Information for Decision Making Chapter 1

Learning Objectives Describe the way managers use accounting information to create value in organizations. Explain how cost accounting information is used for decision making and performance evaluation in organizations. Distinguish between the uses and users of cost accounting and financial accounting information. Identify current trends in cost accounting. Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.

Value Chain L.O. 1 Describe how managers use accounting information to create value in organizations. The value chain describes the activities that increase the value of an organization’s products or services. Production Marketing R&D Customer Service Distribution Design

Can we improve the activity? Can we eliminate the activity? Activities Production Marketing R&D Customer service Distribution Design Evaluate each activity Non Value-Added Activity: Customers perceive no value. Value Added Activity: Customers perceive as adding value. Does this add value? Hmmmm…? Does this add value? Value Added Activity: Customers perceive as adding value. Non Value-Added Activity: Customers perceive no value. Can we improve the activity? Can we eliminate the activity?

Value Chain ? or Creating a new product. Value-Added Non Value-Added Research and Development R&D Creating a new product. Value-Added Non Value-Added ? or

Value Chain ? or Developing and engineering the new product. Design Developing and engineering the new product. Value-Added Non Value-Added ? or

Value Chain ? or Producing the product. Value-Added Non Value-Added Production Producing the product. Value-Added Non Value-Added ? or

Value Chain ? or Informing potential customers about the product. Marketing Informing potential customers about the product. Value-Added Non Value-Added ? or

Value Chain ? or Delivering the product to customers. Value-Added Distribution Delivering the product to customers. Value-Added Non Value-Added ? or

Value Chain ? or Supporting customers who use the product. Value-Added Customer Service CS Supporting customers who use the product. Value-Added Non Value-Added ? or

Managerial Decisions Key Question What adds value to the firm? L.O. 2 Explain how cost accounting information is used for decision making and performance evaluation in organizations. Key Question What adds value to the firm?

Carmen’s Cookies Should Carmen expand operations? Are costs greater than benefits? What are Carmen’s cost drivers? What are Carmen’s differential costs? What are Carmen’s differential revenues?

Cost Benefit Analysis Is the cost greater than the benefit? Consider both the costs and benefits of a proposal. Is the cost greater than the benefit? Don’t Expand Expand

Cost Driver Cost Drivers drive What are Carmen’s cost drivers? Factors that cause or cost drive What drives my cost? These are estimates and require assumptions. Some may be realized Some may not be realized

Cost Driver COST FACTOR Rent Number of storefronts Insurance Labor Number of cookies Ingredients

Differential Costs Not expanding Expanding Costs that change in response to a particular course of action. Differential costs differ between actions. differ actions Not expanding Expanding

Differential Revenues Revenues that change in response to a particular course of action. Differential revenues differ between actions. differ actions Not expanding Expanding

Projected Income Statement For One Week Differential Costs, Revenues & 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 a 35 percent higher than status quo Costs …………………… Food …………………… 1,800 2,700b 900 Labor ………………….. 1,000 1,500b 500 b 50 percent higher than status quo Utilities …………………. 400 600b 200 Rent ……………………. 1,250 ----- Other ………………….. 1,000 1,200c 200 c 20 percent higher than status quo Total costs ……………. $5,450 $7,250 $1,800 Operating profits ……. $850 $1,255 $405

For the Month Ending April 30 Budget A financial plan for the revenues and resources needed to meet financial goals. CARMEN’S COOKIES Budgeted Costs For the Month Ending April 30 Number of cookies 32,000 Food 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 Food 12,900 Total cookie costs $24,200

Actual to Budget Comparison CARMEN’S COOKIES Actual vs Budgeted Costs For the Month Ending April 30 Difference Actual Budget (Variance) Number of cookies sold 32,000 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 2,200 Other Total Food $13,500 $12,900 $600

Actual to Budget Continued Difference Actual Budget (Variance) Labor Manager 3,000 1,500 Other Total Labor 4,500 Utilities 1,800 5,000 Rent Total cookie costs $24,800 $24,200 $600

Financial Accounting System Cost Accounting System Accounting Systems L.O. 3 Distinguish between the uses and users of cost accounting and financial accounting information. Accounting systems are designed to provide information to decision-makers. Financial Accounting System Cost Accounting System Provides information to decision-makers external to the firm. Provides information to decision-makers internal to the firm.

Accounting Systems Continued Financial Accounting reports financial position and income according to Generally Accepted Accounting Principles (GAAP). Data should be comparable across firms. Cost Accounting measures, records and reports information about costs. Data should be relevant for decisions in a particular firm.

Customers of Cost Accounting Individual who purchases or uses a commodity or a service. Customer I love this customer. I love this customer. I love this customer! We love customers. We love happy customers. We love loyal customers.

Customers of Cost Accounting Individuals who use the information provided. Cost Accounting WHO ARE THE CUSTOMERS? Managers making decisions in the firm. Managers Owners evaluating managers. Owners

Trends in Cost Accounting L.O. 4 Identify current trends in cost accounting. High-Tech Production Settings Just-in-Time Method Lean Production Emphasis on Quality Benchmarking Activity-Based Costing Enterprise Resource Planning Six Sigma Performance Measurement

High-Tech Production Settings More technology Less Labor Manufacturing cost driven by technology rather than labor.

Just-in-Time Method Units are produced or purchased just in time for use, keeping inventories at a minimum.

Lean Production A Lean Production philosophy focuses on: Minimum inventory Quality Efficiency Flexibility Worker training

Total Quality Management (TQM) Emphasis on Quality Total Quality Management (TQM) Quality Quality as defined by the customer Organization is managed to excel on all dimensions.

Benchmarking Benchmarking methods measure products, services and activities against the best performance. Benchmarking is an ongoing process resulting in continuous improvement.

Activity-Based Costing (ABC) ABC assigns costs of activities needed to make a product then sums the cost of those activities to compute a product’s cost.

Enterprise Resource Planning (ERP) Purchasing Production Technology Human Resources Finance Information technology linking various systems of the enterprise into a single comprehensive information system.

Six Sigma A system for improving quality that uses data to improve processes and prevent defects. A statistical specification

Performance Measurements Performance measurements indicate how well a process is working. Balanced Scorecard A performance measurement relying on multiple financial and nonfinancial measures of performance.

Financial Players in the Organization Chief Financial Officer (CFO) Treasurer Controller Internal Auditor Cost Accountant

Financial Players in the Organization Manages the entire accounting and finance function. Chief Financial Officer (CFO) Manages liquid assets Treasurer Plans and designs information and incentive systems. Controller Ensures compliance with laws, regulations, and company policies and procedures. Internal Auditor Records, measures, estimates and analyzes costs. Cost Accountant

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. Many accountants or business people have done small things, none of which appeared seriously wrong, but these small things added up to big trouble.

You Discover Unethical Conduct Now What? Follow the organization’s established policies Discuss problems with the immediate superior, unless superior is involved. Submit the issue to the next higher managerial level. Submit the issue to an acceptable reviewing authority. Consider calling the confidential “hotline.” The final recourse if ethical misconduct still exists is to resign from the organization and to submit an informative memorandum to an appropriate representative of the organization.

Sarbanes-Oxley Act of 2002 What’s the intent? Who is impacted? Address problems of corporate governance Who is impacted? Accounting Firms Corporations Corporations? Corporate Responsibility

Corporate Responsibility CEO CFO Who is impacted? Chief Executive Officer Chief Financial Officer Manages the entire accounting and finance function. Manages the entire corporation. What is the impact? Sign financial reports and stipulate that financial statements do not omit material information. Disclose evaluation of the company’s internal controls. Disclose notification of any fraud involving management to Auditors, Audit Committee and Board of Directors.

Institute of Management Accountants’ Code of Ethics Appendix Institute of Management Accountants’ Code of Ethics IMA Code of Ethics Competence Confidentiality Integrity Objectivity

Competence Members have a responsibility to: Maintain an appropriate level of professional competence by ongoing development of their knowledge and skills. Perform their professional duties in accordance with relevant laws, regulations, and technical standards. Prepare complete and clear reports and recommendations after appropriate analyses of relevant and reliable information.

Confidentiality Members have a responsibility to: Refrain from disclosing confidential information acquired in the course of their work except when authorized, unless legally obligated to do so. Inform subordinates as appropriate regarding the confidentiality of information acquired in the course of their work and monitor their activities to assure the maintenance of that confidentiality. Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either personally or through third parties.

Integrity Members have a responsibility to: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. Refrain from engaging in any activity that would prejudice their ability to carry out their duties ethically. Refuse any gift, favor, or hospitality that would influence or would appear to influence their actions. Refrain from either actively or passively subverting the attainment of the organization’s legitimate and ethical objectives. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity. Communicate unfavorable as well as favorable information and professional judgments or opinions. Refrain from engaging in or supporting any activity that would discredit the profession.

Objectivity Members have a responsibility to: Communicate information fairly and objectively. Disclose fully all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, comments, and recommendations presented.

Chapter 1 Should I expand or not? The End