The importance of having a user-friendly cost management system
October 19, 2015
What is the best way to design a cost management system so that it would meet the needs of the users?Martijn Beelen researched this question for his thesis as part of the Executive Master of Finance and Control/Register Controller (EMFC) program. His thesis is one of the three papers nominated in 2015 for the Best Thesis award by the Dutch Society for Register Controllers (VRC). This professional organization annually selects the best EMFC thesis in the Netherlands.
What did you research?
"In my thesis, I researched the best way to design a cost management system so that it would meet the requirements and preferences of its users. Such a system must provide sufficient information to enable cost control, but it should not be too complex either, or nobody will be able to understand or maintain it. It is, therefore, important to make good choices regarding the method of cost allocation to be used and also regarding the design, degree of complexity, and sophistication."
What inspired you to research this subject?
"At my employer, which is part of service provider USG People, several changes led to insufficient understanding of the costs and profitability of various customers, projects, and types of service. The existing cost management system provided insufficiently detailed information and gave inaccurate results. Although there is a lot of literature about cost accounting, I found it difficult to select the right elements to solve this issue. That is why it seemed a good topic to explore further, both to help my employer address the problem and to expand my own knowledge of cost accounting. The lectures of the Management Accounting & Control program served as a good starting point for the research."
Most suitable method of cost allocation
How did you set up your research?
"As a basis for the research, I prepared a two-part theoretical framework based on the management and cost accounting literature, supplemented with scientific insights. The first part gives an overview of the pros and cons of various traditional and modern methods of cost allocation. Traditional methods use volume drivers to allocate costs, while modern systems use more advanced techniques. The second part focuses on important design aspects in terms of complexity and sophistication. Having laid down this framework, I then conducted interviews with the main users of the system in order to identify their needs and contextual factors. An analysis of the interview results helped select the most appropriate cost allocation method for the organization and redesign the cost management system."
What were the results?
"The research showed that time-driven activity-based costing (TDABC) is the most appropriate method for the organization if it wants to gain more insight into the costs of the service. In this method, capacity costs are allocated to cost objects on the basis of the use of practical capacity available in the form of time. The method makes it possible to analyze information at different levels and it provides an insight into the cost of unused capacity thus allowing more cost control. The system was then designed with resource-based cost centers that are adapted to the changed organization. Duration-based cost drivers are used to allocate costs by making use of logged data from operational databases, instead of creating estimates as is usual in TDABC. This offers a solution for what is shown by several studies to be the disadvantage that time estimates often lead to unreliable data and thereby incorrect results of cost management systems. It also provides a link between the operating and financial data so that the financial impact of operational decisions becomes more visible. The end result is a redesign of the cost management system that is in line with the wishes and requirements of the organization and thus a tool for (financial) decision-making."
How is this research relevant to your field?
"Cost management is an important subject for controllers because a cost management system provides important information for planning and control. It is important, therefore, that the design of such a system should remain connected to the organization when changes take place. The theoretical framework that emerged from my research offers the possibility to give input for a design or redesign and can also be applied to other cases. In addition, the study provides an example of how large amounts of operational data can be used as input for modern cost accounting methods such as TDABC. This makes cost accounting information more data-driven rather than being based on estimates. Finally, the study provides specific considerations to be taken into account in a service-providing organization when it comes to the design of cost management systems."
Executive Master of Finance and Control/Register Controller (EMFC)More information about this program
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