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CHAPTER 1 | INTRODUCTION TO COST ACCOUNTING Information Must be May be

characteristics • Historical • Current or forecasted


FIRST PART •Quantitative • Quantitative or
traditional methods of cost and management accounting, • Monetary qualitative
(which are the building blocks for generating information • Verifiable • Monetary or
used to satisfy internal and external user needs) nonmonetary
SECOND PART • Timely and, at a
minimum, reasonably
innovative cost and management accounting topics and
estimated
methods
Overriding criteria -GAAP -Situational relevance
-Consistency (usefulness)
Accounting is called the language of business. -Verifiability -Benefits in excess of
costs
2 ”DIALECTS” -Flexibility
1. FINANCIAL ACCOUNTING Recordkeeping Formal Combination of formal
- primary focus of accounting and informal
- concentrates on the preparation and provision of
financial statements: *As companies grew and were organized across multiple
 balance sheet locations, financial accounting
 income statement became less appropriate for satisfying management’s
 cash flow statement information needs.
 statement of changes in stockholders’ equity
2. MANAGEMENT AND COST ACCOUNTING Larger percentage of total costs
MANAGEMENT ACCOUNTING UPSTREAM COSTS
- Providing information to parties inside an (research, development, product design, and supply chain)
organization so that they can plan, control DOWNSTREAM COSTS
operations, make decisions, and evaluate (marketing, distribution, and customer service)
performance

FINANCIAL ACCOUNTING
Objective: provide useful information to external parties,
including investors and creditors
- requires compliance with generally accepted
accounting principles (GAAP)
- historical, quantitative, monetary, and verifiable
- Companies often used return on investment (ROI)
to allocate resources and evaluate divisional
performance (INCOME/ASSETS)

MANAGEMENT ACCOUNTING COST ACCOUNTING


gather the financial and nonfinancial information - intersection between financial and management
needed by internal users accounting
- commonly addresses individual or divisional - addresses the informational demands of both
concerns rather than those of the firm as a whole financial and management accounting by providing
- not required to adhere to GAAP but provides both product cost information to
historical and forward-looking information for • external parties (stockholders, creditors,
managers.
and various regulatory bodies) for
investment and credit decisions and for
reporting purposes
Financial Management
• internal managers for planning,
Accounting Accounting
controlling, decision making, and
Primary users External Internal
evaluating performance.
Primary Whole Parts (segmented)
organizational focus (aggregated)
STATEMENT OF ETHICAL PROFESSIONAL PRACTICE
COMPETENCE
Each member has a responsibility to:
• Maintain an appropriate level of professional expertise by
continually developing knowledge and skills.
• Perform professional duties in accordance with relevant laws,
regulations, and technical standards.
• Provide decision support information and recommendations
PRODUCT COST that are accurate, clear, concise, and timely.
• Recognize and communicate professional limitations or other
- developed in compliance with GAAP for financial
constraints that would preclude responsible judgment or
reporting purposes, and, for a manufacturing successful performance of an activity.
company, consists of the sum of all factory costs CONFIDENTIALITY
incurred to make one unit of product. Each member has a responsibility to:
- But can also be developed outside of the • Keep information confidential except when disclosure is
constraints of GAAP to assist management in its authorized or legally required.
needs for planning and controlling operations • Inform all relevant parties regarding appropriate use of
confidential information. Monitor subordinates’ activities to
COST ACCOUNTING STANDARDS ensure compliance.
3 bodies issue cost accounting guidelines or standards • Refrain from using confidential information for unethical or
1. Institute of Management Accountants (IMA) illegal advantage.
INTEGRITY
- voluntary membership organization of
Each member has a responsibility to:
accountants, finance specialists, academics, etc
• Mitigate actual conflicts of interest. Regularly communicate with
- issues directives called Statements on business associates to avoid apparent conflicts of interest. Advise
Management Accounting (SMAs) all parties of potential conflicts.
• not legally binding, but their rigorous • Refrain from engaging in any conduct that would prejudice
developmental and exposure process helps ensure carrying out duties ethically.
their wide support • Abstain from engaging in or supporting any activity that might
2. Society of Management Accountants of Canada discredit the profession.
- issues Management Accounting Guidelines (MAGs) CREDIBILITY
• not mandatory for organizational accounting but Each member has a responsibility to:
• Communicate information fairly and objectively.
suggest high-quality accounting practices
• Disclose all relevant information that could reasonably be
3. Cost Accounting Standards Board (CASB)
expected to influence an intended user’s understanding of the
- part of the U.S. Office of Federal Procurement reports, analyses, or recommendations.
Policy • Disclose delays or deficiencies in information, timeliness,
- purpose is to issue cost accounting standards for processing, or internal controls in conformance with organization
defense contractors and federal agencies to help policy and/or applicable law.
ensure uniformity and consistency in government
contracting
- Compliance with CASB standards is required for COMPETENCE
companies bidding on or pricing cost-related - means that individuals will develop and maintain
contracts of the federal government. the skills needed to practice their profession.
Ex. cost accountants working in companies involved in
PROFESSIONAL ETHICS government contracts must be familiar with both GAAP
EARNINGS MANAGEMENT and CASB standards
- any accounting method or practice used by
managers or accountants to deliberately “adjust” a CONFIDENTIALITY
company’s profit amount to meet a predetermined - means that individuals will refrain from disclosing
internal or external target company information to inappropriate parties
- allows a company to meet earnings estimates, (such as competitors)
preserve a specific earnings trend, convert a loss to
a profit, increase management compensation (tied
to stock performance), or hide illegal transactions
INTEGRITY Strategy
- means that individuals will not participate in COST LEADERSHIP
activities that would discredit their company or - refers to a company’s ability to maintain its
profession. competitive edge by undercutting competitor
Ex. it would preclude cost accountants from accepting prices
gifts from suppliers because such gifts could bias (or be - Successful cost leaders focusing almost exclusively
perceived to bias) the accountants’ ability to fairly on manufacturing products or providing services at
evaluate the suppliers and their products a low cost
EX. Walmart, the Honda Fit, and Bic pens compete in
CREDIBILITY their markets based on prices.
- means that individuals will provide full, fair, and
timely disclosure of all relevant information PRODUCT DIFFERENTIATION
Ex. a cost accountant should not intentionally - refers to a company’s ability to offer superior
miscalculate product cost data to materially misstate a quality products or more unique services than
company’s financial position or results of operations competitors; such products and services are,
however, generally sold at premium prices.
Ex. Neiman Marcus, the Honda Acura, and Mont Blanc
ORGANIZATIONAL STRATEGY pens compete on quality and features. Successful
companies generally focus on one strategy or the
MISSION STATEMENT other; however, many firms focus on both strategies at
- expresses the purposes for which the organization the same time (possibly for different product lines),
exists, what the organization wants to accomplish, although one often dominates.
and how its products and services can uniquely
meet its targeted customers’ needs ORGANIZATIONAL STRUCTURE
- used to develop the organization’s strategy or plan - reflects the way in which authority and
for how the firm will fulfill its goals and objectives responsibility for making decisions are distributed
by deploying its resources to create value for in an organization.
customers and shareholders AUTHORITY
- modified over time to adapt to the ever-changing - refers to the right (usually by virtue of position or
business environment rank) to use resources to accomplish a task or
achieve an objective
RESPONSIBILITY
- obligation to accomplish a task or achieve an
objective.
Line personnel
• work directly toward attaining organizational goals
• Persons in these positions will be held responsible
for achieving targeted balanced scorecard
measures or budgeted operating income for their
divisions or geographic regions.
Staff personnel
• Give assistance and advice to line personnel
• Relative to top accounting jobs, the treasurer and
CORE COMPETENCY controller are staff positions.
any critical function or activity in which an organization Treasurers
seeks a higher proficiency than its competitors, making - generally responsible for achieving short- and long-
that function or activity the root of competitiveness and
term financing, investing, and cash management
competitive advantage goals
Ex. Technological innovation, engineering, product Controllers
development, and after-sales service - responsible for delivering financial reports in
conformity with GAAP to management.
3 COMMON ORGANIZATIONAL CONSTRAINTS • Design
1. MONETARY CAPITAL - developing alternative product, service, or process
- Although it can almost always be acquired through designs.
borrowings or equity sales, management should Ex. In 1996, GM changed the Corvette design by
decide whether moving the transmission to the back of the car; this
• the capital can be obtained at a reasonable change gave passengers more leg room. Many
cost and/or companies have redesigned plant layouts to reduce
• whether a reallocation of current capital would product manufacturing time.
be more effective and efficient. • Supply
2. INTELLECTUAL CAPITAL - managing raw materials received from vendors.
- encompasses all of an organization’s intangible Companies often develop longterm alliances with
assets: knowledge, skills, and information. suppliers to reduce costs and improve quality.
- Companies rely on their intellectual capital to Ex. Johnson Controls is the supplier for some General
create ideas for products or services, to train and Motors cars’ seating systems, electronics, instrument
develop employees, and to attract and retain panels, overhead systems, floor consoles, door
customers. systems, and cargo management systems. The
3. TECHNOLOGY relationship is working well, given that Johnson
- companies must adopt emerging technologies to Controls is considered one of GM’s top suppliers
stay at the top of their industry and achieve a almost every year. In many instances, suppliers
competitive advantage over competitors. become extensions of a company’s upstream
operations.
CULTURE • Production
- has a significant role in determining whether the - acquiring and assembling resources to
communication system tends to be formal or manufacture a product or render a service. F
informal, whether authority is likely to be Ex. For GM, production reflects the acquisition of tires,
concentrated in management or distributed metal, paint, fabric, glass, electronics, brakes, and
throughout the organization, and whether there other inputs and the assembly of those items into an
are feelings of well-being or stress in organizational automobile.
members. • Marketing
ENVIRONMENTAL CONSTRAINTS - promoting a product or service to current and
- any limitation caused by external cultural, fiscal prospective customers.
(such as taxation structures), legal/regulatory, or Ex. Promotion could involve developing a Super Bowl
political situations and by the competitive market half-time commercial, placing automobiles on a
structures. showroom floor, designing a billboard advertisement,
or recording a radio announcement to inform
VALUE CHAIN customers about the company’s products or services.
- Strategic management’s foundation • Distribution
- which is used to identify the processes that lead to - delivering a product or service to a customer.
cost leadership or product differentiation. Ex. GM uses trains and trucks to deliver automobiles to
- a set of value-adding functions or processes that dealerships. Other companies could use airlines or
convert inputs into products and services for couriers to distribute their products.
company customers. • Customer Service
- supporting customers after the sale of a product or
Examples from General Motors are used to illustrate the service.
functions within the value chain. Ex. GM provides a 1-800 number for its customers to
call if they have questions or need roadside service.
• Research and Development Other companies may require customers to return a
- experimenting to reduce costs or improve quality. product if it needs repair.
Ex. GM can experiment with various paint formulas to
produce the most lasting exterior paint finish.
- includes short-term and long-term, internal and
external, and financial and nonfinancial measures
to balance management’s view and execution of
strategy.

4 PERSPECTIVES
1. LEARNING AND GROWTH PERSPECTIVE
- focuses on using the organization’s intellectual
capital to adapt to changing customer needs or to
influence new customers’ needs and expectations
through product or service innovations.
- addresses whether a company can continue to
BALANCED SCORECARD progress and be seen by customers as adding value
Accounting information helps managers to measure 2. INTERNAL BUSINESS PERSPECTIVE
dimensions of performance that are - focuses on those things that the organization must
important in accomplishing strategic goals. do well to meet customer needs and expectations
- concentrates on issues such as employee
Historical financial data reflect satisfaction, product quality control, and cost
LAG INDICATORS reduction
- or outcomes that resulted from past actions, such 3. CUSTOMER VALUE PERSPECTIVE
as installing a new production process or - addresses how well the organization is doing
implementing a new software system. relative to important customer criteria such as
Ex. an increase in operating profits (lag indicator) could speed (lead time), quality, service, and price (both
occur after a new production process is installed. purchase and after purchase)
- Customers must believe that, when a product or
LEAD INDICATORS service is purchased, the price paid was worth the
- reflect future outcomes and thereby help assess value received
strategic progress and guide decision making 4. FINANCIAL PERFORMANCE PERSPECTIVE
before lag indicators are known. - addresses the concerns of stockholders and other
Ex. a lead indicator is the number of employees trained stakeholders about profitability and organizational
on a new accounting information system. The growth
expectation is that the more employees who are - A company could, for example, reduce costs by
trained to use the new system, the more rapidly orders outsourcing its technologies to countries where
will be processed, the more satisfied customers will be labor costs are lower.
with turnaround time after placing an order, and the
more quickly profits will be realized. ETHICS IN MULTINATIONAL CORPORATIONS
Accountants and other individuals working for
If fewer employees are trained (lead indicator) than were multinational companies should be aware of not only their
planned to be trained, future profits (lag indicator) will own company’s and the IMA’s code of ethical conduct but
decrease (or not increase as expected) because some also the laws and ethical parameters within countries in
customers will be unhappy with sales order turnaround which the multinational enterprise operates.
time.

BALANCED SCORECARD (BSC)


- a framework that translates an organization’s
strategy into clear and objective performance
measures (both leading and lagging) that focus on
customers, internal business processes,
employees, and shareholders. Thus, the BSC
provides a means by which actual business
outcomes can be evaluated against performance
targets.