Chapter 1

Cost Accounting:
Information for Decision Making

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Value Chain
L.O. 1 Describe the way managers use accounting
information to create value in organizations.

The Value Chain describes a set of activities that

transforms raw materials and resources into the
goods and services end users purchase and consume.
Value added activities
Non value added activities

1-2

LO
1

The Value Chain Components

Production

1-3

Accounting Systems
L.O. 2 Distinguish between the uses and users of cost
accounting and financial accounting information.

Financial
accounting

Reports

Financial
position and
income

Cost
accounting

Reports

Information
about costs

1-4

Managerial Decisions
L.O. 3 Explain how cost accounting information is used
for decision making and performance evaluation
in organizations.

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.
1-5

LO
3

Costs for Decision Making

Carmens 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?

1-6

LO
3

Carmens Cost Drivers

Cost

Driver

Rent
Insurance
Labor

Number of cookies

Ingredients

1-7

LO
3

Differential Costs, Revenues, and Profits

Carmens Cookies
Projected Income Statement for One Week
(1) Status Quo
Original Shop
Sales Only

(2) Alternative
Wholesale & Retail
Distribution

(3) Difference

Sales revenue
Costs:
Food
Labor
Utilities
Rent
Other
Total costs

$6,300

$8,505a

$2,205

1,800
1,000
400
1,250
1,000
$5,450

2,700b
1,500b
600b
1,250
1,200c
$7,250

900
500
200
-0200
$1,800

Operating profits

$ 850

$1,255

$ 405

(a) 35 percent higher than status quo

(b) 50 percent higher than status quo
(c) 20 percent higher than status quo
1-8

LO
3

Responsibility Centers,
Revenues, and Costs
Carmen Diaz
President

Ray Adams
Vice-President
Retail Operations

Cathy Peterson
Vice-President
Wholesale Operations

1-9

LO
3

Responsibility Centers, Revenues, and Costs

Carmens Cookies
Income Statement
For the Month Ending April 30
Retail
Wholesale
Operations
Operations
Sales revenue
Department costs:
Food
Labora
Utilities
Rent
Total department costs
Center marginb
General and admin. costs:
General managers salaryc
Other (administrative)
Total general and admin. costs
Operating profit

Total

$28,400

$23,600

$52,000

13,500
4,500
1,800
5,000
$24,800
$ 3,600

9,800
3,200
2,100
2,500
$17,600
$ 6,000

23,300
7,700
3,900
7,500
$42,400
$ 9,600
5,000
3,200
$ 8,200
$ 1,400

(a) Includes department managers salaries but excludes Carmens salary

(b) The difference between revenues and costs attributable to a responsibility center
(c) Carmens salary
1 - 10

LO
3

Responsibility Centers, Revenues, and Costs

Carmens 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

Actual

Budget

Difference

$ 2,100
5,200
2,000
2,000
2,200
$13,500

$ 2,200
4,700
1,900
1,900
2,200
$12,900

$ (100)
500
100
100
-0$ 600

3,000
1,500
$ 4,500
1,800
5,000
$24,800
32,000

3,000
1,500
$ 4,500
1,800
5,000
$24,200
32,000

-0-0$ -0-0-0$ 600

-01 - 11

Trends in Cost Accounting

L.O. 4 Identify current 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
1 - 12

LO
4

Enterprise Resource Planning

Information technology linking various processes
of the enterprise into a single comprehensive
information system
Purchasing

Production
Technology

Human
Resources

Finance
Marketing

1 - 13

Ethical Issues for Accountants

L.O. 5 Understand ethical issues faced by accountants
and ways to deal with ethical problems that you
face in your career.

The design of the cost accounting system has

the potential to be misused to defraud customers,
employees, or shareholders.

1 - 14

LO
5

Sarbanes-Oxley Act of 2002

What is the
intent?

Address problem
of corporate
governance

Who is
impacted?

Accounting firms
and
corporations

How are
corporations
impacted?

Corporate
responsibility
1 - 15

Appendix 1
Institute of Management Accountants (IMA)
Code of Ethics: Standards
1. Competence
2. Confidentiality
3. Integrity
4. Credibility

1 - 16

End of Chapter 1

McGraw-Hill/Irwin

Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.