model accounts for "mixed" costs, which include both fixed and variable elements,
because it acknowledges that not all expenses can be neatly classified as one or the other.
Multiple cost drivers and nonlinear effects, such as congestion costs, economies of scale, and/or
learning-by-doing can be incorporated into more complex versions of the textbook model (e.g.,
Horngren et al. 2015, Ch. 10). There is no room for conscious managerial judgments prompted
by a wide range of economic restrictions, incentives, and biases in these expansions, which
continue to presume a mechanistic relation between cost driver quantities and costs. The goal of
these enhancements is not to learn what causes costs, therefore they do not "open the black box"
of cost behavior. The activity-based costing (ABC) literature improves upon the conventional
costing model by emphasizing

(1) the role played by resources like buildings, equipment, direct and indirect labor, and

(2) the role played by these resources in carrying out activities like product assembly and order
processing (e.g., Cooper and Kaplan 1987, 1992, 1999). This method improves our
understanding of cost behavior by examining the causes of costs (committed resources) and the
relationships between activities and the resources they need (the costs). Whenever ABC is
described in a textbook, the underlying assumption is that there is a causal relationship between
activity and associated resources, so that if you alter an activity, you must also change the

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resources that go along with it (e.g., Garrison et al. 2015; Horngren et al. 2015). Cooper and
Kaplan (1992) note that it is not always the case that a shift in activity levels results in the
corresponding reallocation of idle resources or the addition of newly required ones. Many
resources, on the other hand, only shift when managers choose to do so (e.g., Cooper and Kaplan
1992; Banker and Hughes 1994). Managers, for instance, are responsible for making and
enforcing choices like whether or not to lay off employees in the event of a drop in business, and
whether or not to add new staff in the event of an uptick. No attempt is made to model how
managers actually make and carry out these choices in the ABC literature. That is to say, the
economic connection between actions and allocated resources is a mystery, with only a rough
approximation possible through the use of a linear proportional model. It is expected that the
relevant activity cost drivers will have additional explanatory power for overhead costs as a
function of volume if ABC is more empirically correct than the conventional model. Cost drivers
for activities that are not measured by volume have been studied by numerous authors, including
Miller and Vollmann (1985), Cooper and Kaplan (1987), Foster and Gupta (1990), Banker and
Johnston (1993), Datar, Kekre, Mukhopadhyay, and Srinivasan (1993), Banker, Potter, and
Schroeder (1995), and others. In most cases, they discover that these activity cost drivers have a
lot more explaining power than the common volume-based drivers. There is more evidence to
back ABC than the old model. These studies are based on a mechanical understanding of cost
behavior, hence they don't try to determine the impact that managerial decisions have on actual
costs. Noreen and Soderstrom (1994, 1997) use hospital-specific activity and cost data to
investigate whether the central "black box" assumption of ABC—that overhead expenses are
directly related to output—holds water. They argue against the idea that managers' resource
changes may be roughly modeled as a linear function of output. These results raise questions
about the status quo black-box strategy and point to the necessity of a new strategy. Many
researchers, including Noreen (1991), Banker and Hughes (1994), Banker and Hansen (2002),
Banker, Hwang, and Mishra (2002), Balakrishnan and Sivaramakrishnan (1996), Balachandran,
Balakrishnan, and Sivaramakrishnan (1997), Göx (2000), Degraeve, Labro, and Roodhooft
(2005), and others, have examined the usefulness Decision-making in light of the ABC cost
structure is the primary subject of these analytical investigations. The cost structure itself is
generally assumed without investigating the administrative choices that give rise to it.
Furthermore, the selling prices and product mix may affect the resource commitments that define

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costs at a certain activity level. As a result, it could be theoretically significant to include cost
structure considerations in the study of pricing and product mix choices.The realization that costs
result from managerial decisions to commit resources is the most fundamental idea behind
modern studies of cost management (Cooper and Kaplan 1992). The economic drivers and
outcomes of observed cost behavior are crucial to making sense of this phenomenon. In the
following section, we'll look at the incentives (e.g., performance compensation, earnings targets,
ownership type, stakeholder activism), biases (e.g., overconfidence), and constraints (e.g.,
demand conditions, production technology, resource adjustment costs, strength of corporate
governance, debt covenants, government regulation) that managers face when deciding on
resource levels. Researchers can now use observable variance in cost behavior to evaluate a wide
variety of phenomena that influence managerial decisions, thanks to the shift in emphasis from
mechanical cost drivers to conscious cost management decisions. Managers do not pick and
choose between fixed, variable, and sticky costs.These cost behavior patterns, on the other hand,
are the result of managers' choices to commit resources while taking those restrictions into
account. Direct labor costs, for instance, can be both constant and variable depending on a
variety of factors. They could be set in Western Europe but open to negotiation in the United
States or China because to differences in the existence or absence of regulations that restrict the
right of management to lay off employees at will (e.g., Garrison et al. 2015, p. 33). Furthermore,
firm-specific factors, such as training expenses for new recruits or union contracts, may affect
the behavior of direct labor costs in a given country (e.g., Banker et al. 2013b). When the
economics of cost control are modeled, it turns out that many of the established assumptions
were wrong. For instance, conventional wisdom from accounting literature and textbooks holds
that when demand is unpredictable, management opts for a cost structure with fewer fixed
expenses and more variable ones (e.g., Balakrishnan, Sivaramakrishnan, and Sprinkle 2008, p.
171).

2.2 Strategic cost management and environmental costs

Strategic cost management (SCM) is defined as “deliberate decision making aimed at aligning
the firm's cost structure with its strategy and optimizing the performance of the strategy”
(Anderson, 2007). In the context of environmental costs, this study examines the influence of
one executional cost management tool, namely the tracking of environmental costs, on one

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important structural cost management activity, namely the implementation of environmental
initiatives. The tracking of environmental costs is defined as the identification and accumulation
of specific internal costs related to the protection of the environment (Henri, Boiral, & Roy,
2014). “The identification refers to the observation, description, and classification of various
types of environmental costs, whereas the accumulation refers to the separate collection and
recording of those costs within the cost accounting systems” (Henri et al., 2014, 648). It
represents an executional cost management activity because it motivates managers and
employees to manage, control and reduce environmental costs in line with the current strategy
(Burritt, 2000), and it prevents suboptimal decisions being made (Joshi, Krishnan, & Lave,
2001). The implementation of environmental initiatives refers to the actions needed for
organizations to master operational control over activities that might have a significant impact on
the environment as well as on the cost structure. For instance, several generic initiatives have
been identified in the industrial ecology literature such as product and process redesign,
substitution and reduction of raw materials used, and recycling (Allenby, 1999; Graedel &
Allenby, 1995). In other words, these initiatives refer to typical environmental actions which
have an influence on the business as a whole. The implementation of environmental initiatives
represent structural cost management activities because they help define the gross parameters of
the firm's cost structure in terms of product design (e.g., attributes, design features,
characteristics), nature and level of raw materials used (e.g., polluting vs. non-polluting material,
recycled vs. non-recycled material), and operational process design (e.g., pollution prevention vs.
end-of-pipe approach).

2.3 Overview of the conceptual model

The conceptual model reflects the extent to which the tracking of environmental costs, as one
executional cost management activity, and the implementation of environmental initiatives, as
one structural cost management activity , specifically support financial performance. These two
hypotheses are associated with the first research question. Furthermore, the model also
reflectsthe mediator role of structural cost management . More specifically, it is argued that the
tracking of environmental costs has a positive influence on the implementation of environmental
initiatives (hypothesis 2a), which in turn positively influence financial performance. These
hypotheses relate to the second research question and will be discussed in greater detail in the

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next sections. Consistent with both the management accounting and environmental management
literatures, numerous studies suggest that other factors could influence the variables under study
(Al-Tuwaijri,Christensen, & Hughes, 2004; Chenhall, 2007; Henri& Journeault, 2010.

2.4 Direct relationship between the tracking of environmental costs and financial performance

Given that the environmental costs constitute an important element of the cost structure, their
tracking has the potential to improve organizational members' awareness of the importance and
scope of impact of environmental management activities within the firm (Parker, 1999). As a
result, they are able to establish links between environmental and organizational goals, and thus
help reduce costs for the current strategy and analyze performance following strategic decisions
(Anderson, 2007). In other words, more cost consciousness contributes to increased financial
performance. Furthermore, by supporting effective resource management, proper accounting
information has the potential to contribute to financial performance (Baines & Langfield-Smith,
2003). In fact, as potential areas for operational and productive efficiencies are revealed, the
specific tracking of environmental costs may help eliminate waste and reduce production costs.
More specifically, it is typically argued that more relevant and useful data are produced by more
sophisticated cost systems. This greater transparency and accuracy of information in turn
improves managerial decision making, and thus leads to improved financial performance (Lee,
2003; Maiga et al., 2014; Pizzini, 2006). The specific monitoring of environmental costs allows
organizations to avoid underestimating or overestimating the cost of its products and services,
and to include the cost of environmental processes and impacts in the pricing of particular
products and services (Parker, 1999; Rannou & Henri, 2010). By failing to sufficiently recognize
environmental costs, a number of consequences could occur, notably in terms of decisions-
making. For instance, suboptimal decisions could be taken by managers, such as inappropriate
product mix, product mispricing, plant closure and inadequate investment decisions Joshi et al.
(2001). Those kinds of decisions could have a negative impact on financial performance. Lastly,
the tracking of environmental costs can also contribute to financial performance when used as a
legitimization tool providing data for external reporting. The disclosure of environmental
information, including environmental costs, is a way to communicate with various stakeholders.

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In so doing, firms influence the public's perception of the organization (Dixon, Mousa, &
Woodhead, 2005). The specific identification of environmental costs may be used as information
to pursue or preserve social legitimacy in order to reduce the likelihood of costly public policy
actions taken against the organization (Patten, 2005). In sum, it is argued that environmental
costs represent an important component of a firm's cost structure. The tracking of a broad range
of environmental costs increases the cost consciousness of managers who are able to better
manage these costs on a short term basis in line with the current strategy.

2.5 Relationship between the tracking of environmental costs and the

implementation of environmental initiatives

The tracking of environmental costs represents an executional cost management activity that
provides information concerning the appropriateness of the level and volatility of environmental
costs as compared to organizational goals and competitive benchmarks (Anderson, 2007). This
information raises awareness about environmental costs throughout the firm and supports
organizational members in their understanding of business processes and organizational
activities(Shields & Young, 1994). More specifically, the tracking of environmental costs
facilitates the understanding of the links between costs and output, and provides insights into
possible cost reductions through specific actions on cost drivers. This understanding acts as the
trigger for the development of initiatives to act on those cost drivers, such as product and process
redesign, substitution, recycling, etc. Therefore, the tracking of environmental costs may help
implement the environmental initiatives needed to build the cost structure that has been revealed
by the improved understanding of cost behavior. The tracking of environmental costs also
provides information concerning the level of improvement of environmental costs (Anderson,
2007), which may reveal potential organizational gaps. In the absence of the specific
identification of environmental costs reflecting areas of improvements, organizational slack may
accumulate, i.e. the difference between the potential performance of an organization and the
actual performance achieved (Levinthal & March, 1981). The detection of a performance gap
impedes the development of slack by stimulating innovation and creativity (Ettlie, 1983; Hage,
1980; Shrivastava, 1983). It is argued that by improving cost knowledge and detecting a
performance gap, the tracking of environmental costs may facilitate the development of
environmental initiatives such as the reduction in the material and energy intensity of goods or

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services, the reduction in the dispersion of toxic materials, improvement of the recyclability,
maximum use of renewable resources, and greater durability of products (WBCSD, 2000). These
initiatives will help address the performance gap revealed by tracking environmental costs.

2.6 Relationship between the implementation of environmental initiatives and

financial performance

The industrial ecology and operation management literatures provide considerable empirical
evidence suggesting that the implementation of environmental initiatives contributes to the
reduction of ecological impacts (e.g., Boiral & Henri, 2012; Henri & Journeault, 2010; King &
Lenox, 2001; Lo´pez-Gamero, Molina-Azorín, & Claver-Corte´s, 2009; Zhu & Sarkis, 2004).
Following an eco-efficiency view, the implementation of environmental initiatives may not only
help reduce ecological impacts, but also to reduce environmental costs. This view refers to the
simultaneous reduction of ecological impacts and the creation of economic value (WBCSD,
1992). The reduction in ecological impacts translates notably into better cost control, which in
turn improves financial performance (Adams & Ghaly, 2006; Dyllick & Hockerts, 2002; Young
& Tilley, 2006). Past accounting and environmental management studies have supported the eco-
efficiency view through both empiricalstudies (e.g., Al-Tuwaijri et al., 2004; Burnett & Hansen,
2008; Henri et al., 2014; Orlitzky, Schmidt, & Rynes, 2003; Wisner, Epstein, & Bagozzi, 2006)
as well as case studies (e.g., Ditz, Ranganathan, & Banks, 1995; Epstein, 1996). For instance, by
redesigning the product or process, firms may (i) reduce energy consumption and consequently,
the cost of energy, (ii) reduce the quantity of waste and consequently the costs of unproductive
raw materials and the cost of waste disposal, and (iii) replace materials with more ecological and
less expensive ones, and/or make more use of recycled components, and/or consume waste
internally, which consequently reduce the cost of direct and indirect materials. In so doing, firms
may reduce the generation of solid waste, air emission levels, water pollution and greenhouse gas
emissions. This helps to reduce the (i) regulatory compliance costs, (ii) effort (and costs
associated with it) related to the management of stakeholder relations and corporate image, and
(iii) costs ensued from environmental risks and future events (fines, penalties, pursuits,
environmental crisis, new regulation, etc.)

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 Chapter Three

Methodology

3.1 Study design

The research hypothesis was supported and the objectives were met through a qualitative
investigation of the CMS's role in the present-day administration of the organization. To define
the concept of "cost management," we employed a combination of general and specialized
scientific methods, such as: methods of comparison and generalization in the analysis of
academic literature; the expert survey method, which allowed us to identify the organization's
primary CMF, create a generalized CMF system for the business, and identify the prerequisites
for incorporating the CMS into the company's overall management structure. Expert surveying
was the primary technique used for this study. Financial accounting and control professionals
were given the opportunity to respond to a semi-formalized questionnaire on their own time.
CMFs and their constituent parts and properties were identified using the expert survey method.
The determination of a CMF and the formation of a CMS are shown to be possible, and the
criteria for incorporating the organization's CMS into the general management system are
established.

3.2 Instruments for study

Twenty-six professionals were polled for this study, and they ranged from academics to
specialists to workers in the industrial sector whose jobs have all had some connection to
financial accounting and control for at least the past seven years. Every respondent was made
aware of the study's goals and the eventual dissemination of a synthesis of the collected data.

3.3 Data mining

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Expert mentions of the capabilities of the cost information base and the state of the organization's
CMS integration into the general management system were calculated during the mathematical
processing of the research results, along with the percentage of expert mentions of the CMS
functions with their subsequent element-by-element characteristics.

Chapter Four
Results

The experts argued that to form an efficient CMS, one must focus on the functions that the
system should perform.

4.1 Cost planning:

Strategic cost planning Involves forecasting costs based on standard cost indicators and a
production plan for finished products (goods, works, services) Tactical cost planning Is based on
a strategic plan considering the state of the internal and external environment, market
requirements, and probable risks. Operational cost planning Is calculated based on actual needs
and production volumes for each of the areas and workplace. Provides for the development of
organizational and managerial measures to adjust the production process by identifying and
mobilizing measures to optimize costs through improving manufacturing technology, organizing
supply logistics, organizing a closed production cycle, etc.

4.2 Organizing the cost management process:

Building an efficient CMS Is aimed at creating a system of actions focused on uniting all
elements in various areas of the enterprise's activities into a single spatiotemporal process,
forming a single information database, segmented by levels of access to information on the
corresponding hierarchical management levels Coordination of cost management (development
of logistical connections) The organization of the cost management process provides for the
establishment of costs centers and centers of responsibility for possible manifestations of excess

15
costs, losses with the determination of responsible persons, and the boundaries of their
responsibility area for each of the sections of the production process.

4.3 Communication between the hierarchical levels of the CMS:

Forming an informational database When organizing a production system, one must organize
a system of information resources for making efficient management decisions. This is possible
only with a single information database with differentiated hierarchical levels of access. A
system for coordinating the actions of executives by levels of responsibility should be formed
based on internal information links uniting all levels of management. The development of a
communication channel scheme based on creating linear and nonlinear communication links
Continuous analysis of situations with discrepancies between target indicators and actual costs
The formation of relevant information and its assessment over time makes it possible to quickly
respond to deviations from the target indicators and follow the main goal of the organization.

4.4 Cost control:

Reflection of the actual costs by a certain level of detail Forms an information database on
the actual state of costs incurred by cost items and elements with the definition of centers of their
responsibility Cost analysis by cost items and elements with responsibility centers A constant
comparative assessment between the actual incurred costs and their planned value serves as the
basis for making efficient, well-grounded management decisions.

4.5 Motivation for cost optimization at all levels of bearing and managing the

costs:

Financial motivation for cost optimization Financial motivation incentivizes workers to look
for the most feasible methods for optimizing costs and achieving the goals of the enterprise
Moral and ethical incentives for cost optimization Through moral and ethical incentives,
managers influence the employees' performance and efficiency, encourage them to realize the
main strategy of the enterprise and make management decisions based on certain principles of
the enterprise.

4.6 Discussion

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The purpose of a cost-effective management strategy (CMS) is not cost reduction but cost
optimization, hence CMS actions are goal-oriented. If you're going to be building a CMS, you
should have a clear idea of what you want to accomplish. Since the primary goal of every
business is to generate profits, that metric is naturally a focal point for management. To
maximize the company's profitability, management takes steps to optimize costs by making more
effective use of its material, labor, and financial resources. In order to produce economically
focused long-term measures, businesses should adopt a planning (forecasting) enterprise cost
mechanism. A general automated control system based on the use of information databases and
up-to-date software can calculate and determine all cost-influencing factors with the
development of alternative actions in the event of changes in the conditions of the enterprise's
functioning affecting the result with the highest degree of accuracy. The experts agreed that
establishing clear accountability nodes and establishing strong horizontal and vertical logistical
links were crucial steps in creating a general management system that would incorporate the
CMS. The effectiveness of management and control systems is dependent on the existence of a
well-developed communication plan for information transfer and interaction between structural
divisions of the organization. The efficiency of the costs incurred and the accuracy of
calculations in the process of planning resources are both improved as a result of these
interconnections: the level of detail of information on costs in the accounting system and
indicators for calculating the product cost; the ratio between the income and the costs incurred;
the relationship between the results of activities and the actions of the people responsible for the
processes; the ratio between the income and the costs incurred. Establishing accountability for
resource utilization in the workplace is essential for cost minimization. To this end, it is prudent
to keep track of expenses as they relate to certain technological procedures, and to budget for
these expenses in accordance with well-defined criteria. An effective control system based on
intended indicators and data on actual costs incurred by types of resources and based on volume
of products produced can only be achieved with such an organized system of cost management.
There needs to be a hierarchical, vertically integrated scheme at each level of the control system's
structure [21]; this includes everything from individual production sites and workshops to entire
corporations and trade groups. The items in the respective estimates or budgets should serve as a
checklist against which the responsibility centers can be evaluated. The enterprise summary
budget is a compilation of the budget estimates for the various hierarchical levels of

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responsibility. Thus, an activity-based analysis of expenses aids in cost management by revealing
opportunities for optimization [22]. In this model, a content management system (CMS) builds a
database that helps employees with managerial authority direct their efforts toward the
enterprise's strategic aim and aid in the creation of competitive goods (goods, works, services).
Due to the fact that it is now possible to respond promptly to likely deviations, investigate them
to identify their causes, and develop methods for eliminating them thanks to having complete
information about the current state and target (planned) indicators of costs for each of the
responsibility centers and the process. The cost ceiling may be established, actual costs can be
compared to key performance indicators, and the people or factors responsible for the overruns
can be pinpointed thanks to the control feature. Decisions made by cost-effective managers are
those that prioritize the long-term success of the firm over short-term gains in profit [23]. This
means weighing all relevant factors before settling on a course of action. The state of the internal
communication system between the structural units of the enterprise (that is, internal logistical
connections) and the implementation of the function of motivating employees are also
considered crucial CMFs by experts, in addition to the functions of planning, organization, and
control. The management team of a company must realize that, without a reliable cost analysis
system, it is impossible to implement the cost control function. The management of the
corresponding hierarchical level is kept up-to-date on the effectiveness of the use of the
organization's existing resources, both as a whole and for individual processes, through
continuous in-depth analysis of the state and structure of costs by elements and cost centers [24].
Experts have identified the following benefits of such a data warehouse. The CMS's structure
will allow for the creation of measures aimed at minimizing expenses across the board and
within specific procedures. The building of a production cycle will be structured around a steady,
gradual distribution of expenses based on technological process-specific indicators of necessity.

When implemented at a business that has been carefully planned around precise requirements,
CMS will guarantee the best possible financial stability indicators and aid in raising the degree of
profitability. According to the elucidation of the specialists, one must fulfill the following
requirements while incorporating the organization's CMS into the general management system:
Building a mechanism for mutual cost regulation at the stages of planning, organization,
technological process, and production—that is, in the process of constructing the entire economic
mechanism of activity [26]—is essential at the executive level of the hierarchical structure of the

18
enterprise when implementing the CMF. Only a computerized control system, driven by a data
store, could accomplish all this. It is the foundation upon which management decision-making
algorithms are run, as well as a supply of information for the analysis system's work for every
operation that takes place within the organization [27]. 'With the introduction of ground-breaking
innovations like robotic process automation and cognitive technologies, cost management is now
becoming a strategic instrument that can alter the way we do business,' claims one expert.
Findings from Deloitte's yearly global cost management survey report [28] indicate that cutting
costs is presently a priority around the world. The report's findings, based on the opinions of over
a thousand top-level managers, indicate that cost cutting has become industry standard across all
four regions (North America, Latin America, Europe, and Asia-Pacific), with 86% of global
respondents stating that their companies will be implementing cost cutting measures within the
next 24 months. However, over half of the businesses in the poll are aiming for cost cuts of less
than 10%. Still, despite setting modest goals, over two-thirds (63%) are falling short.
Macroeconomic concerns/recession (30%) and commodity price fluctuations (19%) are the top
two external risks facing businesses around the world. At the same time, businesses everywhere
have been working hard to strengthen their cost-management practices. "forecasting, budgeting,
and reporting" (at 55%), "new policies and procedures" (51%), and "IT infrastructure, IT
systems, and business intelligence platforms" (at 49%) are the top three areas of concentration.
While 33% of businesses are taking strategic cost actions like outsourcing, centralization, and
company reconfiguration, 40% of those polled are still primarily focused on tactical cost actions
like optimizing business processes and decreasing external spend. With such a narrow strategic
lens, it's difficult to realize significant savings.

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 Chapter Five

5.1 Conclusion

As a result, we can deduce the following.

First, costs are an important aspect of the management system because they affect the bottom
line, the way manufacturing is priced, and the company's ability to compete in the market.

Second, a planning framework for cost management must be put in place if the business is to run
smoothly and the management team is to make well-informed choices. We think it's important to
integrate cost management into all stages of planning and production. In order to effectively
manage expenses, one must devise a system that can exert a steady, controlled influence over the
make-up and dynamics of expenditures.

Third, an organization's expenses are always being optimized throughout the board, from the
planning of operations and the organization of accounting records to the monitoring of the
effectiveness of carrying costs. Management decisions are fair and economically justifiable when
automation and information technologies are used to the process of assessing the database on the
real results of the enterprise's activities and the state of assets, liabilities, and capital.

Fourth, the developed information database of the enterprise's structure and cost system
establishes the technique for gathering operational information, its processing, and the analytical

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methodology, with the subsequent application by the management level of the organization. This
ensures that management decisions are made efficiently in light of an accurate accounting of the
organization's expenditures. As a result, it is important to identify the primary roles played by the
CMS in today's enterprise management software.

Therefore, it is conceivable to perform certain functions of the CMS only if an automated CMS
is introduced and integrated into the general management system of the business; this may
become a future area of study.

5.2 Recommendations

5.2.1. Define your fixed and variable expenses.

Before you get started, have your accounting services firm print all the transactions for the prior
month and group them by vendor. Organize them all by writing "fixed" or "variable" next to each
vendor.

As a refresher, a variable cost is one that is directly tied to revenue—whether that’s raw
materials, direct labor, or similar. On the other hand, fixed expenses include any costs not related
to selling your products or services—from rent or insurance to administrative payroll.

Understanding your cost structure and the distinction between fixed and variable expenses is
critical because it helps to streamline planning, negotiating, and forecasting.

5.2.2. Enter your budget into accounting software.

Many entrepreneurs already have a business budget but haven’t put it into their accounting
software. However, when you take the additional step of setting up the software, it will grab your
current costs and compare them to your budget in a budget-to-actual report throughout the

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month. Budget-to-actual reporting drives variance analysis, which in turn drives your expense
management strategy.

5.2.3. Create a cost management strategy.

With the results of your budget-to-actual report in hand, you can assess which line items will
bring your costs down. Some businesses prefer to prioritize the largest dollar amount variances
because they have the biggest impact on performance. Others prefer to address the actual costs
with the biggest variance from budgeted costs.Regardless of which option you choose, there are
steps you can take to reduce your variable and fixed expenses.

5.2.4. Reduce variable costs.

Variable costs are tied to changes in output, but that doesn’t mean they increase as your business
grows.There are many ways to grow your margin without sacrificing quality:

1. Look for volume discounts. If your cash flow can handle it, take advantage of when
vendors allow you to purchase larger quantities of goods at a discounted rate. If your
supplier doesn’t explicitly offer this as an option and you’ve maintained a good
relationship with them, it can’t hurt to ask.

2. Review vendor contracts regularly. Review your vendor contracts annually or

biannually, and set reminders for expiring ones. You need enough time to shop
around for other suppliers with favorable terms before renewing any vendor
contracts.

3. Centralize purchasing: If possible, appoint one person in your company to oversee

purchasing as well as contract negotiation for everything from internet services to
ordering office supplies. By centralizing this function, this person becomes
specialized in making fiscally responsible decisions.

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5.2.5. Reduce fixed expenses.
It’s easy to become complacent about your fixed costs because they’re usually static. But there
are always opportunities to keep a closer eye on these costs:

Downsize where possible. Simplify and consolidate your operations—whether that means

subleasing unused space, renegotiating the terms of your lease, or finding a more affordable
location.

Outsource where possible. Salaries are only part of the equation when you hire employees. You
also have to consider benefits and employment taxes. Save on overhead by outsourcing expert
services instead of hiring an in-house employee.

Shop for new vendors. Regularly review all contracts associated with fixed expenses. Avoid
signing contracts that auto-renew, and if you do, set reminders close to their expiration date(s).

Change your compensation structure. Instead of laying off employees to save money, consider
converting their pay structure to one that has a variable component—usually tied to revenue. For
example, your best salespeople may accept a lower base salary if you provide a higher
commission rate.

Up your energy efficiency. Small efforts help you become more energy efficient and save money
each month. Turn off lights and equipment when they aren’t in use, replace existing light bulbs
with LED bulbs, or install a programmable thermostat to better regulate temperatures in the
office.

Your business is always going to incur some fixed costs. However, when you take advantage of
opportunities to convert fixed costs into variable ones, your business will be better equipped to
ride out slow sales periods.

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