Kinney ● Raiborn Cost Accounting: Foundations and Evolutions, 8e © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Chapter 1: Introduction to Cost Accounting

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives What are the relationships among financial, management, and cost accounting? What are the the sources of authoritative pronouncements for the practice of cost accounting? What are the sources of ethical standards for cost accountants? What is a mission statement, and why is it important to organizational strategy? What must accountants understand about an organization’s structure and business environment in order to perform effectively in that organization? What is a value chain, and what are the major value chain functions? How is a balanced scorecard used to implement an organization’s strategy? Why is ethical behavior so important in organizations?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accountants Financial accountants provide information 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.

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Relationship of Financial, Management, and Cost Accounting FINANCIAL ACCOUNTING MANAGEMENT ACCOUNTING COST ACCOUNTIN G Product Costs

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Types of Accounting Financial Meet external information needs Comply with GAAP Management Meet internal information needs Does not have to comply with GAAP

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Financial versus Managerial Financial External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal recordkeeping Managerial Internal focus Segments or divisions Current/projected Quantitative/qualitative Monetary and nonmonetary Timely/reasonable estimate Benefits exceed costs Formal and informal recordkeeping

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 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 costs  Disaggregated

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Bodies Financial Public Company Accounting Oversight Board (PCAOB) Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) Management Institute of Management Accountants (IMA) Society of Management Accountants of Canada Cost Accounting Standards Board (CASB)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Management Accounting Organizations  IMA  Statements on Management Accounting  (not legally binding)  Society of Management Accountants of Canada  Management Accounting Guidelines  (not legally binding)  Cost Accounting Standards Board (CASB)  Government contracting standards  (legally binding)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Professional Ethics Earnings management—deliberate accounting adjustments to “hit” profit targets Often adjustments involve cost accounting  Product costs  Inventory valuations Stretching legitimate accounting techniques Outright fraud

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ethics and Legislation Sarbanes-Oxley Act—CEOs and CFOs personally accountable for the accuracy of their organization’s financial reporting False Claims Act—whistle-blower protection and penalties for failure to blow the whistle (disclose known financial frauds)

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ethics and Management Accounting Standards of Ethical Conduct for Management Accountants  Competence  Confidentiality  Integrity  Credibility

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Organizational Strategy 1.Develop mission statement 2.Implement strategy 3.Deploy resources to create value for customers and shareholders 4.Recognize that each organization is unique—thus unique strategies must be developed

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Organizational Strategy 1.Develop mission statement 2.Implement strategy Establish appropriate measures of accomplishment Develop, implement, and monitor necessary information systems

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Five Factors in Organizational Strategy Core competencies Organizational structure Management style and organizational culture Organizational constraints Environmental constraints

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Core competency—critical function or activity providing a competitive advantage Cost leadership strategy—undercut competitor prices Product differentiation strategy—superior quality products or unique services sold at a premium Organizational Strategies

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Strategy Questions Who are your five most important competitors? Is your firm more or less profitable than these firms? Compare prices for equivalent products/services.  Are they higher or lower? Explain the difference. Is it customers, costs, or profit requirements? Are your costs higher or lower than those of main competitors? Where are the differences most pronounced? What segment(s) of your business represents 80% profits? For each business segment above, how large are you relative to the largest competitors? Are you gaining or losing relative market share? What are your customers’ most important purchase criteria? How do you and your competitors rate on these purchase criteria? What are your main strengths and competencies? Are they appreciated by the market? Which are your priority segments? Where is it most important that you gain market share? What is your competitive advantage?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Organizational Structure Distribution of authority and responsibility in an organization  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

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Value Chain  Research and Development  Product Design  Supply  Production  Marketing  Distribution  Customer Service Communicate strategy to all members of the value chain. A set of value-adding functions and processes that converts inputs into products or services

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Components of the Value Chain

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Balanced Scorecard

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Balanced Scorecard Perspectives Learning and Growth  Use the organization’s intellectual capital to adapt to changing customer needs or to influence new customers’ 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

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Balanced Scorecard Measures Short-term and long-term Internal and external Financial and nonfinancial

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Ethics in Multinationals Foreign Corrupt Practices Act—prohibits bribes to obtain/retain business Organization of Economic Cooperation and Development Convention—crime to offer, promise, give bribes to obtain/retain internal business deals

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Questions What is the relationship among financial, management, and cost accounting? How is the balanced scorecard used to implement an organization’s strategy? Where can an accountant find ethical standards for cost accounting?

© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Potential Ethical Issues Earnings management Low-cost production at any cost Whistle-blower retaliation Fixing prices Bribery and other corruption Hiding managerial acts