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Transcript of Information for Decision Making Chapter 1. 1-2 Learning Objectives 1.Describe the way managers use...
Information for Decision Information for Decision MakingMaking
Chapter Chapter 11
1-2
Learning ObjectivesLearning Objectives1.Describe the way managers use accounting
information to create value in organizations.
2.Explain how cost accounting information is used for decision making and performance evaluation in organizations.
3.Distinguish between the uses and users of cost accounting and financial accounting information.
4.Identify current trends in cost accounting.
5.Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
1-3
Value ChainValue Chain
The value chain describes the activities that increase the value of an organization’s products or services.
L.O. 1 Describe how managers use accounting information to create value in organizations.
R&R&DD DesigDesig
nn
ProductioProductionn DistributiDistributi
onon
MarketinMarketingg CustomerCustomer
ServicServicee
1-4
Does this add
value?
ActivitiesActivities
Evaluate each activity
Non Value-Added
Activity: Customers perceive no
value.Can we
eliminate the activity?
Can we improve the activity?
R&R&DD DesigDesig
nn
ProductioProductionn DistributiDistributi
onon
MarketinMarketingg CustomerCustomer
serviceservice
Value Added Activity:
Customers perceive as
adding value.
Does this add value?Value Added
Activity: Customers perceive as
adding value.
Non Value-Added
Activity: Customers perceive no
value.
Hmmmm…?
1-5
Value ChainValue Chain
Value-Added
Creating a new product.
Non Value-Added
Research and Development
R& D
1-6
Value ChainValue Chain
Developing and engineering the new product.
Design
Value-Added
Non Value-Added
1-7
Value ChainValue Chain
Production
Producing the product.
Value-Added
Non Value-Added
1-8
Value ChainValue Chain
Informing potential customers about the product.
Marketing
Value-Added
Non Value-Added
1-9
Value ChainValue Chain
Delivering the product to customers.
Distribution
Value-Added
Non Value-Added
1-10
Value ChainValue Chain
Supporting customers who use the product.
Customer ServiceC
S
Value-Added
Non Value-Added
1-11Managerial Managerial DecisionsDecisions
What adds value to the firm?
L.O. 2 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
1-12
Carmen’s CookiesCarmen’s Cookies
Are costs Are costs greater greater than than benefits?benefits?What are What are
Carmen’s Carmen’s cost cost drivers?drivers?
What are What are Carmen’s Carmen’s differentidifferential costs?al costs?
What are What are Carmen’s Carmen’s differential differential revenues?revenues?
1-13
Cost Benefit AnalysisCost Benefit AnalysisConsider both the costs and benefits of a proposal.
Is the cost greater than the benefit?
Don’t Expan
d
Expand
1-14
What drives my cost?
Cost DriverCost Driver
These are estimates and require assumptions.
Cost DriversWhat are Carmen’s cost drivers?
Factors that cause or cost
Some may be realized
Some may not be realized
drive
1-15
Cost DriverCost Driver
Number of storefronts
Rent
Number of cookies
Labor
Ingredients
Insurance
1-16
Costs that change in response to a particular course of action.
Differential CostsDifferential Costs
Differential costs differdiffer between actions.
differdiffer actions
1-17
Revenues that change in response to a particular course of action.
Differential RevenuesDifferential Revenues
Differential revenues differdiffer between actions.
differdiffer actions
1-18
Differential Costs, Revenues & Differential Costs, Revenues & ProfitsProfits
(1) (2) (3)
Operating profits ……. $850 $1,255 $405
Total costs ……………. $5,450 $7,250 $1,800
Other ………………….. 1,000 1,200c 200
Rent ……………………. 1,250 1,250 -----
Utilities …………………. 400 600b 200
Labor ………………….. 1,000 1,500b 500
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
Food …………………… 1,800 2,700b 900
Costs ……………………
Sales revenue ………... $6,300 $8,505a $2,205
Sales Only Distribution Difference
Original Shop Wholesale & Retail
Status Quo Alternative
1-19
BudgetBudget
Other 2,200
A financial plan for the revenues and resources needed to meet financial goals.
Total Food 12,900
Nuts 1,900
Chocolate 1,900
Eggs 4,700
Flour $2,200
Food
CARMEN’S COOKIES
For the Month Ending April 30Budgeted Costs
Rent 5,000
Total cookie costs $24,200
Utilities 1,800
Total Labor 4,500
Other 1,500
Manager 3,000
Labor
Number of cookies 32,000
1-20Actual to Budget Actual to Budget ComparisonComparison
Difference
Total Food $13,500 $12,900 $600
Nuts 2,000 1,900 100
Chocolate 2,000 1,900 100
Eggs 5,200 4,700 500
Flour $2,100 $2,200 $(100)
Food
Actual Budget (Variance)
CARMEN’S COOKIES
For the Month Ending April 30Actual vs Budgeted Costs
Number of cookies sold 32,000 32,000 0
Costs
02,2002,200 Other
1-21Actual to Budget Actual to Budget ContinuedContinued
Total cookie costs $24,800 $24,200 $600
Utilities 1,800 1,800 0
Total Labor 4,500 4,500 0
Manager 3,000 3,000 0
Labor
Difference
Actual Budget (Variance)
01,5001,500 Other
05,0005,000Rent
1-22Accounting Accounting SystemsSystemsL.O. 3 Distinguish between the uses and users of cost
accounting and financial accounting information.
Accounting systems are designed to provide information to decision-makers.
Financial Accounting System
Cost Accounting System
Provides information to decision-makers external to the firm.
Provides information to decision-makers internal to the firm.
1-23
Financial Accounting reports financial position and income according to Generally Accepted Accounting Principles (GAAP).
Accounting Systems Accounting Systems ContinuedContinued
Cost Accounting measures, records and reports information about costs.
Data should be relevant for decisions in a particular firm.
Data should be comparable across firms.
1-24Customers of Cost Customers of Cost AccountingAccounting
Individual who purchases or uses a commodity or a service.
I love this customer!
I love this customer.
I love this customer.
1-25Customers of Cost Customers of Cost AccountingAccounting
Managers making decisions in the firm.
Managers
Individuals who use the information provided.
Owners evaluating managers.
Owners
1-26Trends in Cost Trends in Cost AccountingAccounting
High-Tech Production Settings
Just-in-Time Method
Lean ProductionEmphasis on
QualityBenchmarking Activity-Based
Costing
Six SigmaPerformance Measurement
L.O. 4 Identify current trends in cost accounting.
Enterprise Resource Planning
1-27High-Tech Production Settings
Manufacturing cost driven by technology rather than labor.
1-28Just-in-Time Just-in-Time MethodMethod
Units are produced or purchased just in time for use, keeping inventories at a minimum.
1-29
Lean Production
Quality
Efficiency
Flexibility
Worker training
A Lean Production philosophy focuses on:
Minimum inventory
1-30
Emphasis on QualityEmphasis on Quality
Organization is managed to excel on all dimensions.
Quality as defined by the customer
1-31
BenchmarkingBenchmarking
Benchmarking is an ongoing process resulting in continuous improvement.
Benchmarking methods measure products, services and activities against the best performance.
1-32Activity-Based Costing Activity-Based Costing (ABC)(ABC)
ABC assigns costs of activities needed to make a product then sums the cost of those activities to compute a product’s cost.
1-33
Finance
Enterprise Resource Planning Enterprise Resource Planning (ERP)(ERP)
Information technology linking various systems of the enterprise into a single comprehensive information system.
Technology
PurchasingProduction
Human Resources
1-34
Six SigmaSix Sigma
A system for improving quality that uses data to improve processes and prevent defects.
A statistical specification
1-35Performance Performance MeasurementsMeasurements
Performance measurements indicate how well a process is working.
Balanced ScorecardA performance measurement relying on
multiple financial and nonfinancial measures of performance.
1-36
Financial Players in the Financial Players in the OrganizationOrganization
Chief Financial Officer (CFO)
Treasurer
Controller
Internal Auditor
Cost Accountant
1-37
Financial Players in the Financial Players in the OrganizationOrganization
Chief Financial Officer (CFO)
Treasurer
Controller
Internal Auditor
Cost Accountant
Manages the entire accounting and finance function.
Manages liquid assets
Plans and designs information and incentive systems.
Ensures compliance with laws, regulations, and company policies and procedures. Records,
measures, estimates and analyzes costs.
1-38Ethical Issues For Ethical Issues For AccountantsAccountants
Many accountants or business people have done small things, none of which appeared seriously wrong, but these small things added up to big trouble.
L.O. 5 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
1-39You Discover Unethical You Discover Unethical ConductConduct
Follow the organization’s established policies
Discuss problems with the immediate superior, unless superior is involved.
Submit the issue to the next higher managerial level.
Submit the issue to an acceptable reviewing authority.
Consider calling the confidential “hotline.”The final recourse if ethical misconduct still exists is to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.
1-40
Sarbanes-Oxley Act of 2002 Sarbanes-Oxley Act of 2002
What’s the
intent?
Address problems of corporate governance
Who is impacted
?
Accounting Firms
Corporations
Corporations?
Corporate Responsibility
1-41
Chief Financial Officer
CFO
Corporate ResponsibilityCorporate Responsibility
Who is impacted?
Chief Executive
Officer
CEO
Manages the entire accounting and finance function.
Manages the entire corporation.
What is the impact?
Sign financial reports and stipulate that financial statements do not omit material information.
Disclose evaluation of the company’s internal controls.
Disclose notification of any fraud involving management to Auditors, Audit Committee and Board of Directors.
1-42
AppendixAppendix
Institute of Management
Accountants’ Code of Ethics
Competence
ConfidentialityIntegrit
y Objectivity
IMA Code of Ethics
1-43
CompetenceCompetenceMembers have a responsibility to:
Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills.
Perform their professional duties in accordance with relevant laws, regulations, and technical standards.
Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.
1-44
Confidentiality Confidentiality Members have a responsibility to:
Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so.
Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality.
Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.
1-45
IntegrityIntegrityMembers have a responsibility to: Avoid actual or apparent conflicts of interest and
advise all appropriate parties of any potential conflict.
Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically.
Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions.
Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives.
Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.
Communicate unfavorable as well as favorable information and professional judgments or opinions.
Refrain from engaging in or supporting any activity that would discredit the profession.
1-46
ObjectivityObjectivity
Members have a responsibility to:
Communicate information fairly and objectively.
Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.
1-47
Chapter 1
Should I expand or
not?