Financial Accounting

Who uses 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
 Disaggregated

Accountants
Financial accountants provide info 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***

ETHICS AND ACCOUNTING

Unethical Practices
 Earning management - deliberate accounting adjustments to "hit" profit targets
 Inappropriate adjustments involved in cost accounting
📌Product Cost
📌 Inventory Valuation
 Stretching legitimate accounting techniques
 Outright fraud
 Bribery and other corruption
IMA Code of Conduct
IMA - Institute of Management Accountants
Certification of CMA
IMA Guidelines for Ethical Behavior
Competence
 maintain an appropriate level of professional leadership and expertise by enhancing knowledge and
skills
 Follow applicable laws, regulations and standards
 Provide accurate, clear, concise, and timely decision support information
 Recognize and communicate professional limitations that preclude responsible judgment
 Maintain an appropriate level of professional leadership and expertise by enhancing knowledge and
skills

Confidentiality up
 keep information confidential except when this disclosure is authorized are legally required
 Do not disclose confidential information unless legally obligated to do so
 Do not use confidentials information or unethical or illegal advantage
 Ensure that subordinates do not disclose confidential information
 Keep information confidential except when disclosure is authorized or legally required.

Integrity (doing what is right as a professional)

 Abstain from activities that might discredit the profession
 Refrain from conduct that would prejudice carrying out duties ethically
 Mitigate conflicts of interest and advise others of potential conflicts
 Refrain from engage in any conduct that would prejudice carrying out duties ethically

Credibility (focuses on the information itself)

 Communicate information fairly and objectively
 Disclose delays or deficiencies in information timeliness, processing, or internal conflicts
 Disclose all relevant information that could influence a user’s understanding of reports and
recommendations
 Provide all relevant information that could reasonably be expected to influence an intended user's
understanding of the reports analysis or recommendations

Cost Management System (CMS)

 are activities that are being done by the company to manage cost

Formal method to plan and control an organization's cost-generating activities with major challenges of:
 achieving profitability in the short run
 Maintaining a competitive position in the long run
 Develop product costs
 Assess product/service life-cycle performance
 Improve understanding of processes and activities
 Control costs
 Measure performance
 Allow pursuit of organizational strategies

Short Run Long Run

Objective Organizational efficiency survival

 Focus Specific costs: manufacturing, Cost strategies:
service, marketing, administration Customers, suppliers,
products, distribution channel

Information Timely, accurate, highly, specific, Periodic, reasonably,

Characteristics short term accurate, broad focus long
term

Cost Management System Design

The design of the CMS is influenced by
 Organizational for, structure and culture
 Organizational mission and core competencies
 Operations and competitive environment and strategies


Organizational Form
Choice if form affects
 Cost of raising capital
 Cost of operating business
 Cost of litigating
 Statutory authority to make decisions

Forms of the business include

 Corporation, Partnership, Sole Proprietors

Organizational Structure
 Distribution of authority and responsibility in an organization (centralized or decentralized)

Decentralized - they have an authority to decide on their own but they are responsible for that
Centralized - before they make a decision it must be approved by the head

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

Organizational Culture (tone/ color / vibes of the company)

 An underlying set of assumption about the entity and the goals, processes, practices and values that
are shared by its members
 How people interact with each other
 The extent to which individuals take authority and assuming responsibility for organizational outcomes

Organizational Mission and Strategies

 Core competency - critical function or activity providing a competitive advantage
 Cost leadership strategy - undercut competitor prices (same quality between competitors)
 Product differentiation strategy - superior quality products or unique services sold at a premium
(monopolize)

Value Chain
A set of value-adding functions and processes that converts inputs into products or services.
Balanced Scorecard
 Learning and Growth Perspective
 Internal Business Process Perspective
 Customer Value Perspective
 Financial Performance Perspective

Balanced Scorecard Perspective

Learning and Growth
 Used organization's intellectual capital to adapt to changing customer needs or to influence new
customer's 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

Direct Cost
 are identified with and can be traced to a cost object. Wood used to make guitars
 not only physical but the significance of cost

Indirect Cost
 cannot be identified with or traced to a cost object. A production supervisor's salary is an indirect cost
because if cannot be traced to an individual guitar

DIRECT MATERIALS
 An integral part of the finished product
 A significant portion of the total cost of the product

DIRECT LABOR
 An integral part of the finished product
 A significant portion of the total cost of the product

FACTORY OVERHEAD
 Cost other than direct materials cost and direct labor costs that are incurred in a manufacturing process
factory / manufacturing overhead cost
  Costs that do not enter directly into the finished product such as oil used to lubricate the machinery
and janitorial supervisory wages
 Some costs that are part of the product but are considered insignificant

Period Cost
 Selling expenses which are incurred in marketing the product and delivering the sold product to the
customer
*distribution expenses
 Administrative expenses which are incurred in managing the company and are not directly related to
manufacturing or selling functions.

COMPARING MERCHANDISING AND MANUFACTURING ACTIVITIES

Merchandisers
 Buy Finished goods
 Sell finished goods

Manufacturers
 Buy raw materials
 produce and sell finished goods

Balance Sheet
Merchandisers
Current assets
 Cash
 Receivables
 Prepaid Expenses
 Merchandise Inventory

Manufacturers
Current assets
 Cash
 Receivables
 Prepaid Expenses
 Inventories
*Raw materials - materials waiting to be processed
*Work in Process - partially complete products - some materials, labor, or overhead has been added
*Finished goods - completed products awaiting sale.
Schedule of Cost of Goods Manufactured
 Calculates the cost of raw material,direct labor and manufacturing overhead used in production
 Calculates the manufacturing costs associated with goods that were finished during the period