Download - Basic concepts lecture acctg 501
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Cost Accounting:
Information for
Decision Making
Basic Concepts
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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.
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Accounting
The
Language
of
Business
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• 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
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Two Areas 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 Accounting
Provides information to
investors, creditors,
and regulators
Complies with GAAP
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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
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Relationship of Financial,
Management, and Cost
Accounting
FINANCIAL
ACCOUNTING
MANAGEMENT
ACCOUNTING
COST
ACCOUNTING
Product
Costs
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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.
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THE VALUE CHAIN COMPONENTS
Research &
DevelopmentDesign Purchasing
Marketing DistributionCustomer
Service
Production
LO1
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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.
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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
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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
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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.
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COST DATA FOR MANAGERIAL
DECISIONS
• Costs for decision making
• Costs for control and evaluations
• Different data for different decisions
LO3
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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
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CARMEN’S COST DRIVERS
DriverCost
Rent
Insurance
Labor
Ingredients
Number of stores
Number of cookies
LO3
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DIFFERENTIAL COSTS
• Costs that change in response to a particular
course of action
• Differential costs change (differ) between actions.
LO3
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DIFFERENTIAL REVENUES
• Revenues that change in response to a particular
course of action.
• Differential revenues change (differ) between actions.
LO3
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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
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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
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RESPONSIBILITY CENTERS,
REVENUES, AND COSTS
Carmen Diaz
President
Ray Cruz
Vice-President
Retail Operations
Cathy Santos
Vice-President
Wholesale Operations
LO3
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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
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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
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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
10. Balanced Scorecard
L.O. 4 Identify current trends in cost accounting.
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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.
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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
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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.
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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.
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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
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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
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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
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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
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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
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BALANCE SCORECARD
Four perspectives
Learning and Growth
Internal Business
Customer Value
Financial Performance
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Balanced Scorecard
FinancialCustomerValue
Internal Business
Learning and Growth
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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
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Balance Scorecard• Learning and Growth
• Internal Business– Things to do well to meet customer
needs and expectations
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Balance Scorecard• Learning and Growth
• 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
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Balance Scorecard• Learning and Growth
• 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 Performance– Stockholders/stakeholders concerns
about profitability and organizational growth
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Balance ScorecardFour perspectives
• Learning and Growth
• Internal Business
• Customer Value
• Financial Performance
Measures
• Short term and long-term
• Internal and external
• Financial and nonfinancial
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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.
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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
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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
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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 financial
reports stipulating that the financial statements do not
omit material information.
• The company must disclose the evaluation of their
internal controls.
LO5
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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 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.
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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.
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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.
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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.
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END OF CHAPTER 1
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin