Basic concepts lecture acctg 501

Cost Accounting:

Information for

Decision Making

Basic Concepts

LEARNING OBJECTIVES

L.O. 1 Describe the way managers use accounting

information to create value in organizations.

L.O. 2 Distinguish between the uses and users of cost

accounting and financial accounting information.

L.O. 3 Explain how cost accounting information is used

for decision making and performance evaluation

in organizations.

L.O. 4 Identify current trends in cost accounting.

1-2

Accounting

The

Language

of

Business

• Provide information to external parties

– Stockholders, creditors, regulators

• Estimate the cost of products produced

and services provided

• Provide information to internal decision

makers

– To plan, control, and evaluate performance

Accountants

Two Areas of Accounting

Financial

• Meet external

information needs

• Comply with

GAAP

Management

• Meet internal

information needs

• Does not have to

comply with

GAAP

Financial Accounting

Provides information to

investors, creditors,

and regulators

Complies with GAAP

Accounting DifferencesFinancial

• External focus

• Whole

organization

• Historical

• Quantitative

• Monetary

• Verifiable

• GAAP

• Formal

recordkeeping

Managerial

• Internal focus

• Segments or divisions

• Current/projected

• Quantitative/qualitative

• Monetary and

nonmonetary

• Timely/reasonable estimate

• Benefits exceed costs

• Formal and informal

recordkeeping

Relationship of Financial,

Management, and Cost

Accounting

FINANCIAL

ACCOUNTING

MANAGEMENT

ACCOUNTING

COST

ACCOUNTING

Product

Costs

VALUE CHAIN

– Value added activities

– Non value added activities

• The Value Chain describes a set of activities that

transforms raw materials and resources into the

goods and services end users purchase and consume.

L.O. 1 Describe the way managers use accounting

information to create value in organizations.

1-9

THE VALUE CHAIN COMPONENTS

Research &

DevelopmentDesign Purchasing

Marketing DistributionCustomer

Service

Production

LO1

1-10

ACCOUNTING SYSTEMS

Financial

accounting

Financial

position and

income

Reports

Cost

accounting

Information

about costs

Reports

L.O. 2 Distinguish between the uses and users of cost

accounting and financial accounting information.

1-11

ACCOUNTING SYSTEMS

• The financial data prepared for this purpose

are governed by generally accepted accounting

principles (GAAP) in the United States and by

international financial reporting (IFRS) in many

other countries.

• The primary purpose of financial accounting

is to provide investors and creditors information

regarding company and management performance.

• Cost data for managerial use need not comply

with GAAP or IFRS.

LO2

1-12

CUSTOMERS OF ACCOUNTING

• Different uses of accounting information require

different types of accounting information.

• Accountants must work with the users of cost

accounting information to provide the best

possible information for managerial purposes.

LO2

1-13

MANAGERIAL DECISIONS

• Individuals make decisions.

• Decisions determine the performance

of the organization.

• Managers use information from the accounting

system to make decisions.

• Owners evaluate organizational and managerial

performance with accounting information.

L.O. 3 Explain how cost accounting information is used

for decision making and performance evaluation

in organizations.

1-14

COST DATA FOR MANAGERIAL

DECISIONS

• Costs for decision making

• Costs for control and evaluations

• Different data for different decisions

LO3

1-15

COSTS FOR DECISION MAKING

• Carmen’s Cookies has been making and selling

cookies through a small store downtown.

• One of her customers suggests that she expand

operations and sell to wholesalers and retailers.

• Should Carmen expand operations?

LO3

1-16

CARMEN’S COST DRIVERS

DriverCost

Rent

Insurance

Labor

Ingredients

Number of stores

Number of cookies

LO3

1-17

DIFFERENTIAL COSTS

• Costs that change in response to a particular

course of action

• Differential costs change (differ) between actions.

LO3

1-18

DIFFERENTIAL REVENUES

• Revenues that change in response to a particular

course of action.

• Differential revenues change (differ) between actions.

LO3

1-19

DIFFERENTIAL COSTS, REVENUES, AND

PROFITS

Sales revenue

Costs:

Food

Labor

Utilities

Rent

Other

Total costs

Operating profits

P6,300

1,800

1,000

400

1,250

1,000

P5,450

P 850

P8,505a

2,700b

1,500b

600b

1,250

1,200c

P7,250

P1,255

P2,205

900

500

200

-0-

200

P1,800

P 405

(1) Status Quo

Original Shop

Sales Only

(2) Alternative

Wholesale & Retail

Distribution (3) Difference

Carmen’s Cookies

Projected 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

1-20

COSTS FOR CONTROL AND

EVALUATION

• A responsibility center is a specific unit of an

organization assigned to a manager who is

held accountable for its operations and resources.

LO3

1-21

RESPONSIBILITY CENTERS,

REVENUES, AND COSTS

Carmen Diaz

President

Ray Cruz

Vice-President

Retail Operations

Cathy Santos

Vice-President

Wholesale Operations

LO3

1-22

RESPONSIBILITY CENTERS, REVENUES, AND

COSTS Carmen’s Cookies

Income Statement

For the Month Ending April 30

Sales revenue

Department costs:

Food

Labora

Utilities

Rent

Total department costs

Center marginb

General and admin. costs:

General manager’s salaryc

Other (administrative)

Total general and admin. costs

Operating profit

P28,400

13,500

4,500

1,800

5,000

P24,800

P 3,600

P23,600

9,800

3,200

2,100

2,500

P17,600

P 6,000

P52,000

23,300

7,700

3,900

7,500

P42,400

P 9,600

5,000

3,200

P 8,200

P 1,400

Retail

Operations

Wholesale

Operations 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

1-23

RESPONSIBILITY CENTERS, REVENUES, AND

COSTS Carmen’s Cookies

Retail Responsibility Center

Budgeted versus Actual Costs

For the Month Ending April 30

Food:

Flour

Eggs

Chocolate

Nuts

Other

Total food

Labor:

Manager

Other

Total labor

Utilities

Rent

Total cookie costs

Number of cookies sold

P 2,100

5,200

2,000

2,000

2,200

P13,500

3,000

1,500

P 4,500

1,800

5,000

P24,800

32,000

P 2,200

4,700

1,900

1,900

2,200

P12,900

3,000

1,500

P 4,500

1,800

5,000

P24,200

32,000

P (100)

500

100

100

-0-

P 600

-0-

-0-

P -0-

-0-

-0-

P 600

-0-

Actual Budget Difference

LO3

1-24

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

10. Balanced Scorecard

L.O. 4 Identify current trends in cost accounting.

1-25

COST ACCOUNTING IN

RESEARCH AND DEVELOPMENT

LO4

• Lean manufacturing techniques are not simply

about production.

• Companies partner with suppliers in the development

stage to ensure cost-effective deigns for products.

1-26

COST ACCOUNTING IN DESIGN

• Product designers must write detailed

specifications on a product’s design.

• ABC assigns costs of activities needed to make

a product, then sums the cost of those activities

to compute the total cost of the product.

• This is often referred to as design for

manufacturing (DFM).

LO4

1-27

COST ACCOUNTING IN PURCHASING

• Performance measurement indicates

how well a process is working.

• It minimizes unnecessary transaction processes.

LO4

• Benchmarking methods measure products,

services, and activities against the

best performance.

• Benchmarking is an ongoing process resulting

in continuous improvement.

1-28

COST ACCOUNTING IN PRODUCTION

• A lean accounting system provides measures

at a work cell or process level.

LO4

• JIT is an inventory system designed to lower

the cost of maintaining excess inventory.

1-29

COST ACCOUNTING IN MARKETING

• Cost relationship management (CRM)

is a system that allows firms to target

profitable customers by assessing

customer revenues and costs.

• Harrah’s Entertainment provides

“complimentary” services to some

customers. (typically called comping”).

LO4

1-30

COST ACCOUNTING IN DISTRIBUTION

• Outsourcing occurs when a firm’s activities are

performed by another organization or individual

in the supply or distribution chain.

• Nikon, for example, relies on UPS for distribution.

LO4

1-31

COST ACCOUNTING IN

CUSTOMER SERVICE

• TQM is a management method which

focuses on excelling in all dimensions.

• Cost of quality is a system that identifies the cost

of producing low quality items.

• The emphasis is placed on quality.

Quality is defined by the customer.

LO4

1-32

ENTERPRISE RESOURCE PLANNING

• Information technology linking various processes

of the enterprise into a single comprehensive

information system

Technology

Purchasing

Human

Resources

Marketing

Production

Finance

LO4

1-33

KEY FINANCIAL PLAYERS

IN AN ORGANIZATION

Treasurer Manages liquid assetsDetermines where to

invest cash balances

ControllerPlans and designs

information systems

Determines cost

accounting policies

Internal

auditor

Ensures compliance

with laws

Ensures that procurement

rules are followed

Cost

accountant

Records, measures,

and, analyzes costs

Evaluates costs of

products and processes

Chief financial

officer (CFO)

Manages entire finance

and accounting function

Signs off on financial

statements

Major Responsibilities Example ActivitiesTitle

LO4

1-34

BALANCE SCORECARD

Four perspectives

Learning and Growth

Internal Business

Customer Value

Financial Performance

Balanced Scorecard

FinancialCustomerValue

Internal Business

Learning and Growth

Balance Scorecard• Learning and Growth

– Use the organization’s intellectual capital to adapt to changing customer needs or to influence new customers’ needs and expectations through product or service innovations


• Internal Business– Things to do well to meet customer

needs and expectations




• Customer Value– How well the organization is doing

relative to important customer criteria




• Customer Value– How well the organization is doing

relative to important customer criteria

• Financial Performance– Stockholders/stakeholders concerns

about profitability and organizational growth

Balance ScorecardFour perspectives

• Learning and Growth

• Internal Business

• Customer Value

• Financial Performance

Measures

• Short term and long-term

• Internal and external

• Financial and nonfinancial

ETHICAL ISSUES FOR ACCOUNTANTS

• The design of the cost accounting system has

the potential to be misused to defraud customers,

employees, or shareholders.

L.O. 5 Understand ethical issues faced by accountants

and ways to deal with ethical problems that you

face in your career.

1-42

ETHICS

• Follow the Institute of Management

Accountants (IMA) guidelines:

• Clarify the relevant issues and concepts by

discussion with a disinterested party or contact

the appropriate confidential ethics “hotline.”

• Discuss problems with the immediate superior,

unless the superior is involved.

• Consult an attorney about your rights and obligations.

LO5

1-43

SARBANES-OXLEY ACT OF 2002

What is the

intent?

Who is

impacted?

How are

corporations

impacted?

Address problem

of corporate

governance

Accounting firms

and

corporations

Corporate

responsibility

LO5

1-44

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 financial

reports stipulating that the financial statements do not

omit material information.

• The company must disclose the evaluation of their

internal controls.

LO5

1-45

APPENDIX 1

Institute of Management Accountants’ (IMA)

Code of Ethics: Standards

1. Competence

2. Confidentiality

3. Integrity

4. Credibility

1-46

COMPETENCEMembers have a responsibility to:

1. Maintain an appropriate level of professional expertise

by continually developing knowledge and skills.

2. Perform professional duties in accordance with

relevant laws, regulations, and technical standards.

3. Provide decision support information and recommendations

that are accurate, clear, concise, and timely.

4. Recognize and communicate professional limitations

or other constraints that would preclude responsible

judgment or successful performance of activity.

1-47

CONFIDENTIALITYMembers have a responsibility to:

1. Keep information confidential except when disclosure

is authorized or legally required.

2. Inform all relevant parties regarding appropriate use

of confidential information.

3. Refrain from using confidential information for unethical

or illegal advantage.

4. Monitor subordinates’ activities to ensure compliance.

1-48

INTEGRITYMembers have a responsibility to:

1. Mitigate actual conflicts of interest, regularly communicate

with business associates to avoid apparent conflicts of

interest. Advise all parties of any potential conflicts.

2. Refrain from engaging in any conduct that would prejudice

carrying out duties ethically.

3. Abstain from engaging in or supporting any activity that

might discredit the profession.

1-49

CREDIBILITYMembers have a responsibility to:

1. Communicate information fairly and objectively.

2. Disclose all relevant information that could reasonably

be expected to influence an intended user’s understanding

of the reports, analyses, or recommendations.

3. Disclose delays or deficiencies in information, timeliness,

processing, or internal controls in conformance with

organization policy and/or applicable law.

1-50

Basic concepts lecture acctg 501

Education

Transcript of Basic concepts lecture acctg 501