1. Chapter 1-2 The Accountant’s Role in the Organization
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Chapter 1-2
The Accountant’s Role in the Organization
An Introduction to Cost Terms and Purposes
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2. Main purposes of accounting system
Accounting provides information for three major puposes: 1- Routine internal reporting for the decisions of managers. 2- Non-routine internal reporting for the decisions of managers 3- External reporting to investor, gov….
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3. An accounting system present the information to the users through ....
Internal
Reports
External
Reports
External reporting to outside parties on the organization’s financial positions, operations and related activities.
Routine
Internal Reports
Non-routine
Internal Reports
Routine internal reporting to managers for planning and controlling operations.
Non-routine internal reporting to managers for special decision-making and long range planning.
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4. Users of Accounting Information
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Exh.
1.8
Users of Accounting Information
External Users
Internal Users
Individuals
Businesses
Investors
Creditors
Government Regulatory Agencies
Taxing Authorities
Owners
Managers
All those are the decision makers for their own objectives
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5. Qualitative characteristic of info..
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Qualitative characteristic of info..
The information should be;
Understandable
timely
reliable
relevant
and comparable
Understandable
This characteristic requires that the information are understandable by the users.
For that purpose, it is assumed that those users have basic knowledge and information about business and economic activities and accounting.
Timely
The financial information will be mostly useful to the decision makers if they are presented timely.
Any delay in the presentation may limit the usefulness of the information provided. Therefore, the companies are urged to provide their financial statements on a timely basis.
For example, CMB requires the public companies to publish their annual financial statements no later than three months after the balance sheet date.
reliable
Reliability determines the value of the financial statements to the decision makers.
To be reliable, financial statement shall be prepared free of errors and bias, and the users of the financial statements can depend on presented information while making their future decisions.
relevant
This concept is one of the core criteria in determining the quality of the accounting information.
The accounting information provided by a financial statement or an item, should be able to answer the question in the user’s mind.
comparable
Users of financial statements should be presented with comparable information so that they will be able to spot trends in the financial positions and profitability of a company.
Comparability states that the accounting policies should be the same from one period to the next in order to provide comparability of performance across years.
The companies can change their policies if such a change is expected to improve the fair presentation of the FS.
However, the changes in the accounting policies and their monetary effects should be disclosed in the FS.
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6. Fields of Accounting & Sub-systems...
Financial Accounting
Management Accounting
output
Accounting information
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7. Accounting Discipline Overview
Managerial Accounting – measures, analyzes and reports financial and nonfinancial information to help managers make decisions to fulfill organizational goals. Managerial accounting need not be GAAP compliant.
Financial Accounting – focus on reporting to external users including investors, creditors, and governmental agencies. Financial statements must be based on GAAP.
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8. Major Differences Between Financial & Managerial Accounting
Financial Accounting
Purpose
Decision making
Communicate financial position to outsiders
Primary Users
Internal managers
External users
Focus/Emphasis
Future-oriented
Past-oriented
Rules
Do not have to follow GAAP; cost vs. benefit
GAAP compliant;
CPA audited
Time Span
Ultra current to very long
time horizons
Historical monthly, quarterly reports
Behavioral Issues
Designed to influence employee behavior
Indirect effects on
employee behavior
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9. Strategy & Management Accounting
Strategy – specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives
Strategic Cost Management – focuses specifically on the cost dimension within a firm’s overall strategy
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10. Strategy & Management Accounting
Management accounting helps answer important questions such as:
Who are our most important customers, and how do we deliver value to them?
What substitute products exist in the marketplace, and how do they differ from our own?
What is our critical capability?
Will we have enough cash to support our strategy or will we need to seek additional sources?
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11. Management Accounting and Value
Creating value is an important part of planning and implementing strategy
Value is the usefulness a customer gains from a company’s product or service
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12. Management Accounting and Value
Value Chain is the sequence of business functions in which customer usefulness is added to products or services
The Value-Chain consists of:
Research & Development
Design
Production
Marketing
Distribution
Customer Service
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13. The Value Chain Illustrated
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14. Key Success Factors
The dimensions of performance that customers expect, and that are key to the success of a company include:
Cost and efficiency
Quality
Time
Innovation
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15. Planning & Control Systems
Planning selects goals, predicts results, decides how to attain goals, and communicates this to the organization
Answers to two questions:
1- What’s desired?
2- When and how is it to be accomplished?
Budget – the most important planning tool
Control takes actions that implement the planning decision, decides how to evaluate performance, and provides feedback to the organization
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16. A Five-Step Decision Making Process in Planning & Control
Identify the problem and uncertainties
Obtain information
Make predictions about the future
Make decisions by choosing between alternatives
Implement the decision, evaluate performance, and learn
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17. Management Accounting Guidelines
Cost – Benefit approach is commonly used: benefits generally must exceed costs as a basic decision rule
Behavioral & Technical Considerations – people are involved in decisions, not just dollars and cents
Different definitions of cost may be used for different applications
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18. An Introduction to Cost Terms and Purposes
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19. Basic Cost Terminology
Cost – sacrificed resource to achieve a specific objective
Actual cost – a cost that has occurred
Budgeted cost – a predicted cost
Cost object – anything of interest for which a cost is desired

20. Basic Cost Terminology
Cost accumulation – a collection of cost data in an organized manner
Cost assignment – a general term that includes gathering accumulated costs to a cost object. This includes:
Tracing accumulated costs with a direct relationship to the cost object and
Allocating accumulated costs with an indirect relationship to a cost object

21. Direct & Indirect Costs
Direct costs – can be conveniently and economically traced (tracked) to a cost object
Indirect costs – cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner

22. Assigning Costs to a Cost Object

23. Direct Costs Indirect Costs Cost Examples Parts Assembly line wages
Electricity
Rent
Property taxes

24. Factors Affecting Direct / Indirect Cost Classification
Cost Materiality
Availability of information-gathering technology
Operational Design

25. Cost Behavior
Variable costs – changes in total in proportion to changes in the related level of activity or volume
Fixed costs – remain unchanged in total regardless of changes in the related level of activity or volume
Costs are fixed or variable only with respect to a specific activity or a given time period

26. Cost Behavior, continued
Variable costs – are constant on a per-unit basis. If a product takes 5 pounds of materials each, it stays the same per unit regardless of one, ten or a thousand units are produced
Fixed costs – change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit

27. Cost Behavior Summarized
Total Dollars
Cost per Unit
Variable Costs
Change in proportion with output
More output = More cost
Unchanged in relation to output
Fixed Costs
Change inversely with output
More output = lower cost
per unit

28. Cost Behavior Visualized

29. Other Cost Concepts
Cost Driver – a variable that causally affects costs over a given time span
Relevant Range – the band of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and a given cost
For example, fixed costs are considered fixed only within the relevant range.

30. Relevant Range Visualized

31. A Cost Caveat
Unit costs should be used cautiously. Since unit costs change with a different level of output or volume, it may be more prudent to base decisions on a total dollar basis.
Unit costs that include fixed costs should always reference a given level of output or activity
Unit Costs are also called Average Costs

32. Multiple Classification of Costs
Costs may be classified as:
Direct / Indirect, and
Variable / Fixed
These multiple classifications give rise to important cost combinations:
Direct & Variable
Direct & Fixed
Indirect & Variable
Indirect & Fixed

33. Multiple Classification of Costs, Visualized

34. Different Types of Firms
Manufacturing-sector companies – create and sell their own products
Merchandising-sector companies – product resellers
Service-sector companies – provide services (intangible products)

35. Types of Manufacturing Inventories
Direct Materials – resources in-stock and available for use
Work-in-Process (or progress) – products started but not yet completed. Often abbreviated as WIP
Finished Goods – products completed and ready for sale

36. Types of Product Costs Also known as Inventoriable Costs
Direct Materials
Direct Labor
Indirect Manufacturing – factory costs that are not traceable to the product. Other common names for this type of cost include Manufacturing Overhead costs or Factory Overhead costs.

37. Accounting Distinction Between Costs
Inventoriable costs – product manufacturing costs. These costs are capitalized as assets (inventory) until they are sold and transferred to Cost of Goods Sold.
Period costs – have no future value and are expensed as incurred.

38. Cost Flows
The Cost of Goods Manufactured and the Cost of Goods Sold section of the Income Statement are accounting representations of the actual flow of costs through a production system.
Note the importance of inventory accounts in the following accounting reports, and in the cost flow chart

39. Cost flows Visualized Work-in-Process Inventory
Finished Goods Inventory
Begining Inventory
Begining Inventory
Direct Material Cost
100
Cost of Goods Manufactured
220
Direct Labor Cost 80
220
180
Factory Overhead Cost 70
Cost of Goods Sold
Total Manufacturing Cost
250
Ending Inv. 40
220
When sales occur
180
Ending Inv. 30

40. Schedule of Cost of Goods Manufactured
DRECT MATERIAL COST (Direct Material Used)
100
DRECT LABOR COST (Direct Manufacturing Labor) 80
FACTORY OVERHEAD COST (Indirect Manufacturing Cost) 70
Manufacturing Cost Incurred During the Period
250
BEGINING WORK-IN PROCESS INVENTORY
Total Manufacturing Cost to Account for
ENDING WORK-IN-PROCESS INVENTORY
-30
COST OF GOODS MANUFACTURED
220
Schedule of Direct Material Used
BEGINING DM INVENTORY 50
PURCHASES OF DIRECT MATERIALS DURING THE PERIOD 75
Cost of DM avaliable for Use
125
ENDING DM INVENTORY (-)
-25
DIRECT MATERIAL USED
100

41. Schedule of Cost of Goods Sold
BEGINING FINISHED GOODS INVENTORY
COST OF GOODS MANUFACTURED DURING THE PERIOD
220
Cost of goods avaliable for sale
ENDING FINISHED GOODS INVENTORY (-)
-40
COST OF GOODS MANUFACTURED
180

42. Cost Flows Visualized

43. Cost of Goods Manufactured

44. Multiple-Step Income Statement

45. Other Cost Considerations
Prime cost is a term referring to all direct manufacturing costs (labor and materials)
Conversion cost is a term referring to direct labor and factory overhead costs, collectively
Overtime labor costs are considered part of overhead due to the inability to precisely know the true cause of these costs