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CMA Cost Management – Processes, Techniques and Benefits

The CMA Cost Management Accounting paper is an important paper covering 20% weight in the Part 1 Financial Reporting, Planning, Performance, and Control of the certification exams conducted by IMA. Hence you need to be have a thorough idea about this and CMA cost accounting if you want to clear the exams comfortably.

Introduction To CMA Cost Accounting Paper

The core objective of every business is to earn profits. So it is natural that every company would keep a tab on its expenses in order to ensure that they stay within acceptable limits. This is on of the core ways in which they can maximize their profits.
The branch of finance which allows them to achieve this is called Cost Management.  In fact, it is one of the most important disciplines of finance, and hence IMA puts a lot of focus in ensuring that all the candidates gain thorough knowledge about it through the CMA Cost Management paper.
Cost Management can be used by any company that is interested in improving its operational efficiency. Cost Management helps them to measure, control and optimize their costs.

The Concept Of Cost Management

Imagine that you are a builder who is coming out with a residential project. There will be hundreds of items that you will need to construct the buildings.  A revenue that you can get by selling the residential units is more or less fixed, but the costs are not. So you will need to measure and control the several items that will go into constructing the buildings. If the costs are not controlled properly, you will tend to overspend and that will have a disastrous effect on your profits.
If you  implement tight cost  management procedures, then you will be able to:

  • Estimate the costs
  • Prepare a budget
  • During the construction, evaluate whether the actual costs are in line with the budgeted costs or not.
  • Identify deviations from the budget and take appropriate measures to  control  the cost

The Benefits Of Cost Management Accounting

  • The biggest benefit of Cost Management is that it helps in ensuring that your project remains profitable, even if it continues for a long time. Be it a large product like a residential unit or any small item like a pen that you are manufacturing, Cost Management can help you to control the production expenses uniformly. It also helps in identifying spoilage is and cost overruns so that you can take appropriate measures to ensure that those losses do not become unmanageable.
  • Cost Management Accounting will also enable you to predict future cost based on the historical cost patterns. So if you are undertaking a project which is very similar to one that you had completed some time back, then you can look at the cost pattern of the completed project to estimate what the cost of the new project will be.
  • In the long run, cost management will ensure that your business outfit remains profitable and competitive. The advantage that you will get by implementing these techniques is going to help you reduce the final output cost and offer the products to the market at a reasonable rate. This will help you in expanding your market share as well.

Techniques Of Cost Management Accounting

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Another important area of study in the CMA Cost Management are the costing techniques. There are several systems of Cost Management Accounting which are actively used by business is to measure and control their costs. Some of these are:

  • Marginal costing:

Marginal costing helps in estimating the cost of the units being produced. It helps in locating the cost of different production factors like materials, labor, overheads etc. to each unit under production. Costs are also divided into fixed and variable costs, which helps in measuring the production cost of the different materials accurately.

  • Direct costing:

In this method, the costs that can be directly attributed to the units under production are assigned to their production cost. Any indirect cost, i.e. The cost that are more general in nature are charged to the profit and loss account directly.

  • Absorption costing:

In this method, all the costs related to the units being produced are assigned to the production cost irrespective of whether these are direct or indirect costs.

  • Standard costing:

In standard costing, a budgeted cost for the product is determined in advance and is used as a “standard cost” for the units to be produced. During production, the actual costs are closely monitored to identify any deviation from the standard cost.   In case there is any deviation, the cause for the deviation will be determined and eradicated. This will ensure that the cost for the subsequent batches that are produced will be as per the standard cost that has been determined for the product.
Standard costing requires a very stringent an efficient system of cost monitoring and control. In the absence of such a system, the implementation of standard costing will become very difficult and the whole purpose will be defeated. This is one of the most important techniques of Cost Management.
Cost Management has gained considerable importance among the companies across the world and is an essential ingredient in determining the cost and profit structure within which the company can operate. Innumerable companies across the world have been actively using cost management techniques for many years now to ensure that they remain profitable and competitive in the global markets.
Since cost management has a direct impact on the financial results of businesses, its importance is going up with every passing year. This is also why the CMA Cost Management Accounting paper is one of the key areas where the candidates are tested by IMA.

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