Cost Accounting:

Information for Decision

Makers

Chapter 1
Learning Objectives:
1. Describe the way managers use accounting information to
create value in organizations.

2. Distinguish between the uses and users of cost accounting and

financial accounting information.
3. Explain how cost accounting information is used for decision-
making and performance evaluation in organization.

4. Identify current trends in cost accounting.

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 Value Chain
LO1 Describe the way managers use accounting
information to create value in organizations.

The Value Chain describes a set of activities that

transforms raw material and resources into the final
goods and services which will be purchased by
customers.

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Analyzing Value Added Activities
Evaluate each Activity
Does it add value?
• Value Added – the
customer perceives
value has been added.
• Non Value Added – the
customer does not
perceive any added
value.

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Value Chain
Value
Activity Added
R&D: Creating a new product 
Design: Developing and engineering new products 

Purchasing: Acquisition of goods and services for production 

Production: Producing the product 
Marketing: Informing customers about the product 
Distribution: Delivering the product to customers 
Service: Supporting customers using the product 
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Accounting Systems
LO2 Distinguish between the uses and users of cost
accounting and financial accounting information.

Accounting systems are designed to provide

information to decision-makers.

Financial Accounting System Cost Accounting System

Provides information to Provides information to

external decision-makers Internal decision-makers

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Accounting System, continued…
 Financial accounting reports financial position and
income according to GAAP (Generally Accepted
Accounting Principles).

 Data should be comparable across firms.

 Cost accounting measures, records and reports

information about costs.

 Data should be relevant for decisions in a particular

firm.

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Customers of Cost Accounting
Customers who purchase or use the
commodity or service.

Managers making decisions within the

firm.

Owners of the firm evaluating

managers.

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Managerial Decisions
LO3 Explain how cost accounting information is used for
decision making and performance evaluation in
organization.

KEY QUESTION:
What adds value to the firm?

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Carmen’s Cookies
Should Carmen expand operations?
 Are the benefits greater than the
costs?
 What are the differential revenues?
 What are the differential costs?
 What are the cost drivers?

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Cost Benefit Analysis
Consider both costs & benefits of a proposal.

Are costs greater than the benefits?

Benefits > Costs? Expand!

Benefits < Costs? Don’t Expand!

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Cost Drivers
What drives cost?
Factors that cause or ‘drive’ cost.
These are estimates and require assumptions.
What are Carmen’s cost drivers?
Number of stores.
Number of cookies.

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trend in Cost Accounting
LO4 Identify current trends in cost accounting.

1. ABC – Activity Based Costing

2. Performance Measurement
3. Benchmarking
4. JIT - Just In Time Inventory
5. CRM - Customer Relationship Management
6. TQM - Total Quality Management
8. COQ – Cost of Quality

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ABC: Activity Based Costing
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.

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Performance Measurement

Performance Measurement
indicates how well a process is
working.

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Benchmarking
 Benchmarking methods
measure products, services,
and activities against the best
performance.

 Benchmarking is an ongoing
process resulting in continuous
improvement.
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JIT: Just In Time Inventory
JIT is an inventory system
designed to lower the cost of
maintaining excess inventory.

• Units are produced or purchased ‘just

in time’ for use, keeping inventories
at a minimum.

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CRM
Customer Relationship Management
CRM is a system that allows firms to target
profitable customers by assessing customer
revenues and costs. Some examples are:
• In Las Vegas, Harrah’s Entertainment provides
“complimentary” services to some customers.
• In the airline industry, frequent flyers
accumulate ‘points’ that can be redeemed for
services.
• Many credit cards issue ‘points’ which can be
traded for products or services.

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TQM
Total Quality Management
TQM is a management method which
focuses on excelling in all dimensions.
• The emphasis is placed on quality.
• Quality is defined by the customer.

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COQ – Cost of Quality
Cost of Quality is a system that identifies the
cost of producing low quality items.
Examples are:
 Identifying the costs associated with producing
defective units
 Quantifying the cost of lost sales due to producing
sub-standard products
 Tracking the cost of returns due to a lack of
quality

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Key Financial Managers in an Organization
Chief Financial Officer (CFO) Manages the entire accounting
and finance functions

Treasurer Manages liquid assets

Controller Plans and designs

information and incentive
systems

Internal Auditor Ensures compliance with laws, regulations,

and company policies and procedures

Cost Records, measures,

estimates, and analyzes
Accountant
costs

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Ethical Issues For Accountants
LO5 Understand ethical issues faced by accountants and
ways to deal with ethical problems that you face in
your career.

Many accountants or business people have

done small things, none of which appeared
seriously wrong, but these small things added
up to big trouble.

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Discover Unethical Conduct?
Now what?? 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.

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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
• The company must disclose notification of any fraud
involving management to Auditors, the Audit Committee,
and the Board of Directors
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Chapter 1

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