Introduction to Cost Accounting

Chapter 1
Learning Objectives

Distinguish financial accounting from managerial

(1)
accounting

Understand how management accountants help firms

(2)
make strategic decisions
Describe the set of business functions in the value chain
(3) and identify the dimensions of performance that
customers are expecting of companies
Explain the five-step decision-making process and its
(4)
role in management accounting
Describe three guidelines management accountants
(5)
follow in supporting managers
2
 ACCOUNTING

❖ The process of identifying, measuring and

communicating economic information about an
organisation, to facilitate informed judgements by
users of the information
▪ Identifying key financial components.
▪ Measuring the monetary values of these components in
true and fair manner.
▪ Communicating the information in ways useful to the
users.
Managerial Accounting & Financial Accounting

Managerial accounting Financial accounting

provides information provides information
for managers inside an to stockholders,
organization who creditors and others
direct and control who are outside
its operations. the organization.

4
 Major Differences Between
Financial & Managerial Accounting

Managerial Accounting Financial Accounting

Communicate financial
Purpose Decision making
position to outsiders

Primary Users Internal managers External users

Focus/Emphasi
Future-oriented Past-oriented
s
Do not have to follow GAAP compliant;
Rules
GAAP; cost vs. benefit CPA audited
Ultra current to very long Historical monthly,
Time Span
time horizons quarterly reports
Behavioral Designed to influence Indirect effects on
Issues employee behavior employee behavior
Cost Accounting

❖ Cost accounting provides information for both

management accounting and financial accounting
professionals.
❖ Cost accounting is the process of measuring, analyzing,
and reporting financial and nonfinancial information
related to the costs of acquiring or using resources in an
organization.
❖ The distinction between management accounting and
cost accounting is not so clear-cut.
Strategy & Management Accounting

❖ Strategy – specifies how an organization create

value for its customers while distinguishing itself
from its competitors.
▪ Cost leadership strategy
▪ Product differentiation strategy
❖ Strategic Cost Management – focuses
specifically on the cost dimension within a firm’s
overall strategy
Strategy & Management Accounting

❖ Management accounting helps answer important

questions such as:
▪ Who are our most important customers, and what
critical capability do we have to be competitive
and deliver value to them?
▪ What is the bargaining power of our customers?
▪ What is the bargaining power of our suppliers?
▪ What substitute products exist in the marketplace,
and how do they differ from our own?
▪ Will we have enough cash to support our strategy
or will we need to seek additional sources?
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

© 2009 Pearson Prentice Hall. All rights reserved.

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:
1. Research & Development
2. Design
3. Production
4. Marketing
5. Distribution
6. Customer Service
Different Parts of the Value Chain
Exercise 1
A Value Chain Implementation
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
▪ Sustainability
Exercise 2
A Five-Step Decision Making Process in
Planning & Control

• Identify the problem and uncertainties

Step 1

• Obtain information
Step 2
Planning
• Make predictions about the future
Step 3

• Make decisions by choosing between

Step 4 alternatives

• Implement the decision, evaluate performance,

Control Step 5 and learn
Exercise 3
Key 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
Exercise 4
A Typical Organizational Structure
and the Management Accountant
Exercise 5
Professional Ethics

❖ The four standards of ethical conduct for

management accountants as advanced by the
Institute of Management Accountants:
▪ Competence
▪ Confidentiality
▪ Integrity
▪ Credibility
Learning Materials

❖Chapter 1 (Horngren’s Cost Accounting)

❖Excersices 1-17, 1-18, 1-19, 1-20, 1-22, 1-25, 1-18, 1-30, 1-32