Transcript
Cost Accounting:Information for Decision Making
Chapter 1
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Learning Objectives
L.O. 1 Describe the way managers use accountinginformation to create value in organizations.
L.O. 2 Distinguish between the uses and users of costaccounting and financial accounting information.
L.O. 3 Explain how cost accounting information is usedfor decision making and performance evaluationin organizations.
L.O. 4 Identify current trends in cost accounting.
L.O. 5 Understand ethical issues faced by accountantsand ways to deal with ethical problems that youface in your career.
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Value Chain
– Value added activities– Non value added activities
• The Value Chain describes a set of activities thattransforms raw materials and resources into thegoods and services end users purchase and consume.
L.O. 1 Describe the way managers use accountinginformation to create value in organizations.
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The Value Chain Components
Research &Development
Design Purchasing
Marketing DistributionCustomerService
Production
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Accounting Systems
Financialaccounting
Financialposition and
income
Reports
Costaccounting
Informationabout costs
Reports
L.O. 2 Distinguish between the uses and users of costaccounting and financial accounting information.
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Accounting Systems
• The financial data prepared for this purposeare governed by generally accepted accountingprinciples (GAAP) in the United States and byinternational financial reporting (IFRS) in manyother countries.
• The primary purpose of financial accountingis to provide investors and creditors informationregarding company and management performance.
• Cost data for managerial use need not complywith GAAP or IFRS.
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Customers of Accounting
• Different uses of accounting information requiredifferent types of accounting information.
• Accountants must work with the users ofcostaccounting information to provide the bestpossible information for managerial purposes.
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Managerial Decisions
• Individuals make decisions.
• Decisions determine the performanceof the organization.
• Managers use information from the accountingsystem to make decisions.
• Owners evaluate organizational and managerialperformance with accounting information.
L.O. 3 Explain how cost accounting information is usedfor decision making and performance evaluationin organizations.
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Cost Data for ManagerialDecisions
• Costs for decision making
• Costs for control and evaluations
• Different data for different decisions
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Costs for Decision Making
• Carmen’s Cookies has been making and sellingcookies through a small store downtown.
• One of her customers suggests that she expandoperations and sell to wholesalers and retailers.
• Should Carmen expand operations?
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Carmen’s Cost Drivers
DriverCost
Rent
Insurance
Labor
Ingredients
Number of stores
Number of cookies
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Differential Costs
• Costs that change in response to a particularcourse of action
• Differential costs change (differ) between actions.
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Differential Revenues
• Revenues that change in response to a particularcourse of action.
• Differential revenues change (differ) between actions.
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Differential Costs, Revenues, and Profits
Sales revenueCosts:
FoodLaborUtilitiesRentOther
Total costs
Operating profits
$6,300
1,800 1,000 400 1,250 1,000$5,450
$ 850
$8,505a
2,700b
1,500b
600b
1,250 1,200c
$7,250
$1,255
$2,205
900 500 200 -0- 200$1,800
$ 405
(1) Status QuoOriginal Shop
Sales Only
(2) AlternativeWholesale & Retail
Distribution (3) Difference
Carmen’s CookiesProjected Income Statement for One Week
(a) 35 percent higher than status quo
(b) 50 percent higher than status quo
(c) 20 percent higher than status quo
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Costs for Control and Evaluation
• A responsibility center is a specific unit of anorganization assigned to a manager who isheld accountable for its operations and resources.
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Responsibility Centers,Revenues, and Costs
Carmen DiazPresident
Ray AdamsVice-President
Retail Operations
Cathy PetersonVice-President
Wholesale Operations
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Responsibility Centers, Revenues, and CostsCarmen’s CookiesIncome Statement
For the Month Ending April 30
Sales revenueDepartment costs:
FoodLabora
UtilitiesRent
Total department costsCenter marginb
General and admin. costs:General manager’s salaryc
Other (administrative)Total general and admin. costsOperating profit
$28,400
13,500 4,500 1,800 5,000$24,800$ 3,600
$23,600
9,800 3,200 2,100 2,500$17,600$ 6,000
$52,000
23,300 7,700 3,900 7,500$42,400$ 9,600
5,000 3,200$ 8,200$ 1,400
RetailOperations
WholesaleOperations Total
(a) Includes department managers’ salaries but excludes Carmen’s salary
(b) The difference between revenues and costs attributable to a responsibility center
(c) Carmen’s salary
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Responsibility Centers, Revenues, and CostsCarmen’s Cookies
Retail Responsibility CenterBudgeted versus Actual CostsFor the Month Ending April 30
Food:FlourEggsChocolateNutsOther
Total foodLabor:
ManagerOther
Total laborUtilitiesRentTotal cookie costsNumber of cookies sold
$ 2,100 5,200 2,000 2,000 2,200$13,500
3,000 1,500$ 4,500 1,800 5,000$24,800 32,000
$ 2,200 4,700 1,900 1,900 2,200$12,900
3,000 1,500$ 4,500 1,800 5,000$24,200 32,000
$ (100) 500 100 100
-0- $ 600
-0- -0- $ -0- -0-
-0- $ 600 -0-
Actual Budget Difference
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Trends in Cost Accounting
1. Research and development
2. Design
3. Purchasing
4. Production
5. Marketing
6. Distribution
7. Customer service
8. ERP – Enterprise resource planning
9. Creating value in the organization
L.O. 4 Identify current trends in cost accounting.
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Cost Accounting inResearch and Development
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• Lean manufacturing techniques are not simplyabout production.
• Companies partner with suppliers in the developmentstage to ensure cost-effective deigns for products.
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Cost Accounting in Design
• Product designers must write detailedspecifications on a product’s design.
• ABC assigns costs of activities needed to makea product, then sums the cost of those activitiesto compute the total cost of the product.
• This is often referred to as design formanufacturing (DFM).
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Cost Accounting in Purchasing
• Performance measurement indicateshow well a process is working.
• It minimizes unnecessary transaction processes.
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• Benchmarking methods measure products,services, and activities against thebest performance.
• Benchmarking is an ongoing process resultingin continuous improvement.
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Cost Accounting in Production
• A lean accounting system provides measuresat a work cell or process level.
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• JIT is an inventory system designed to lowerthe cost of maintaining excess inventory.
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Cost Accounting in Marketing
• Cost relationship management (CRM)is a system that allows firms to targetprofitable customers by assessingcustomer revenues and costs.
• Harrah’s Entertainment provides“complimentary” services to somecustomers. (typically called comping”).
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Cost Accounting in Distribution
• Outsourcing occurs when a firm’s activities areperformed by another organization or individualin the supply or distribution chain.
• Nikon, for example, relies on UPS for distribution.
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Cost Accounting inCustomer Service
• TQM is a management method whichfocuses on excelling in all dimensions.
• Cost of quality is a system that identifies the costof producing low quality items.
• The emphasis is placed on quality.Quality is defined by the customer.
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Enterprise Resource Planning
• Information technology linking various processesof the enterprise into a single comprehensiveinformation system
Technology
Purchasing
Human Resources
Marketing
Production
Finance
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Key Financial Playersin an Organization
Treasurer Manages liquid assetsDetermines where toinvest cash balances
ControllerPlans and designsinformation systems
Determines costaccounting policies
Internalauditor
Ensures compliancewith laws
Ensures that procurementrules are followed
Costaccountant
Records, measures,and, analyzes costs
Evaluates costs ofproducts and processes
Chief financialofficer (CFO)
Manages entire financeand accounting function
Signs off on financialstatements
Major Responsibilities Example ActivitiesTitle
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Ethical Issues for Accountants
• The design of the cost accounting system hasthe potential to be misused to defraud customers,employees, or shareholders.
L.O. 5 Understand ethical issues faced by accountantsand ways to deal with ethical problems that youface in your career.
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Ethics
• Follow the Institute of ManagementAccountants (IMA) guidelines:
• Clarify the relevant issues and concepts bydiscussion with a disinterested party or contactthe appropriate confidential ethics “hotline.”
• Discuss problems with the immediate superior,unless the superior is involved.
• Consult an attorney about your rights and obligations.
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Sarbanes-Oxley Act of 2002
What is theintent?
Who isimpacted?
How arecorporationsimpacted?
Address problemof corporategovernance
Accounting firmsand
corporations
Corporateresponsibility
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Corporate ResponsibilityWho is impacted?
What is the impact?
• CEO – Chief Executive Officer– Manages entire corporation
• CFO – Chief Financial Officer– Manages accounting and finance
• The officers of the corporation must sign the financialreports stipulating that the financial statements do notomit material information.
• The company must disclose the evaluation of theirinternal controls.
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Appendix 1
Institute of Management Accountants’ (IMA)Code of Ethics: Standards
1. Competence
2. Confidentiality
3. Integrity
4. Credibility
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CompetenceMembers have a responsibility to:
1. Maintain an appropriate level of professional expertiseby continually developing knowledge and skills.
2. Perform professional duties in accordance withrelevant laws, regulations, and technical standards.
3. Provide decision support information and recommendationsthat are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitationsor other constraints that would preclude responsiblejudgment or successful performance of activity.
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ConfidentialityMembers have a responsibility to:
1. Keep information confidential except when disclosureis authorized or legally required.
2. Inform all relevant parties regarding appropriate useof confidential information.
3. Refrain from using confidential information for unethicalor illegal advantage.
4. Monitor subordinates’ activities to ensure compliance.
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IntegrityMembers have a responsibility to:
1. Mitigate actual conflicts of interest, regularly communicatewith business associates to avoid apparent conflicts ofinterest. Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudicecarrying out duties ethically.
3. Abstain from engaging in or supporting any activity thatmight discredit the profession.
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CredibilityMembers have a responsibility to:
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonablybe expected to influence an intended user’s understandingof the reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness,processing, or internal controls in conformance withorganization policy and/or applicable law.
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End of Chapter 1
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
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