Chap 001

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.

1-2

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.

1-3

The Value Chain Components

Research &Development

Design Purchasing

Marketing DistributionCustomerService

Production

LO1

1-4

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.

1-5

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.

LO2

1-6

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.

LO2

1-7

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.

1-8

Cost Data for ManagerialDecisions

• Costs for decision making

• Costs for control and evaluations

• Different data for different decisions

LO3

1-9

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?

LO3

1-10

Carmen’s Cost Drivers

DriverCost

Rent

Insurance

Labor

Ingredients

Number of stores

Number of cookies

LO3

1-11

Differential Costs

• Costs that change in response to a particularcourse of action

• Differential costs change (differ) between actions.

LO3

1-12

Differential Revenues

• Revenues that change in response to a particularcourse of action.

• Differential revenues change (differ) between actions.

LO3

1-13

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

LO3

1-14

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.

LO3

1-15

Responsibility Centers,Revenues, and Costs

Carmen DiazPresident

Ray AdamsVice-President

Retail Operations

Cathy PetersonVice-President

Wholesale Operations

LO3

1-16

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

LO3

1-17

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

LO3

1-18

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.

1-19

Cost Accounting inResearch and Development

LO4

• Lean manufacturing techniques are not simplyabout production.

• Companies partner with suppliers in the developmentstage to ensure cost-effective deigns for products.

1-20

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).

LO4

1-21

Cost Accounting in Purchasing

• Performance measurement indicateshow well a process is working.

• It minimizes unnecessary transaction processes.

LO4

• Benchmarking methods measure products,services, and activities against thebest performance.

• Benchmarking is an ongoing process resultingin continuous improvement.

1-22

Cost Accounting in Production

• A lean accounting system provides measuresat a work cell or process level.

LO4

• JIT is an inventory system designed to lowerthe cost of maintaining excess inventory.

1-23

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”).

LO4

1-24

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.

LO4

1-25

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.

LO4

1-26

Enterprise Resource Planning

• Information technology linking various processesof the enterprise into a single comprehensiveinformation system

Technology

Purchasing

Human Resources

Marketing

Production

Finance

LO4

1-27

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

LO4

1-28

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.

1-29

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.

LO5

1-30

Sarbanes-Oxley Act of 2002

What is theintent?

Who isimpacted?

How arecorporationsimpacted?

Address problemof corporategovernance

Accounting firmsand

corporations

Corporateresponsibility

LO5

1-31

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.

LO5

1-32

Appendix 1

Institute of Management Accountants’ (IMA)Code of Ethics: Standards

1. Competence

2. Confidentiality

3. Integrity

4. Credibility

1-33

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.

1-34

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.

1-35

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.

1-36

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.

1-37

End of Chapter 1

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin