Although product/service profitability may be calculated periodically as a requirement for external reporting, the financial accounting system does not reflect life-cycle information. The cost management system should provide information about the life-cycle performance of a product or service. Without life-cycle information, managers will not have a basis to relate costs incurred in one stage of the life cycle to costs and profitability of other stages.
For example, managers may not recognize that strong investment in the development and design stage could provide significant rewards in later stages by minimizing costs of engineering changes and potential quality-related costs. Further, if development/design cost is not traced to the related product or service, managers may not be able to recognize organizational investment “disasters.”
A cost management system should help managers comprehend business processes and organizational activities. Only by understanding how an activity is accomplished and the reasons for cost incurrence can managers make cost-beneficial improvements in the production and processing systems. Managers of a company desiring to implement new technology or production systems must recognize what costs and benefits will flow from such actions; these assessments can be made only if the managers understand how the processes and activities will differ after the change.