Basic Concepts in Cost Accounting

Part 1
Learning Objectives
• Describe the nature, purpose, scope and use of modern cost accounting
• Explain the value chain concept in a business firm and the set of business functions or activities in such chain
• Describe the relationship of cost accounting to financial accounting and management accounting
• Describe the changes in the contemporary business environment and its impact on cost

Accounting: The Language of Business

Two Areas of Accounting: both meet information needs

Financial Accounting Managerial Accounting

External focus Internal focus

Whole organization Segments or divisions

Historical Current/projected

Quantitative Quantitative/qualitative

Monetary Monetary and nonmonetary

Verifiable Timely/reasonable estimate

Benefits exceed costs Benefits exceed costs

Comply GAAP

Formal recordkeeping Formal & informal recordkeeping

Cost Accounting
a facet of management accounting that measures, analyzes, and reports financial and non-financial information
relating to the costs of acquiring or using resources in an organization.

Accounting Information Systems

Consists of interrelated manual and computer parts and uses processes such as collecting, recording,
summarizing, analyzing, and managing data to transform inputs into information that is provided to users.

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 Components

Upstream costs:
• Research & Development
• Design
• Purchasing
Production
Downstream costs:
• Marketing
• Distribution
• Customer Service

Managerial Decisions
• 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.

Cost Data for Managerial Decisions

• Costs for decision making
• Costs for control and evaluations
• Different data for different decisions

Part 2
Learning Objectives
• Explain the uses of cost accounting information.
• Identify the three basic elements of manufacturing costs
• Illustrate basic cost accounting procedures
• Distinguish between the two basic cost accounting systems
• Illustrate a job order cost system.

Changes in the Contemporary Business Environment

Shift to a global business environment
-Economic interdependence and increased
competition
-Recent trend to economic nationalism
Lean Manufacturing
-Just-in-time (JT) inventory methods, inventory reduction and quality control
- Flexible manufacturing systems
- Emphasis on speed-to-market (i.e., time-based competition)
Importance of information technology
- Increased use of the internet has reduced processing time, increased access to important
information, and facilitated information
exchange
Focus on the customer
-Consumers expect functionality, quality, and innovation
-Shorter product life-cycles have intensified competition

Shifts in management organization

- Shift from financial to customer-based measures
- The focus has shifted from financial measures and hierarchal command-and-control organizations to
nonfinancial measures and flexible organizational structures.
Social, political, and cultural considerations
-Changes include a more diverse workforce, changes in regulatory requirements, and a renewed sense of ethical
responsibility.

Trends in Cost Accounting

1. The Balanced Scorecard
2. The Value Chain
3. Activity Based Costing and Management
4. Business Analytics
5. Target Costing
6. Life-cycle Costing
7. Benchmarking
8. Business Process Improvement
9. Total Quality Management
10. Lean Accounting
11. The Theory of Constraints
12. Enterprise Risk Management
13. Sustainability

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 designs for products

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
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

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.

Cost Accounting in Marketing

• Cost relationship management (CRM) is a system that allows firms to target profitable customers by assessing
customer revenues and costs.
• Some Companies provide "complimentary" services to some customers. (typically called comping").

Cost Accounting in Distribution

• Outsourcing occurs when a firm's activities are performed by another organization or individual in the supply
or distribution chain
• Lazada, for example, relies on JRS for distribution

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.

Enterprise Resource Planning

• Information technology linking various processes of the enterprise into a single comprehensive information
system

ORGANIZATIONAL STRUCTURE
Organizational Chart
• Assists in carrying out management's functions
• Prepared by most companies
• shows:
1. The interrelationships of activities
2. The delegation of authority
3. The delegation of responsibility

Ethical Issues for Accountants

• 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

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

Institute of Management Accountants' (IMA)

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

2. Confidentiality
Members have a responsibility to:
• Keep information confidential except when disclosure is authorized or legally required
• Inform all relevant parties regarding appropriate use of confidential information
• Refrain from using confidential information for unethical or illegal advantage.
• Monitor subordinates' activities to ensure compliance.

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

4. Credibility/Objectivity
Members have a responsibility to:
• Communicate information fairly and objectively
• Disclose all relevant information that could reasonably be expected to influence an intended user's
understanding of the reports, analyses, or recommendations.
• Disclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with
organization policy and/or applicable law.

Learning Objectives
• Explain the uses of cost accounting information.
• Identify the three basic elements of manufacturing costs
• Illustrate basic cost accounting procedures
• Distinguish between the two basic cost accounting systems.
• Illustrate a job order cost system.

What is Cost Accounting?

• Cost Accounting provides the detailed information that management needs to control current operations and
plan for the future.
• Management uses this information to decide how to allocate resources to the most efficient and profitable
areas of the business.

Types of Businesses that use Cost Accounting

• All types of business entities-manufacturing merchandising, and service businesses-require cost accounting
information systems to track their activities.
• Manufacturers convert purchased raw materials into finished goods by using labor, technology, and facilities.
• Merchandisers purchase finished goods for resale.
• For-profit service businesses, such as health clubs, accounting firms, some private educational institutions sell
services rather than products.
• Not-for-profit service agencies, such as charities, governmental agencies, and some health care facilities,
provide at little or no cost the user.
The Nature of the Manufacturing Process
• requires that the accounting information systems of manufacturers be designed to accumulate detailed cost
data relating to the production process.
• The manufacturing process requires the conversion of raw materials into finished goods through the use of
labor and other factory resources
• Product quality is as important a competitive weapon as control in the global arena.
• ISO 9000 standards requires that manufacturers have a well-defined quality control system, and that they
consistently maintain a high level of product quality.

Uses of Cost Accounting Information

• Cost Accounting Information is used for:
• Determining Product Costs and Pricing
• Planning and Control

Other Uses of Unit Cost Information

• Determining the selling price of a product
• Meeting competition
• Bidding on Contracts
• Analyzing profitability

Professional Ethics, CMA Certification, and Corporate Governance

• IMA - Institute of Management Accountants
• CMA- Certified Management Accountant certificate
• Sarbanes-Oxley Act of 2002 - written to protect shareholders and stakeholders by improving corporate
governance
• Corporate governance is the means by which a company is directed and controlled.
• Key elements of Sarbanes-Oxley
• CEO and CFO certification of financial statements
• Establishment of Public Company
• Accounting Oversight Board (PCAOB)
• Prohibits a public accounting firm from providing non-auditing services to a company it audits.
• Requires that a company's annual eport contain an internal report

Professional Ethics, CMA Certification and Corporate Governance

• Board of Directors' responsible for hiring, compensating, and terminatin the audit firm
• Severe criminal penalties for the destruction or alternation of business documents and retaliation against
"whistleblowers"

3 Basic Elements of Manufacturing Costs

1. direct materials
2. direct labor
3. factory overhead

Cost Accounting Systems

• To provide management with data needed for effective cost control, two basic types of cost accounting
systems have been developed:
1. Process Cost System
2. Job order Cost System
• Both systems are used to gather cost data and to allocate costs to goods manufactured.

Chapter Summary
• Cost management is the development and use of cost management information by the management
accountant.
• Cost management information is used in all four of the management functions and is important in the pursuit
of a firm's mission and goals
• The contemporary business environment has increased the level of competition faced by organizations, and
has influenced the role of the management accountant.
• There were several contemporary management techniques in which cost management responds to the
changing business environment.