IE 618 Spring 2013…Slide content extracted from Hansen, Mowen, & Guan 3
Grade:
• 25 % Exam 1
• 25 % Exam 2
• 30 % Team Project
• 10 % Corporate Profiles
• 10 % Homework
• Class Attendance and Participation
IE 618 – Spring 2014
Chapter 1 Objectives
1. Describe cost management and explain how it differs from financial accoun;ng.
2. Iden;fy the current factors affec;ng cost management.
3. Describe how management accountants func;on within an organiza;on.
4. Understand the importance of ethical behavior for management accountants.
5. Iden;fy the three forms of cer;fica;on available to internal accountants.
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Financial Accounting vs. Management Accounting:
A Systems Framework
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Accoun&ng Informa&on System • Consists of interrelated manual and computer parts • Uses processes such as collec;ng, recording, summarizing, analyzing, and managing data to transform inputs into informa;on that is provided to users.
Two major systems: • The financial accoun;ng informa;on system • The cost managerial accoun;ng informa;on system
The biggest difference between the two is the targeted user.
Objec;ve 1
Financial Accounting vs. Management Accounting:
A Systems Framework
• Accoun&ng informa&on systems • Financial accoun&ng
• Produces outputs for external users. • Follows rules and conven;ons such as those set by the SEC and FASB.
• Creates outputs such as financial statements. • Cost management
• Produces outputs for internal users. • Designed to cost services, products and other objects. • Is used in planning and control and decision making. Criteria and formats set internally.
• Outputs include reports, schedules and analyses.
10 Objec;ve 1
Cost Management Accounting Information System
• Two major subsystems of the Cost Management Accoun&ng Informa&on System • Cost accoun&ng informa&on system
• Assigns costs to individual products and services. • Assists external financial repor;ng by valuing inventories and determining cost of sales. These assignments must conform to external rules.
• Opera&onal control informa&on system • Provides accurate and ;mely feedback concerning performance.
• Improve profit by increasing customer value.
11 Objec;ve 1
Factors Affecting Cost Management
Global Compe&&on • The new compe;;ve environment has increased the
demand not only for more cost informa;on but also for more accurate informa;on.
• Vastly improved transporta;on and communica;on has led to a global market for many manufacturing and service firms.
12 Objec;ve 2
Factors Affecting Cost Management
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Growth of the Service Industry • As the tradi;onal industries have declined in
importance, the service sector of the economy has increased in importance.
• Deregula;on of many services has increased compe;;on in the service industry.
Objec;ve 2
Factors Affecting Cost Management
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Advances in Informa&on Technology • Computers are used to monitor and control opera;ons.
• The result is an opera;onal system that is fully integrated with marke;ng and accoun;ng data.
• Increased ability to accurately cost products because of advances in tools.
• Emergence of e-‐commerce • Internet trading • Electronic data interchange • Bar coding • RFID technologies
Objec;ve 2
Factors Affecting Cost Management
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Advances in Management Environment • The theory of constraints is a method used to
con;nuously improve manufacturing ac;vi;es and nonmanufacturing ac;vi;es.
• Just-‐in-‐1me manufacturing is a demand-‐pull system that strives to produce a product only when it is needed and only in the quan;;es demanded by customers.
• Lean Manufacturing is the persistent pursuit and elimina;on of waste which simultaneously embodies respect for people.
• Computer-‐integrated manufacturing is the automa;on of the manufacturing environment.
Objec;ve 2
Factors Affecting Cost Management
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Customer Orienta&on • Firms are compe;ng not only in terms of technology and
manufacturing, but in the speed of delivery and response to deliver value to the customer.
• Companies must also sa;sfy the needs of internal customers, such as staff func;ons exist to support line func;ons.
New Product Development • Management recognizes that a high propor;on of produc;on
costs are commiVed during the development and design stage of a new product.
• The requirement to control cost encourages the use of target cos1ng and ac1vity-‐based management.
Objec;ve 2
Factors Affecting Cost Management
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Total Quality Management • Con;nual improvement and elimina;on of waste are the
two founda;on principles that govern a state of manufacturing excellence.
• A philosophy of total quality management, in which managers strive to create an environment that will enable organiza;ons to manufacture perfect (fully compliant/zero defect) products, has replaced the acceptable quality aZtudes of the past.
Objec;ve 2
Factors Affecting Cost Management
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Time as a Compe&&ve Element • Time is the crucial element in all phases of the value chain. • Decreasing non-‐value-‐added ;me appears to go hand-‐in-‐hand
with increasing quality. • Objec;ve: increase value and responsiveness to customer needs Efficiency • While quality and ;me are important, improving these
dimensions without corresponding improvements in financial performance may be fu;le, if not fatal.
• Cost is a cri;cal measure of efficiency. • Efficiency: “Doing Things Right” • Effec;veness: “Doing the Right Things”
Objec;ve 2
The Role of the Management Accountant
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Line posi1ons are posi;ons that have direct responsibility for the basic objec;ves of an organiza;on. Staff posi1ons are posi;ons that are suppor;ve in nature and have only indirect responsibility for an organiza;on’s basic objec;ves.
Objec;ve 3
The role of today’s Cost and Management Accountant
The Controller Ø Financial reports Ø SEC repor;ng Ø Tax planning and repor;ng Ø Performance repor;ng Ø Internal audi;ng Ø Budge;ng Ø Accoun;ng systems and internal controls
The Treasurer Ø Collec;on of cash Ø Monitoring of cash payments
Ø Monitors cash availability Ø Short-‐term investments Ø Short and long-‐term borrowing
Ø Issuing of capital stock
21 Objec;ve 3
Information for Planning, Controlling, Continuous Improvement,
and Decision Making
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Planning is the detailed formula;on of future ac;ons to achieve a par;cular end.
• Requires seZng objec;ves and iden;fying methods to achieve those objec;ves.
Controlling is the managerial ac;vity of monitoring a plan’s implementa;on and taking correc;ve ac;on as needed. Feedback is informa;on that can be used to evaluate or correct the steps being taken to implement a plan.
Objec;ve 3
Information for Planning, Controlling, Continuous Improvement,
and Decision Making
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Con1nuous improvement is required in a dynamic environment if a firm is to remain compe;;ve or to establish a compe;;ve advantage. A relentless pursuit to deliver more value to the customer; and, always searching for ways to increase efficiency through: waste reduc;on, quality improvement, cost reduc;on, non-‐value added ac;vity elimina;on/reduc;on Decision making is the process of choosing among compe;ng alterna;ves
Objec;ve 3
Accounting and Ethical Conduct
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Benefits of Ethical Behavior ü Can create customer and employee loyalty ü Avoid li;ga;on costs
Objec;ve 4
Standards of Ethical Conduct for Management Accountants • Competence • Confiden;ality • Integrity • Credibility
Certification
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• CMA: One of the main purposes of the CMA was to establish management accoun;ng as a recognized, professional discipline, separate from the profession of public accoun;ng.
• CPA: The responsibility of a CPA is to provide assurance concerning the reliability of financial statements.
• CIA: The focus of the CIA is to recognize competency in internal audi;ng rather than external audi;ng as with the CPA.
Objec;ve 5
Certification
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Four areas emphasized on the CMA exam:
1) Business analysis
2) Management accoun;ng and repor;ng
3) Strategic management
4) Business applica;ons
Objec;ve 5
1. Describe a cost management informa;on system, its objec;ves, and its major subsystems, and indicate how it relates to other opera;ng and informa;on systems.
2. Explain the cost assignment process. 3. Define tangible and intangible products, and explain why
there are different product cost defini;ons. 4. Prepare income statements for manufacturing and service
organiza;ons. 5. Explain the difference between tradi;onal and
contemporary cost management systems.
Chapter 2 Objectives
3
System: a set of interrelated parts that performs one or more processes to accomplish specific objec;ves
• Works by using processes to transform inputs into outputs that sa;sfy the system’s objec;ves
An informa;on system is designed to provide informa;on to people in the company who might need it.
A Systems Framework
Objec;ve 1
Financial Accoun&ng Informa&on System • Inputs: well-‐specified economic events • Processes: rules and conven;ons established by the SEC
and FASB • Outputs: financial statements for external users
Cost Management Informa&on System • Inputs and processes: set by management; not bound by
externally imposed criteria • Outputs: reports for internal users
A Systems Framework
Objec;ve 1
The cost management informa1on system has three broad objec;ves that provide informa;on for:
1) Cos;ng services, products, and other objects of interest to management
2) Planning and control
3) Decision making
The value chain is the set of ac;vi;es required to design, develop, produce, market, deliver, and provide post-‐sales service for the products and services sold to customers.
A Systems Framework
Objec;ve 1
• Costs are sacrifices made to obtain goods or services. As long as they remain unexpired, they are on the balance sheet as an asset.
• Expenses are expired costs which are deducted from revenues on the income statement.
• Cost Objects are anything for which costs are measured and assigned. Some cost objects are tangible, such as the product we make; others are not, such as ac;vi;es for which we wish to accumulate cost informa;on. – Example: A bicycle is a cost object when you are determining the cost
to produce a bicycle – Assigning costs accurately to cost objects is crucial …cost of resources
used by a cost object
2 Cost Assignment: Direct Tracing, Driver Tracing and Allocation
Objec;ve 2
Traceability means that costs can be assigned easily and accurately, using a causal rela;onship.
Methods of tracing: 1. Direct tracing: relies on physical observance of causal
rela;onships to assign costs to cost objects—ex: direct mat’l 2. Driver tracing: relies on drivers as causal factors to assign
costs to cost objects—ex: process energy consump5on
Costs that cannot be traced are considered indirect costs and are allocated to products in some predetermined way.
Note: whether direct or indirect cost depends on cost object-‐-‐plant hea;ng/cooling
Cost Assignment: Direct Tracing, Driver Tracing and Allocation
Objec;ve 2
• Tangible products are goods produced by conver;ng raw materials into finished products.
• Services are ac;vi;es performed for a customer or by a customer using the service provider’s products or facili;es. Services have three characteris;cs that separate them from tangible products: • Intangibility • Perishability • Inseparability
3 Product and Service Costs
Objec;ve 3
• Direct materials are those materials that are directly traceable to the goods or services being produced.
• Example: The cost of wood in furniture. • Direct labor is the labor that is directly traceable to the goods or services being produced.
• Example: Wages of assembly-‐line workers. • Overhead are all other manufacturing costs.
• Example: Plant deprecia5on, u5li5es, property taxes, indirect materials, indirect labor (plant security), etc.
Manufacturing Costs (Production Costs)
Product and Service Costs
Objec;ve 3
Typically, the most important cost object is the output of the organization: Product or Service…considered “product cost”
• Prime Cost is the sum of direct materials and direct labor. • Conversion Cost is the sum of direct labor and overhead.
• Note: Never add prime cost and conversion cost or you will have double counted labor because it is included in each defini5on!
Prime and Conversion costs
Product and Service Costs
Objec;ve 3
• Marke1ng (selling) costs are the costs necessary to market, distribute, and service a product or service.
• Example: Adver5sing, storage, sales comm, and freight out. • Administra1ve costs are the costs associated with research, development, and general administra;on of the organiza;on that cannot reasonably be assigned to either marke;ng or produc;on.
• Example: Legal fees, salary of the chief execu5ve officer. Note: R&D costs may be separate from Admin Costs are the costs necessary to create the underlying innova;on, prototypes & development the technologies for a product or service.
Nonproduction Costs
(Period Costs)
Product and Service Costs
Objec;ve 3
• Income Statement: Manufacturing Firm • Prepared for external par;es • Follows standard format • Is referred to as an absorp&on-‐cos&ng or full-‐cos&ng income
statement because all manufacturing costs are absorbed into the cost of goods.
• Cost of Goods Manufactured represents the total manufacturing cost of goods completed during the period.
• Work in Process consists of all par;ally completed units found in produc;on at a given point in ;me (usually the end of one period/beginning of the next).
• Cost of Goods Sold (COGS) is the manufacturing cost of all goods that were sold during the period.
External Financial Statements
Objec;ve 4
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Income Statement: Manufacturing Firm
Sales 2,000,000$ Less: Cost of Goods Sold 1,300,000 Gross margin 700,000$ Less operating expenses:
Research and development 100,000$ Selling 300,000 Administrative 150,000 550,000
Operating income 150,000$
Manufacturing OrganizationIncome Statement
For the Year Ended December 31, 2010
From the Cost of Goods Sold Schedule
• Tradi&onal Cost Management Systems • Tradi&onal Cost Accoun&ng
• Assumes all costs can be classified as fixed or variable with respect to changes in units or volume – called “unit-‐based costs”.
• Allocates costs that are not unit-‐based. • Tradi&onal Cost Control
• Assigns costs to organiza;onal units and holds the unit manager responsible for controlling the assigned costs.
• Performance is measured by comparing actual outcomes with standard or budgeted outcomes.
• Emphasis is on financial measures of performance.
Traditional and Activity-Based Cost Management Systems
Objec;ve 5
• Ac&vity-‐Based Cost Management Systems • Ac&vity-‐Based Cost Accoun&ng
• Emphasizes tracing over alloca;on • Iden;fies non-‐unit-‐based ac;vity drivers—unrelated to volume of
products produced. Ex: material handling costs more accurately related to number of moves and not number of products moved.
• Flexible system capable of producing cost informa;on for a variety of purposes.
• Ac&vity-‐based Cost Control • Seeks to understand and control ac5vi5es rather than costs. • Ac&vity-‐based management (ABM) focuses on improving customer
value. • Looks at the process view and focuses accountability on ac;vi;es to
maximize systemwide performance.
Traditional and Activity-Based Cost Management Systems
Objec;ve 5
Comparison of Traditional and ABC Systems
Traditional and Activity-Based Cost Management Systems
Objec;ve 5
Trade-Off Between Measurement and Error Costs
Traditional and Activity-Based Cost Management Systems
Objec;ve 5
Shifting Measurement and Error Costs
Traditional and Activity-Based Cost Management Systems
Objec;ve 5