1. Information for Decision Making
Chapter 1

2. 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.

3. 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

4. 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?

5. 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

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

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

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

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

10. 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

11. 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?

12. 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?

13. 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

14. 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

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

16. 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

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

18. 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

19. 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

20. 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

21. 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

22. 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.

23. 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.

24. 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.

25. 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

26. 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

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

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

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

30. 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.

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

32. 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.

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

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

35. 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.

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

37. 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

38. 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.

39. 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.

40. 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

41. 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.

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

43. 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.

44. 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.

45. 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.

46. 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.

47. Chapter 1
Should I expand or not?
The End