1. Cost Accounting:
Information for
Decision Making
Basic Concepts

2. LEARNING OBJECTIVES
L.O. 1 Describe the way managers use accounting
information to create value in organizations.
L.O. 2 Distinguish between the uses and users of cost
accounting and financial accounting information.
L.O. 3 Explain how cost accounting information is used
for decision making and performance evaluation
in organizations.
L.O. 4 Identify current trends in cost accounting.
1-2

3. Accounting
The
Language
of
Business

4. Accountants
• Provide information to external parties
– Stockholders, creditors, regulators
• Estimate the cost of products produced
and services provided
• Provide information to internal decision
makers
– To plan, control, and evaluate performance

5. Two Areas of Accounting
Financial
Management
• Meet external
• Meet internal
information needs
information needs
• Comply with
• Does not have to
GAAP
comply with
GAAP

6. Financial Accounting
Provides information to
investors, creditors,
and regulators
Complies with GAAP

7. Accounting Differences
Financial
Managerial
• External focus
• Whole
organization
• Historical
• Quantitative
• Monetary
• Verifiable
• GAAP
• Formal
recordkeeping
•
•
•
•
•
Internal focus
Segments or divisions
Current/projected
Quantitative/qualitative
Monetary and
nonmonetary
• Timely/reasonable estimate
• Benefits exceed costs
• Formal and informal
recordkeeping

8. Relationship of Financial,
Management, and Cost
Accounting
Product
Costs
FINANCIAL
COST MANAGEMENT
ACCOUNTING
ACCOUNTING
ACCOUNTING

9. 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
1-9

10. LO1
THE VALUE CHAIN COMPONENTS
Research &
Development
Design
Purchasing
Production
Marketing
Distribution
Customer
Service
1-10

11. ACCOUNTING SYSTEMS
L.O. 2 Distinguish between the uses and users of cost
accounting and financial accounting information.
Financial
accounting
Reports
Financial
position and
income
Cost
accounting
Reports
Information
about costs
1-11

12. LO2
ACCOUNTING SYSTEMS
• The primary purpose of financial accounting
is to provide investors and creditors information
regarding company and management performance.
• The financial data prepared for this purpose
are governed by generally accepted accounting
principles (GAAP) in the United States and by
international financial reporting (IFRS) in many
other countries.
• Cost data for managerial use need not comply
with GAAP or IFRS.
1-12

13. LO2
CUSTOMERS OF ACCOUNTING
• Accountants must work with the users of cost
accounting information to provide the best
possible information for managerial purposes.
• Different uses of accounting information require
different types of accounting information.
1-13

14. 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.
• Owners evaluate organizational and managerial
performance with accounting information.
1-14

15. COST DATA FOR MANAGERIAL
DECISIONS
LO3
• Costs for decision making
• Costs for control and evaluations
• Different data for different decisions
1-15

16. 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?
1-16

17. LO3
CARMEN’S COST DRIVERS
Cost
Driver
Rent
Number of stores
Insurance
Labor
Number of cookies
Ingredients
1-17

18. LO3
DIFFERENTIAL COSTS
• Costs that change in response to a particular
course of action
• Differential costs change (differ) between actions.
1-18

19. LO3
DIFFERENTIAL REVENUES
• Revenues that change in response to a particular
course of action.
• Differential revenues change (differ) between actions.
1-19

20. LO3
DIFFERENTIAL COSTS, REVENUES, AND
PROFITS
Carmen’s Cookies
Projected Income Statement for One Week
(1) Status Quo
Original Shop
Sales Only
(2) Alternative
Wholesale & Retail
Distribution
(3) Difference
Sales revenue
Costs:
Food
Labor
Utilities
Rent
Other
Total costs
P6,300
P8,505a
P2,205
1,800
1,000
400
1,250
1,000
P5,450
2,700b
1,500b
600b
1,250
1,200c
P7,250
900
500
200
-0200
P1,800
Operating profits
P 850
P1,255
P 405
(a) 35 percent higher than status quo
(b) 50 percent higher than status quo
(c) 20 percent higher than status quo
1-20

21. COSTS FOR CONTROL AND
EVALUATION
LO3
• A responsibility center is a specific unit of an
organization assigned to a manager who is
held accountable for its operations and resources.
1-21

22. RESPONSIBILITY CENTERS,
REVENUES, AND COSTS
LO3
Carmen Diaz
President
Ray Cruz
Vice-President
Retail Operations
Cathy Santos
Vice-President
Wholesale Operations
1-22

23. LO3
RESPONSIBILITY CENTERS, REVENUES, AND
Carmen’s Cookies
COSTS
Income Statement
For the Month Ending April 30
Retail
Operations
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
Wholesale
Operations
Total
P28,400
P23,600
P52,000
13,500
4,500
1,800
5,000
P24,800
P 3,600
9,800
3,200
2,100
2,500
P17,600
P 6,000
23,300
7,700
3,900
7,500
P42,400
P 9,600
5,000
3,200
P 8,200
P 1,400
(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
1-23

24. LO3
RESPONSIBILITY CENTERS, REVENUES, AND
Carmen’s Cookies
COSTS
Retail Responsibility Center
Budgeted versus Actual Costs
For the Month Ending April 30
Actual
Food:
Flour
Eggs
Chocolate
Nuts
Other
Total food
Labor:
Manager
Other
Total labor
Utilities
Rent
Total cookie costs
Number of cookies sold
Budget
Difference
P 2,100
5,200
2,000
2,000
2,200
P13,500
P 2,200
4,700
1,900
1,900
2,200
P12,900
P (100)
500
100
100
-0P 600
3,000
1,500
P 4,500
1,800
5,000
P24,800
32,000
3,000
1,500
P 4,500
1,800
5,000
P24,200
32,000
-0-0P -0-0-0P 600
-0-
1-24

25. TRENDS IN COST ACCOUNTING
L.O. 4 Identify current trends in cost accounting.
1. Research and development
2. Design
3. Purchasing
4. Production
5. Marketing
6. Distribution
7. Customer service
8. ERP – Enterprise resource planning
9. Creating value in the organization
10. Balanced Scorecard
1-25

26. LO4
COST ACCOUNTING IN
RESEARCH AND DEVELOPMENT
• Lean manufacturing techniques are not simply
about production.
• Companies partner with suppliers in the development
stage to ensure cost-effective deigns for products.
1-26

27. LO4
COST ACCOUNTING IN DESIGN
• Product designers must write detailed
specifications on a product’s design.
• This is often referred to as design for
manufacturing (DFM).
• ABC assigns costs of activities needed to make
a product, then sums the cost of those activities
to compute the total cost of the product.
1-27

28. LO4
COST ACCOUNTING IN PURCHASING
• Performance measurement indicates
how well a process is working.
• It minimizes unnecessary transaction processes.
• Benchmarking methods measure products,
services, and activities against the
best performance.
• Benchmarking is an ongoing process resulting
in continuous improvement.
1-28

29. LO4
COST ACCOUNTING IN PRODUCTION
• A lean accounting system provides measures
at a work cell or process level.
• JIT is an inventory system designed to lower
the cost of maintaining excess inventory.
1-29

30. LO4
COST ACCOUNTING IN MARKETING
• Cost relationship management (CRM)
is a system that allows firms to target
profitable customers by assessing
customer revenues and costs.
• Harrah’s Entertainment provides
“complimentary” services to some
customers. (typically called comping”).
1-30

31. LO4
COST ACCOUNTING IN DISTRIBUTION
• Outsourcing occurs when a firm’s activities are
performed by another organization or individual
in the supply or distribution chain.
• Nikon, for example, relies on UPS for distribution.
1-31

32. LO4
COST ACCOUNTING IN
CUSTOMER SERVICE
• TQM is a management method which
focuses on excelling in all dimensions.
• The emphasis is placed on quality.
Quality is defined by the customer.
• Cost of quality is a system that identifies the cost
of producing low quality items.
1-32

33. LO4
ENTERPRISE RESOURCE PLANNING
• Information technology linking various processes
of the enterprise into a single comprehensive
information system
Purchasing
Production
Technology
Human
Resources
Finance
Marketing
1-33

34. LO4
KEY FINANCIAL PLAYERS
IN AN ORGANIZATION
Title
Major Responsibilities
Example Activities
Chief financial Manages entire finance
officer (CFO) and accounting function
Signs off on financial
statements
Treasurer
Manages liquid assets
Determines where to
invest cash balances
Controller
Plans and designs
information systems
Determines cost
accounting policies
Internal
auditor
Ensures compliance
with laws
Ensures that procurement
rules are followed
Cost
accountant
Records, measures,
and, analyzes costs
Evaluates costs of
products and processes
1-34

35. BALANCE SCORECARD
Four perspectives
Learning and Growth
Internal Business
Customer Value
Financial Performance

36. Balanced Scorecard
Learning
and Growth
Customer
Value
Internal
Business
Financial

37. Balance Scorecard
• 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

38. Balance Scorecard
• Learning and Growth
• Internal Business
– Things to do well to meet customer
needs and expectations

39. Balance Scorecard
• Learning and Growth
• 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

40. Balance Scorecard
• Learning and Growth
• 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 Performance
– Stockholders/stakeholders concerns
about profitability and organizational
growth

41. Balance Scorecard
Four perspectives
• Learning and Growth
• Internal Business
• Customer Value
• Financial Performance
Measures
• Short term and long-term
• Internal and external
• Financial and nonfinancial

42. 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.
1-42

43. LO5
ETHICS
• Follow the Institute of Management
Accountants (IMA) guidelines:
• Discuss problems with the immediate superior,
unless the superior is involved.
• Clarify the relevant issues and concepts by
discussion with a disinterested party or contact
the appropriate confidential ethics “hotline.”
• Consult an attorney about your rights and obligations.
1-43

44. LO5
SARBANES-OXLEY ACT OF 2002
What is the
intent?
Address problem
of corporate
governance
Who is
impacted?
Accounting firms
and
corporations
How are
corporations
impacted?
Corporate
responsibility
1-44

45. LO5
CORPORATE RESPONSIBILITY
Who is impacted?
• CEO – Chief Executive Officer
– Manages entire corporation
• CFO – Chief Financial Officer
– Manages accounting and finance
What is the impact?
• The officers of the corporation must sign the financial
reports stipulating that the financial statements do not
omit material information.
• The company must disclose the evaluation of their
internal controls.
1-45

46. APPENDIX 1
Institute of Management Accountants’ (IMA)
Code of Ethics: Standards
1. Competence
2. Confidentiality
3. Integrity
4. Credibility
1-46

47. COMPETENCE
Members have a responsibility to:
1. Maintain an appropriate level of professional expertise
by continually developing knowledge and skills.
2. Perform professional duties in accordance with
relevant laws, regulations, and technical standards.
3. Provide decision support information and recommendations
that are accurate, clear, concise, and timely.
4. Recognize and communicate professional limitations
or other constraints that would preclude responsible
judgment or successful performance of activity.
1-47

48. CONFIDENTIALITY
Members have a responsibility to:
1. Keep information confidential except when disclosure
is authorized or legally required.
2. Inform all relevant parties regarding appropriate use
of confidential information.
3. Refrain from using confidential information for unethical
or illegal advantage.
4. Monitor subordinates’ activities to ensure compliance.
1-48

49. INTEGRITY
Members have a responsibility to:
1. Mitigate actual conflicts of interest, regularly communicate
with business associates to avoid apparent conflicts of
interest. Advise all parties of any potential conflicts.
2. Refrain from engaging in any conduct that would prejudice
carrying out duties ethically.
3. Abstain from engaging in or supporting any activity that
might discredit the profession.
1-49

50. CREDIBILITY
Members have a responsibility to:
1. Communicate information fairly and objectively.
2. Disclose all relevant information that could reasonably
be expected to influence an intended user’s understanding
of the reports, analyses, or recommendations.
3. Disclose delays or deficiencies in information, timeliness,
processing, or internal controls in conformance with
organization policy and/or applicable law.
1-50

51. END OF CHAPTER 1
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.