©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster The Accountant’s Role in the Organization Chapter 1 1/31/05

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 1 Describe how cost accounting supports management accounting and financial accounting.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Management Accounting It measures and reports financial and nonfinancial information that helps internal managers make decisions to fulfill the goals of an organization.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Financial Accounting Its focus is on reporting to external parties. It provides financial statements based on generally accepted accounting principles. It measures and records business transactions.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Accounting It provides information for both management accounting and financial accounting. It measures and reports financial and nonfinancial data relating to the cost of acquiring or using resources of the firm.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost Management It describes the activities of managers in short-term and long-term planning and control of costs. It is a key part of general management strategies and their implementation. It includes the continuous reduction of costs.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 2 Understand how management accountants affect strategic decisions.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Strategic Cost Management Developing strategy Providing quality products at low cost Providing unique products or services Building resources and capabilities Implementing strategy

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Strategic Cost Management Current Assets Long-Term Productive Assets Intangible Assets Building resources and capabilities to meet the firm’s objectives in the Marketplace Cash Accounts Receivable Inventory Machinery & Equip, Buildings, Computers, Software Patents, trademarks, research capability, distribution network

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 3 Distinguish between the planning and control decisions of managers.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Planning and Controlling Management DecisionManagement Accounting System Planning Control Performance Evaluation Budgets Accounting System Performance Reports Feedback

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Planning and Controlling What is planning? Setting goals Predicting results Deciding how to attain goals Communicating the goals to the entire organization

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Planning and Controlling What is control? Deciding and taking actions Deciding on performance evaluation and feedback

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Planning and Controlling What are budgets? They are quantitative expressions of a proposed plan of action. They aid in the coordination and implementation of the plan.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Planning and Controlling What are performance reports? These are reports that compare actual results with budgeted amounts. Evaluation of actual performance versus budget

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Performance Report Example Budget Actual Variance Revenues$59,000$60,000$1,000 F Cost of goods sold 42,000 43,400 1,400 U Wages 6,700 7, U General 1, F Fixed costs 5,000 5,0000 Operating income$ 4,000$ 3,700$ 300 U Boone Shop, July 2003

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Performance Report Example Actual cost of goods sold were 72% of revenues instead of the budgeted 71%. Budget % Actual % Revenues$59,000100$60, Cost of goods sold 42, , Gross margin$17,000 29$16,600 28

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Feedback This involves managers examining past performance and systematically exploring alternative ways to make better informed decisions in the future. Why did cost of goods sold increase? How can that be prevented in the future?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 4 Distinguish among the problem- solving, scorekeeping, and attention-directing roles of management accountants.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Problem Solving This involves comparative analysis for decision making. This role asks: Of the several alternatives available, which is the best? Which computer system should we buy? Which product line should we emphasize? Which plant should be shut down?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Scorekeeping This involves accumulating data and reporting reliable results to all levels of management. This role asks: How is the business doing? Are we generating enough sales? Are our costs under control? Are we generating sufficient cash flow?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Attention Directing This involves helping managers properly focus their attention. This role asks: Which opportunities and problems should be emphasized first. Attention directing should focus on all opportunities to add value to an organization, not just cost-reduction opportunities.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 5 Identify four themes managers need to consider for attaining success.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Customer Focus The challenge facing managers is to continue investing sufficient (but not excessive) resources in customer satisfaction such that profitable customers are attracted and retained. Adding value for the customer. i.e., frequent flyer miles The challenge facing managers is to continue investing sufficient (but not excessive) resources in customer satisfaction such that profitable customers are attracted and retained. Adding value for the customer. i.e., frequent flyer miles

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Analysis This theme has two related aspects: 1. Treat each of the business functions in the value chain as an essential and valued contributor. See Exhibit 1-4, page Treat each of the business functions in the value chain as an essential and valued contributor. See Exhibit 1-4, page Integrate and coordinate the efforts of all business functions in addition to developing the capabilities of each individual business function. 2. Integrate and coordinate the efforts of all business functions in addition to developing the capabilities of each individual business function.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Key Success Factors These are operational factors that directly affect the economic viability of the organization. Cost – organizations are under continuous pressure to reduce costs. Cost – organizations are under continuous pressure to reduce costs. Quality – customers are expecting higher levels of quality. Quality – customers are expecting higher levels of quality.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Key Success Factors Time – organizations are under pressure to complete activities faster and to meet promised delivery dates more reliably. Time – organizations are under pressure to complete activities faster and to meet promised delivery dates more reliably. Innovation – there is now heightened recognition that a continuing flow of innovative products or services is a prerequisite to the ongoing success of most organizations. Innovation – there is now heightened recognition that a continuing flow of innovative products or services is a prerequisite to the ongoing success of most organizations.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Continuous Improvement and Benchmarking Continuous improvement by competitors creates a never-ending search for higher levels of performance within many organizations. You must keep up or stay ahead! Continuous improvement by competitors creates a never-ending search for higher levels of performance within many organizations. You must keep up or stay ahead!

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 6 Describe the set of business functions in the value chain.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain The term “value chain” refers to the sequence of business functions in which usefulness is added to the products or services of an organization. The term “value” is used because as the usefulness of the product or service is increased, so is its value to the customer.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Management accountants provide decision support for managers in the following six business functions:

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain R & D Design Production Marketing Distribution Service Management Accounting

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Functions Research and Development It is the process that is conducted to generate and experiment with ideas related to new products, services, or processes. These ideas may or may not result in new products.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Functions It is the detailed planning and engineering of ideas that will become new products, services, or processes. How to configure the product, how to build it, what features it will have, functionality, efficient use of resources, etc. Design

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Functions It is the acquisition, coordination, and assembly of resources to produce a product or deliver a service. Raw materials, machinery and equipment, facilities, skilled workers, etc. Production

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Functions It is the manner by which companies promote and sell their products or services to customers or prospective customers. Advertising, direct contact, market research, beta sites, etc. Marketing

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Functions It is the delivery of products or services to the customer. Direct sales, distribution network, retail outlets, E-Commerce, etc. Distribution

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Value Chain Functions It is the after-sale support activities provided to customers. Includes warranty, product support, updates to software, hotline for problem solving, etc. Service

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 7 Describe three ways management accountants support managers.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Key Guidelines 1. Cost-benefit approach 2. Full recognition of behavioral as well as technical considerations 3. Using different costs for different purposes

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Cost-Benefit Approach A cost-benefit approach should be used in order to spend resources if they promote decision making that better attains organization goals in relation to the costs of those resources used. For example, will I earn more than what it costs me to make it? Would a new budget process provide more benefit that it would cost?

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Behavioral and Technical Considerations A management accounting system should have two simultaneous missions for providing information: 1. To help managers make wise economic decisions 2. To help managers and other employees to aim and strive for goals of the organization, add value to products and help employees perform better.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Different Costs for Different Purposes A cost concept used for the external reporting purpose need not be the appropriate concept for the purpose of internal routine reporting to managers. We do not have to follow GAAP for internal reporting purposes. So we can use various non-GAAP cost systems to evaluate performance within the firm.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 8 Understand how cost management accounting fits into an organization’s structure.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Organization Chart

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Controller’s Responsibilities (Chief Accounting Officer)

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Learning Objective 9 Understand what professional ethics mean to management accountants.

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Professional Ethics Confidentiality Integrity Objectivity Competence

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Competence l Maintain level of professional competence, i.e. continuing professional education l Perform duties in accordance with relevant laws, regulations and standards l Prepare complete and clear reports supported by relevant and reliable information

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Integrity l Avoid actual or apparent conflicts of interest l Refuse any gift or favor that would appear to influence your behavior or actions l Do not subvert the goals of the organization l Realize and communicate professional limitations l Communicate unfavorable as well as favorable info l Refrain from actions that would discredit the firm l Do not engage in any unethical activities

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Confidentiality l Do not disclose confidential information unless legally obligated to do so. l Inform subordinates regarding confidentiality of information l Refrain from using or appearing to use confidential information either personally of through a third party

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Objectivity l Communicate information fairly and objectively l Disclose fully all relevant information that might influence a decision maker or user of that information

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster Resolution of Ethical Conflicts l Discuss problems with immediate supervisor l If immediate supervisor involve or uninterested, submit issues to next higher managerial level l Do not report confidential issues externally unless legally required to do so. l If no satisfaction, consult an attorney l Ultimately, you may have to resign, but issue a factual memorandum to the Board of Directors, Audit Committee, or Executive committee of the Board

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster End of Chapter 1