1. Cost Accounting: Information for Decision Making
Chapter 1
Cost Accounting: Information for Decision Making
We start the study of the Fundamentals of Cost Accounting with a review and overview of information necessary for decision making.
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Value Chain L.O. 1 Describe the way managers use accounting
information to create value in organizations.
The Value Chain describes a set of activities that
transforms raw materials and resources into the
goods and services end users purchase and consume.
– Value added activities
– Non value added activities
The value chain describes the set of activities that increase the value of an organization’s products or services. Value-added activities are activities that customers perceive as valuable because the activity adds utility to the goods or services they purchase. In other words, customers define value.
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3. The Value Chain Components
LO1
The Value Chain Components
Research &
Development
Design
Purchasing
Production
All products start with research and development. Is research and development (creating and developing ideas related to a new product) value-added or nonvalue-added?
Once we have the idea for a new product, the product must be developed and engineered. Does this add value?
The purchasing department is responsible for acquiring all of the necessary components and supplies in order to produce the product. Does this add value?
We must produce the product or deliver the service in order for the product or service to have value to a customer.
We need to inform potential customers about the attributes of our product or service.
Delivering the product or service to the customer adds value. If the customer does not have the product or service, it has no value.
Finally, chances are you have experienced the value of customer service. Have you ever called the technical support line for a software application you installed on your computer? If so, I hope the support added value to your product.
Marketing
Distribution
Customer
Service
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4. Accounting Systems
L.O. 2 Distinguish between the uses and users of cost
accounting and financial accounting information.
Financial
accounting
position and
income
Reports
Financial accounting information is designed for decision makers who are not directly involved in the daily management of the firm.
Cost accounting information is designed for managers.
Cost
accounting
Information
about costs
Reports
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5. Managerial Decisions
L.O. 3 Explain how cost accounting information is used
for decision making and performance evaluation
in organizations.
Individuals make decisions.
Decisions determine the performance
of the organization.
Managers use information from the accounting
system to make decisions.
The key question is: What adds value to the firm? Let’s look at how cost information adds value to the organization. Cost information adds value to the organization if that information improves managers’ decisions.
Owners evaluate organizational and managerial
performance with accounting information.
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6. Costs for Decision Making
LO3
Costs for Decision Making
Carmen’s Cookies has been making and selling
cookies through a small store downtown.
One of her customers suggests that she expand
operations and sell to wholesalers and retailers.
Should Carmen expand operations?
Now we are going to look at an example involving decision making. Carmen’s Cookies.
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7. Carmen’s Cost Drivers Cost Rent Insurance Labor Ingredients Driver
LO3
Carmen’s Cost Drivers
Cost
Rent
Insurance
Labor
Ingredients
Driver
Number of stores
What drives the cost of rent and the cost of insurance? The number of storefronts Carmen has drives rent and insurance. If Carmen opens a new storefront, her rent and insurance costs will increase. On the other hand, what drives the cost of labor or the cost of the ingredients for the cookies? How many cookies Carmen makes will determine how many employees she needs and how much flour and sugar are required.
Number of cookies
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8. Differential Costs, Revenues, and Profits
LO3
Differential Costs, Revenues, and Profits
Sales revenue
Costs:
Food
Labor
Utilities
Rent
Other
Total costs
Operating profits
$6,300
1,800
1,000
400
1,250
$5,450
$ 850
$8,505a
2,700b
1,500b
600b
1,200c
$7,250
$1,255
$2,205
900
500
200
-0-
$1,800
$ 405
(1) Status Quo
Original Shop
Sales Only
(2) Alternative
Wholesale & Retail
Distribution
(3) Difference
Carmen’s Cookies
Projected Income Statement for One Week
Look at Carmen’s projected income statement. If Carmen maintains the status quo and does not expand, revenue will be $6,300. However, she expects revenues to increase 35% if she expands. Differential revenue is $2,205. If food, labor and utilities costs all increase 50%, Carmen has differential costs of $900, $500, and $200 for those costs. Carmen determines she currently has room for increased cookie production so she will not be required to rent additional space. Therefore rent is not a differential cost. However, her other costs also increase 20% for differential costs of $200. Using this cost information to analyze revenues and costs, Carmen determines that she has differential profits of $405 if she expands rather than maintaining the status quo.
(a) 35 percent higher than status quo
(b) 50 percent higher than status quo
(c) 20 percent higher than status quo
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9. Responsibility Centers, Revenues, and Costs
LO3
Responsibility Centers, Revenues, and Costs
Carmen Diaz
President
Ray Adams
Vice-President
Retail Operations
Cathy Peterson
Wholesale Operations
This is an example of an organization’s chart. Please notice that Ray Adams is in charge of retail operations and Cathy Peterson is in charge of wholesale operations. Are these responsibility centers?
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10. Responsibility Centers, Revenues, and Costs
LO3
Responsibility Centers, Revenues, and Costs
Carmen’s Cookies
Income Statement
For the Month Ending April 30
Sales revenue
Department costs:
Food
Labora
Utilities
Rent
Total department costs
Center marginb
General and admin. costs:
General manager’s salaryc
Other (administrative)
Total general and admin. costs
Operating profit
$28,400
13,500
4,500
1,800
5,000
$24,800
$ 3,600
$23,600
9,800
3,200
2,100
2,500
$17,600
$ 6,000
$52,000
23,300
7,700
3,900
7,500
$42,400
$ 9,600
$ 8,200
$ 1,400
Retail
Operations
Wholesale
Total
Do you think that general and administrative costs should be distributed to the two operations?
(a) Includes department managers’ salaries but excludes Carmen’s salary
(b) The difference between revenues and costs attributable to a responsibility center
(c) Carmen’s salary
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11. Responsibility Centers, Revenues, and Costs
LO3
Responsibility Centers, Revenues, and Costs
Carmen’s Cookies
Retail Responsibility Center
Budgeted versus Actual Costs
For the Month Ending April 30
Food:
Flour
Eggs
Chocolate
Nuts
Other
Total food
Labor:
Manager
Total labor
Utilities
Rent
Total cookie costs
Number of cookies sold
$ 2,100
5,200
2,000
2,200
$13,500
3,000
1,500
$ 4,500
1,800
5,000
$24,800
32,000
$ 2,200
4,700
1,900
$12,900
$24,200
$ (100)
500
100
-0-
$ 600
$ -0-
$ 600
Actual
Budget
Difference
A budget, or a financial plan for the revenues and resources needed to meet financial goals, is an important tool for the financial success of both individuals and organizations. Do you have a budget?
Another important use of cost accounting information is the evaluation of the performance of an organization. Comparing the actual results to the budgeted results allows managers to evaluate the performance of the organization and owners to evaluate the performance of individual managers. For example, look at Carmen’s actual activity and costs compared to her budgeted activity and costs. If Carmen budgeted selling 32,000 cookies and actually sold 32,000 cookies in the month of April, why were her food costs $600 higher than she anticipated?
In evaluating activities for April, Carmen is also interested in seeing that actual labor costs equaled the amount budgeted. As part of the planning and control process, managers prepare budgets containing expectations about revenues and costs for the coming period. At the end of the period, managers compare actual results with the budget. This allows them to see whether changes can be made to improve future operations.
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12. Trends in Cost Accounting
L.O. 4 Identify current trends in cost accounting.
Research and development
Design
Purchasing
Production
Marketing
Distribution
Customer service
8. ERP – Enterprise resource planning
9. Creating value in the organization
Cost accounting continues to experience dramatic changes. Developments in information technology (IT) have nearly eliminated manual bookkeeping. Emphasis on cost control is increasing in all types of organizations.
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13. Enterprise Resource Planning
LO4
Enterprise Resource Planning
Information technology linking various processes
of the enterprise into a single comprehensive
information system
Purchasing
Production
Technology
Human
Resources
Finance
Enterprise resource planning (ERP) uses information technology to link the various processes of the enterprise into a single comprehensive information system. Because all the company’s processes are integrated, ERP has significant potential for providing information on the cost of products and services. However, implementation problems are keeping many companies from realizing this potential.
Marketing
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14. 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.
The design of the cost accounting system has
the potential to be misused to defraud customers,
employees, or shareholders.
Accountants report information that can have a substantial impact on the careers of managers who are generally held accountable for achieving financial performance targets. Failure to achieve a target can have serious negative consequences for a manager. Therefore, accountants may find themselves under pressure by management to make accounting choices that improve performance reports rather than accurately reflect performance. As a professional accountant, manager, or business owner, you will face ethical situations on an everyday basis.
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15. Sarbanes-Oxley Act of 2002 Address problem What is the of corporate
LO5
Sarbanes-Oxley Act of 2002
What is the
intent?
Address problem
of corporate
governance
Who is
impacted?
Accounting firms
and
corporations
When there is a public perception of widespread ethical problems, the result is often legislation making certain conduct is not only unethical, but also illegal. Congress passed the Sarbanes-Oxley Act of 2002 to address some of the more serious problems of corporate governance that surfaced in the late 1990s and early 2000s.
How are
corporations
impacted?
Corporate
responsibility
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16. Appendix 1 Institute of Management Accountants’ (IMA)
Code of Ethics: Standards
Competence
Confidentiality
Integrity
Credibility
In Appendix 1 to Chapter 1 is the Institute of Management Accountants’ Code of Ethics. The code of ethics addresses four standards; competence, confidentiality, integrity, and credibility.
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17. End of Chapter 1 McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.