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Kinney ● Raiborn

Cost Accounting: Foundations and Evolutions, 8e

Chapter 1:Introduction to Cost Accounting

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Learning Objectives

What are the relationships among financial, management, and cost accounting?

What are the the sources of authoritative pronouncements for the practice of cost accounting?

What are the sources of ethical standards for cost accountants? What is a mission statement, and why is it important to

organizational strategy? What must accountants understand about an organization’s

structure and business environment in order to perform effectively in that organization?

What is a value chain, and what are the major value chain functions?

How is a balanced scorecard used to implement an organization’s strategy?

Why is ethical behavior so important in organizations?

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Accountants Financial accountants provide information to

external parties Investors Creditors Regulators

Managerial accountants provide information to internal users Managers

Cost accountants provide information to both internal and external users Product cost information

Accounting is the language of business.

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Relationship of Financial, Management, and Cost Accounting

FINANCIALACCOUNTING

MANAGEMENTACCOUNTING

COSTACCOUNTIN

G

Product Costs

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Types of Accounting

Financial Meet external

information needs Comply with GAAP

Management Meet internal

information needs Does not have to

comply with GAAP

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Financial versus Managerial

Financial 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

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Product Cost Information

External parties—stockholders, creditors, and regulators For investment and credit decisions Complies with GAAP Enterprise focus

Internal parties Planning, controlling, and decision making Evaluating performance Includes upstream and downstream costs Disaggregated

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Accounting Bodies

Financial Public Company

Accounting Oversight Board (PCAOB)

Securities and Exchange Commission (SEC)

Financial Accounting Standards Board (FASB)

Management Institute of

Management Accountants (IMA)

Society of Management Accountants of Canada

Cost Accounting Standards Board (CASB)

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Management Accounting Organizations IMA

Statements on Management Accounting (not legally binding)

Society of Management Accountants of Canada Management Accounting Guidelines (not legally binding)

Cost Accounting Standards Board (CASB) Government contracting standards (legally binding)

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Professional Ethics

Earnings management—deliberate accounting adjustments to “hit” profit targets

Often adjustments involve cost accounting Product costs Inventory valuations

Stretching legitimate accounting techniques Outright fraud

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Ethics and Legislation

Sarbanes-Oxley Act—CEOs and CFOs personally accountable for the accuracy of their organization’s financial reporting

False Claims Act—whistle-blower protection and penalties for failure to blow the whistle (disclose known financial frauds)

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Ethics and Management Accounting

Standards of Ethical Conduct for Management Accountants Competence Confidentiality Integrity Credibility

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Organizational Strategy

1. Develop mission statement2. Implement strategy3. Deploy resources to create value for

customers and shareholders4. Recognize that each organization is unique

—thus unique strategies must be developed

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Organizational Strategy

1. Develop mission statement2. Implement strategy

Establish appropriate measures of

accomplishment

Develop, implement, and

monitor necessary

information systems

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Five Factors in Organizational Strategy Core competencies Organizational structure Management style and organizational culture Organizational constraints Environmental constraints

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Core competency—critical function or activity providing a competitive advantage

Cost leadership strategy—undercut competitor prices

Product differentiation strategy—superior quality products or unique services sold at a premium

Organizational Strategies

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Strategy Questions Who are your five most important

competitors? Is your firm more or less profitable

than these firms? Compare prices for equivalent

products/services. Are they higher or lower? Explain

the difference. Is it customers, costs, or profit requirements?

Are your costs higher or lower than those of main competitors? Where are the differences most pronounced?

What segment(s) of your business represents 80% profits?

For each business segment above, how large are you relative to the largest competitors? Are you gaining or losing relative market share?

What are your customers’ most important purchase criteria?

How do you and your competitors rate on these purchase criteria?

What are your main strengths and competencies? Are they appreciated by the market?

Which are your priority segments? Where is it most important that you

gain market share? What is your competitive advantage?

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Organizational Structure

Distribution of authority and responsibility in an organization Authority—right to use resources to accomplish a

task or achieve an objective Responsibility—obligation to accomplish a task or

achieve an objective Line manager works directly toward attaining

organizational goals Staff employees give assistance and advice to line

managers Treasurer and Controller

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Value Chain

Research and Development

Product Design Supply Production

Marketing Distribution Customer Service

Communicate strategy to all members of the value chain.

A set of value-adding functions and processes that converts inputs into products or services

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Components of the Value Chain

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Balanced Scorecard

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Balanced Scorecard Perspectives

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 Financial

Address stockholders/stakeholders concerns about profitability and organizational growth

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Balanced Scorecard Measures

Short-term and long-term Internal and external Financial and nonfinancial

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Ethics in Multinationals

Foreign Corrupt Practices Act—prohibits bribes to obtain/retain business

Organization of Economic Cooperation and Development Convention—crime to offer, promise, give bribes to obtain/retain internal business deals

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Questions

What is the relationship among financial, management, and cost accounting?

How is the balanced scorecard used to implement an organization’s strategy?

Where can an accountant find ethical standards for cost accounting?

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Potential Ethical Issues

Earnings management Low-cost production at any cost Whistle-blower retaliation Fixing prices Bribery and other corruption Hiding managerial acts