The Manager and Management

Accounting
Chapter One
 What is Cost Accounting?
• Cost accounting is a process of recording,
analyzing and reporting all of a company’s costs
(both variable and fixed) related to the production
of a product.
• Cost accounting provides the detailed information
that management needs to control current
operations and plan for the future.
 What is Cost Accounting?
• Cost accounting is helpful because it can
identify where a company is spending its
money, how much it earns, and where money
is being lost.
• Cost accounting aims to report, analyze, and
lead to the improvement of internal cost
controls and efficiency.
 Value Chain

The Value Chain describes a set of activities

that transforms raw material and resources
into the final goods and services which will be
purchased by customers.
 Analyzing Value Added Activities
Evaluate each Activity
Does it add value?
• Value-added analysis is a
method for identifying
problems within a process.
• Value Added – the customer
perceives value has been
added.
• Non Value Added – the
customer does not perceive
any added value.
 Value Chain
Non Value
Value
Added
Activity Added
R&D: Creating a new product 
Design: Developing and engineering new products 

Purchasing: Acquisition of goods and services for 

production

Production: Producing the product 

Marketing: Informing customers about the product 
Distribution: Delivering the product to customers 
Service: Supporting customers using the product 
 Accounting Systems

Accounting systems are designed to provide

information to decision-makers.

Financial Accounting System Cost Accounting System

Provides information to Provides information to

external decision-makers Internal decision-makers
 Accounting Systems
• An accounting system is how you keep your
business's records. You would put into your
accounting system transactions such as invoices,
money spent from the business's bank account, bills
from suppliers, and money you've spent yourself on
business costs.
• The accounting system will then take these
transactions and use them to build reports, such as
your profit and loss account and balance sheet,
which help you make decisions about your business.
 Customers of Cost Accounting

The most important participant in any business is the

customer. A customer is an individual who purchases or
uses the product or service offered.

 Customers who purchase or use the commodity or service.

 Managers making decisions within the firm.
 Owners of the firm evaluating managers.
Managerial Decisions

KEY QUESTION:
What adds value to the firm?
Carmen’s Cookies
Should Carmen expand operations?
 Are the benefits greater than the
costs?
 What are the differential revenues?
 What are the differential costs?
 What are the cost drivers?
 Differential revenue
• Defines differential revenue as the estimated increase
or decrease in revenue that results from one course of
action compared to an alternative plan the business is
considering.
• Differential revenue calculates the total revenue
generated by a project, action or plan and compares
that with the total revenue that another viable project
you could undertake produces. For example, if Project
A generates total revenue of $100,000 and Project B
generates total revenue of $90,000, the differential
revenue is $100,000 less $90,000, or $10,000.
 Differential revenue
• As an example, Company XYZ, a small electronics
company, is trying to decide between alternative one,
which is to purchase new machinery that would
increase revenue by $80,000, or alternative two,
which is to purchase two new delivery trucks that
would increase revenue by $60,000. In this situation,
alternative one would result in a $20,000 higher
increase in revenue than alternative two. The
difference of $20,000 is the amount of differential
revenue.
 Differential cost
 Defines differential cost as the increase or
decrease in costs that the business anticipates
will result from the two alternative courses of
action. The cost of the alternative includes
any initial investment, additional labor,
supplies.
 Differential cost is the difference between the
cost of two alternative decisions, or of a
change in output levels.
 Differential cost
• Example, Company XYZ anticipates that
alternative one, the new machinery, will increase
costs by $70,000 and that alternative two, the
delivery trucks, will increase costs by $60,000.
Alternative one will result in a $10,000 cost
increase. Therefore, $10,000 is the differential
cost.
Cost Benefit Analysis
Consider both costs & benefits of a proposal.

Are costs greater than the benefits?

Benefits > Costs? Expand!

Benefits < Costs? Don’t Expand!
 Cost Drivers
• A cost driver directly influences a business activity.
There may be multiple cost drivers associated with
an activity. For example, direct labor hours are a
driver of most activities in product manufacturing.
If the cost of labor is high, this will increase the
cost of producing all company products or services.
If the cost of warehousing is high, this will also
increase the expenses incurred for product
manufacturing or providing services.
 Cost Drivers

What drives cost?

Factors that cause or ‘drive’ cost.
What are Carmen’s cost drivers?
Number of stores.
Number of cookies.
Carmen’s Cost Drivers
Cost Driver
Rent # of stores
Insurance

Labor # of cookies
Ingredients
 Differential Costs, Revenues, and Profits
Carmen’s Cookies
Projected Income Statement for One Week

(1) (2) (3)

Status Quo Alternative

Original Shop Wholesale & Retail
Sales Only Distribution Difference
Sales Revenue $ 6,300 $ 8,505a $ 2,205
Costs
Food 1,800 2,700b 900 (a) 35 percent
higher than
Labor 1,000 1,500b 500 status quo
Utilities 400 600b 200 (b) 50 percent
Rent 1,250 1,250 -0- higher than
status quo.
Other 1,000 1,200c 200
(c) 20 percent
Total Costs $ 5,450 $ 7,250 $ 1,800 higher than
Operating Profit $ 850 $ 1,255 $ 405 status quo.
Budget
CARMEN’S COOKIES
Budgeted Costs
For the Month Ending April 30

Number of Cookies 32,000

Materials Labor:

Flour $2,200 Manager $3,000

Eggs 4,700 Other 1,500
Chocolate 1,900 Total Labor 4,500
Nuts 1,900 Utilities 1,800
Other 2,200 Rent 5,000
Total Materials $12,900 Total Cookie Costs $24,200
Actual to Budget Comparisons
CARMEN’S Cookies
Actual vs Budgeted Costs
For the Month Ending April 30

Difference
Actual Budget (Variance)

Number of Cookies Sold 32,000 32,000 -0-

Costs:
Food
Flour $2,100 $2,200 $(100)
Eggs 5,200 4,700 500
Chocolate 2,000 1,900 100
Nuts 2,000 1,900 100
Other 2,200 2,200 -0-
Total Food $13,500 $12,900 $ 600
Actual to Budget, Continued. . .
Difference
Actual Budget (Variance)
Labor

Manager $3,000 $3,000 $ -0-

Other 1,500 1,500 -0-

Total Labor $ 4,500 $ 4,500 $ -0-

Utilities 1,800 1,800 -0-

Rent 5,000 5,000 -0-

Total Cookie Costs $24,800 $24,200 $600

 Financial Accounting, Management
Accounting, and Cost Accounting
 Financial accounting and management accounting
have different goals.
 Financial accounting focuses on reporting financial
information to external parties such as investors,
government agencies, banks, and suppliers based on
Generally Accepted Accounting Principles (GAAP).
 Management accounting is the process of measuring,
analyzing, and reporting financial and nonfinancial
information that helps managers make decisions to
fulfill the goals of an organization.
 Financial Accounting, Management
Accounting, and Cost Accounting
 Management accounting collects data from cost
accounting and financial accounting. Thereafter, it
analyzes and interprets the data to prepare reports
and provide necessary information to the
management.
 The primary objective of management accounting is to
provide necessary information to the management in
the process of its planning, controlling, and
performance evaluation, and decision-making.
 Financial Accounting, Management
Accounting, and Cost Accounting
 Managers use management accounting information
to:
1. Develop, communicate, and implement strategies
2. Coordinate product design, production, and
marketing decisions and evaluate a company’s
performance
 Management accounting information and reports do not have
to follow set principles or rules. The key questions are always
1. how will this information help managers do their jobs better?
2. Do the benefits of producing this information exceed the
costs?
 Financial Accounting, Management
Accounting, and Cost Accounting
• Cost accounting provides information for both
management accounting and financial accounting
professionals.
• Cost accounting is the process of measuring,
analyzing, and reporting financial and nonfinancial
information related to the costs of acquiring or using
resources in an organization.
 The main objective of cost accounting is to assist
the management in cost control and decision-
making.
 Determination of cost and cost control are the
primary roles of cost accounting
 Decision Making, Planning, and Control
 The five-step decision-making process.
1.Identify the problem and uncertainties.
• Naomi has two main choices:
a. Increase the selling price of the newspaper
b. Increase the rate per page charged to advertisers.
 The key uncertainty is the effect any increase in prices
or rates will have on demand. A decrease in demand
could offset the price or rate increases and lead to
lower rather than higher revenues.
 Decision Making, Planning, and Control
2. Obtain information. Gathering information before
making a decision helps manager gain a better
understanding of uncertainties. Naomi asks her
marketing manager to talk to some representative
readers to gauge their reaction to an increase in the
newspaper’s selling price.
3. Predictions about the future. Based on this
information, Naomi makes predictions about the future.
She concludes that increasing prices would upset readers
and decrease readership.
4. Make decisions by choosing among alternatives.
 Decision Making, Planning, and Control
 Steps 1 through 4 are collectively referred to as
planning.
 Planning consists of selecting an organization’s goals
and strategies, predicting results under various
alternative ways of achieving those goals, deciding how
to attain the desired goals, and communicating the
goals and how to achieve them to the entire
organization.
 The most important planning tool when implementing strategy is
a budget. A budget is the quantitative expression of a proposed
plan of action by management and is an aid to coordinating
what needs to be done to execute that plan.
 Decision Making, Planning, and Control
5. Implement the decision, evaluate performance,
and learn. Managers at the Daily News take action to
implement the March 2014 budget. The firm’s management
accountants then collect information on how the company’s actual
performance compares to planned or budgeted performance.
The information on the actual results is different from the
predication planning information Naomi collected in Step 2,
which enabled her to better understand uncertainties, to make
predictions, and to make a decision. Allowing managers to
compare actual performance to budgeted performance is the
control or postdecision role of information.
 Decision Making, Planning, and Control
 Control comprises taking actions that implement the
planning decisions, evaluating past performance, and
providing feedback and learning to help future
decision making.
• The ultimate purpose of controls is to help managers
make better decisions.
• Controls make managers aware of problems and give
them information that is necessary for decision.
 Trends in Cost Accounting
1. ABC – Activity Based Costing
2. Performance Measurement
3. Benchmarking
4. JIT - Just In Time Inventory
5. CRM - Customer Relationship Management
6. Outsourcing
7. TQM - Total Quality Management
8. COQ – Cost of Quality
9. ERP - Enterprise Resource Planning.
 ABC: Activity Based Costing
 Activity-based costing (ABC) is a system you can use to find
production costs
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.
Activity-based costing is a costing method that identifies activities in an organization and
assigns the cost of each activity to all products and services.
 Performance Measurement

Performance Measurement indicates how well

a process is working.
 Performance measurement is essential for effective
management
 Benchmarking
 Benchmarking methods measure
products, services, and activities
against the best performance.

 Benchmarking is an ongoing
process resulting in continuous
improvement.
JIT: Just In Time Inventory
 JIT is an inventory system
designed to lower the cost of
maintaining excess inventory.

• Units are produced or purchased ‘just in

time’ for use, keeping inventories at a
minimum.
 Customer Relationship Management
 CRM is a system that allows firms to target profitable
customers by assessing customer revenues and costs.

• Customer relationship management (CRM) is a technology

for managing all your company's relationships and
interactions with customers and potential customers.
 Outsourcing

Outsourcing occurs when a firm’s activities are

performed by another organization or individual in the
supply or distribution chain.
Outsourcing is a business practice in which a company
hires a third-party to perform tasks, handle operations .
 Total Quality Management
 TQM applies quantitative methods as the basis for
continuous improvement. It relies on facts, data, and
analysis. And it supports product planning and performance
reviews.
• The emphasis is placed on quality.
• Quality is defined by the customer.
 Cost of Quality
 Cost of Quality can be termed as the process that
measures and determine where and how the
resources of organizations are utilized for in
maintenance of quality and prevention of delivering
poor outputs.
 Enterprise Resource Planning
 "Enterprise Resource Planning" and refers to a type of
software or system used by a business to plan and
manage daily activities such as supply chain,
manufacturing, services, financials and other
processes.
 The main purpose of an ERP system is to increase
organizational efficiency of an organization by
managing and improving how company resources are
utilized.
 Enterprise Resource Planning
 ERPs connect every aspect of an enterprise.
 ERP software system allows for better performance
and project management that helps plan, budget,
predict and accurately report on an organization’s
financial health and processes.