1. Copyright © 2013 Nelson Education Ltd. 1-1 PowerPoint Presentations for Cornerstones of Cost Accounting First Canadian Edition Adapted by George Gekas Ryerson University

2. 1-2 BASIC COST MANAGEMENT CONCEPTS 1 Copyright © 2013 Nelson Education Ltd.

3. 1-3 Accounting Information Systems Financial Accounting Produces outputs for external users such as financial statements Inputs and the rules and conventions governing processes, generally accepted accounting principles (GAAP), are defined by Canadian Institute of Chartered Accountants (CICA), provincial securities commissions, and International Accounting Standards Board (IASB) 1 Copyright © 2013 Nelson Education Ltd. Accounting Information Systems 1

4. 1-4 Accounting Information Systems Cost Management Accounting Produces outputs for internal users such as reports, schedules, and analyses Designed to cost services, products, and other objects Used in planning and control and decision making Criteria and formats set internally 1 Copyright © 2013 Nelson Education Ltd. Accounting Information Systems 1

5. 1-5 1 Copyright © 2013 Nelson Education Ltd. Accounting Information Systems 1

6. 1-6 Cost Management Information System Two Major Subsystems Cost Accounting Information System Assigns costs to individual products and services Assists external financial reporting by valuing inventories and determining cost of sales Assignments must conform to external rules Operational Control Information System Provides accurate and timely feedback concerning performance Improves profit by increasing customer value 1 Copyright © 2013 Nelson Education Ltd. 1

7. 1-7 Copyright © 2013 Nelson Education Ltd. Cost Management Information System 1

8. Global Competition The new competitive environment has increased the demand not only for more cost information but also for more accurate information. Vastly imported transportation and communication has led to a global market for many manufacturing and service firms. 1-8 1 Copyright © 2013 Nelson Education Ltd. Factors Affecting Cost Management 1

9. 1-9 Growth of the Service Industry 1 As the traditional industries have declined in importance, the service sector of the economy has increased in importance. Deregulation of many services has increased competition in the service industry. Copyright © 2013 Nelson Education Ltd. Factors Affecting Cost Management 1

10. 1-10 Advances in IT and Manufacturing Environment 1 Computers monitor and control operations. Operational system is fully integrated with marketing and accounting data. Increased ability to accurately cost products because of advances in computerized tools used. Emergence of e-commerce: Internet trading Electronic data interchange (EDI) Bar coding Copyright © 2013 Nelson Education Ltd. Factors Affecting Cost Management 1

11. 1-11 Advances in Management Environment Theory of Constraints Method used to continuously improve manufacturing and nonmanufacturing activities Just-In-Time Manufacturing Demand-pull system that strives to produce a product only when it is needed and only in quantities demanded by customers Computer-Integrated Manufacturing Automation of the manufacturing environment Copyright © 2013 Nelson Education Ltd. Factors Affecting Cost Management 1

12. 1-12 Cost Assignment: Direct Tracing, Driver Tracing, and Allocation Costs Sacrifices made to obtain goods or services as long as they remain unexpired, they are on the balance sheet as an asset Expenses Expired costs that are deducted from revenues on the income statement Copyright © 2013 Nelson Education Ltd. 2

13. 1-13 Cost Assignment: Direct Tracing, Driver Tracing, and Allocation Cost Objects Anything for which costs are measured and assigned Some are tangible, such as the product we make; others are not, such as activities we for which we wish to accumulate cost information Copyright © 2013 Nelson Education Ltd. 2

14. 1-14 Traceability: Costs can be assigned easily and accurately, using a causal relationship 1.Direct tracing: Relies on physical observance of causal relationships to assign costs to cost objects 2.Driver tracing: Relies on drivers as causal factors to assign costs to cost objects Allocation: Costs that cannot be traced are considered indirect costs and are allocated products in some predetermined way Copyright © 2013 Nelson Education Ltd. Cost Assignment: Direct Tracing, Driver Tracing, and Allocation 2

15. 1-15 Product and Service Costs Tangible Products Goods produced by converting raw materials into finished products Services Activities performed for or by a customer using the service provider’s products or facilities Three characteristics that separate them from tangible products: Intangibility Perishability Inseparability Copyright © 2013 Nelson Education Ltd. 3

16. 1-16 Direct Materials: Directly traceable to the goods or services being produced Example: Cost of wood in furniture Direct Labour: Directly traceable to the goods or services being produced Example: Wages of assembly-line workers Overhead: All other manufacturing costs Example: Plant depreciation, utilities, property taxes, indirect materials, indirect labour, etc. Copyright © 2013 Nelson Education Ltd. Product and Service Costs 3

17. 1-17 Prime Cost Sum of direct materials and direct labour Conversion Cost Sum of direct labour and overhead Hint: Never add prime cost and conversion cost or you will have double-counted labour because it is included in each definition! Prime and Conversion Costs Copyright © 2013 Nelson Education Ltd. Product and Service Costs 3

18. 1-18 Copyright © 2013 Nelson Education Ltd. Product and Service Costs 3

19. 1-19 Marketing (selling) Costs Necessary to market, distribute, and service a product or service Example: Advertising, storage costs, and freight out Administrative Costs Associated with research, development, and general administration of the organization that cannot reasonably be assigned to either marketing or production Example: Legal fees, salary of the chief executive officer Nonproduction Costs (Period Costs) (Period Costs) Nonproduction Costs (Period Costs) (Period Costs) Copyright © 2013 Nelson Education Ltd. Product and Service Costs 3

20. Income Statement: Manufacturing Firm Prepared for external parties Follows standard format Referred to as an absorption-costing or full-costing income statement because all manufacturing costs are absorbed into the cost of goods Cost of Goods Manufactured represents the total manufacturing cost of goods completed during the period. Work in Process consists of all partially completed unites found in production at a given point in time (usually the end of one period/beginning of the next). Cost of Goods Sold is the manufacturing cost of all goods that were sold during the period. 1-20 Copyright © 2013 Nelson Education Ltd. Financial Statements 4

21. The Role of Management Accountant The Controller  Financial reports  Tax planning and reporting  Performance reporting  Internal auditing  Budgeting  Accounting systems and internal controls The Treasurer  Collection of cash  Monitoring of cash payments  Monitors cash availability  Short-term investments  Short and long-term borrowing 1-21 Copyright © 2013 Nelson Education Ltd. 4

22. 1-22 Information for Planning, Controlling, Continuous Improvement, and Decision Making Planning is the detailed formulation of future actions to achieve a particular end. Planning requires setting objectives and identifying methods to achieve those objectives. Controlling is the managerial activity of monitoring a plan’s implementation and taking corrective action as needed. Feedback is information that can be used to evaluate or correct the steps being taken to implement a plan. Copyright © 2013 Nelson Education Ltd. 4

23. 1-23 Continuous improvement is required in a dynamic environment if a firm is to remain competitive or to establish a competitive advantage. Decision making is the process of choosing among competing alternatives. Copyright © 2013 Nelson Education Ltd. 4 Information for Planning, Controlling, Continuous Improvement, and Decision Making

24. 1-24 Ethical behaviour involves choosing the right, proper, and just action Benefits of Ethical Behaviour Can create customer and employee loyalty Long-term profitability Avoid litigation costs The ten core ethical values for business include: Honesty, Integrity Fidelity, Fairness Responsibility, Accountability Reliability, Respect for others Pursuit of excellence Copyright © 2013 Nelson Education Ltd. 5 Ethical Behaviour

25. 1-25 Standards of Ethical Conduct for Managerial Accountants Competence Confidentiality Integrity Credibility Copyright © 2013 Nelson Education Ltd. 5 Ethical Conduct and Behaviour

26. 1-26 Professional Accounting Designations-Certification CMA Main purpose was to establish management accounting as a recognized, professional discipline, separate from the profession of public accounting CICA Responsibility of a CICA is to provide assurance concerning the reliability of financial statements CGA Focus is to recognize competencies in the full spectrum of accounting Copyright © 2013 Nelson Education Ltd. 5

27. End of Chapter 1 1-27