Cost Accounting

Professor Keyur Thaker

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Financial Account – show horse
Tax Account – minimize tax liability
Mgmt Account- work horse

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 How do u feel if u
Find Jet Plane cockpit without dashboard
Study a Course with no Exams,
Performance evaluation or feedback?
An Fully automated plant without the
control panel and no display of plant
performance parameters.

Measurement is key to management

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 What you measure gets attention
What gets attention gets managed
What gets rewarded gets done
Measurement should drive decision and
behaviors in the interest of organization.

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 Agenda
Need For Management Accounting
Basic Concepts
Scope
Contents
Pedagogy

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 Relevant Cases & Articles
Time for CFO to Step Up
Regal marine: The Accountants’ Role

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 Management Accounting

Measures and reports financial and

nonfinancial information that helps
managers make decisions to fulfill the
goals of an organization.

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 Financial Accounting

Its focus is on reporting to external parties.

It measures and records business transactions.
It provides financial statements based on
generally accepted accounting principles.

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 Cost Accounting

It provides information for both management

accounting and financial accounting.
It measures and reports financial
and nonfinancial data.

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 Management Accounting
major subdivisions
• Full Cost Accounting
• Traditional and ABC
• Differential accounting (Relevant Accting)
• Marginal, Relevant cost and revenues for decision
making
• Management control or responsibility accounting
• Budgeting, KRA, Transfer Pricing, Resp Accounting
• Management Control can be financially or
operationally oriented

Anthony & Young (1999)

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 Cost Management

It describes the activities of managers in

planning and control of costs.
It includes the continuous reduction of costs.
It is a key part of general management
strategies and their implementation.

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 The purpose and Use
For Costing of Procedures, Services,
Products and other cost objects
Developing Information For Planning,
Control and Performance Evaluation
Identifying Relevant costs for making
decisions

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Link Between Managerial and
Financial Accounting
Management Accounting offers cost
information required for financial reporting
For e.g. to value inventories

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 Management Financial Accounting
Accounting

Necessity Optional Required

Purpose A means to the end of Produce Statements for
Assisting Management Outside users
User Relatively small Relatively large group;
group; known identity unknown
Underlying Varies according to use One basic Equation:
Structure of information Assets = Liabilities +
owners Equity

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 Management Financial
Accounting Accounting
Source of Whatever is useful to GAAP
Principle management (varies with
purpose)
Time Orientation Historical & Future Historical
estimates
Information Monetary and Non Primary Monetary
Content Monetary
Information Many Approximations Fewer Approximations
Precision
Report Frequency Varies with purpose; Quarterly and
Annually
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 Management Financial
Accounting Accounting
Report Issued Promptly after Delays of Weeks or
Timeliness end of period even months
covered
Report Entity Responsibility Center Overall
– e.g. Functions, Organization
Divisions, Biz Units
Liability Virtually none Severe lawsuits,
Potential Threat is always
present

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 Key Ideas of
Management Accounting
Decision Making Relies on Incremental Analysis
Different cost definitions are relevant for different purpose
Accounting numbers are approximates
Decision maker must often work with incomplete data
Accounting evidence is only partial evidence
People, not numbers, get things done
You get what you measure
Affects human behavior and decisions

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Role of CFO/Finance Function

Treasurer & Controller

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Role of CFO/Finance Function

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CONTROLLER TREASURER
Control Planning Capital Provision
Reporting and Interpreting Investor Relations
Evaluating and Consulting Short-Term Financing
Administrating Tax Banking and Custody
Government Reporting Credits and Collections
Asset Protection Investments
Appraising the Economy Insurance
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 Controller
Focus: Inward Transactions, Past Business Activities, and Compliance

The Role:
Head accountant of the company. Supervise other accountants and oversee the
preparation of financial reports, such as income statements and balance sheets.
Responsibilities:
Reports to the chief financial officer (CFO). The head of the finance department.
Preparing reports and overseeing the accounting and auditing functions of a
business, monitoring internal controls to lessen risks and create value within the
organization. Analyzing financial data, preparing budgets. Tax compliance.
Qualifications:
Degree in Accounting, Finance, Economics, or Business is most suitable for this
position. A financial controller is also required to be a licensed CPA/CA,

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 Treasurer
Focus: Outward Movers Looking Towards the Future of the Business
The Role:
The protector of a company’s value and finances from financial risks that arises from business activities.
Traditionally, a treasurer is under the accounting department Now branched out as the corporate treasury
management.
Responsibilities:
Interacting with shareholders, bankers, and current and potential investors.
Obtaining investment capital and managing the cash flow of the business.
Obtaining loans and credit from outside sources.
Build and maintain healthy business relationships with banks and raise equity capital.
Investing company funds and communicating with shareholders.
Cash management and making sure that financial goals are met.
Qualifications:
A degree in Accounting, Finance, Economics, or Business is most suitable for this position.
A thorough understanding of various segments of the business and an outstanding ability to
communicate with top management and various finance professionals.

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 Changing role of CFO
Guardian and leader of good planning and performance
management
Keep focusing on Control dimension
Make the organizational capabilities, people, process and
system understand
How company/business creates value?
How operational performance (measures) translate to financial
performance?
Is there Clarity, uniformity and transparency in measurement?
Does it facilitate Effective dialogue to enhance understanding of
business and better decisions

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 Know what to know
Be information literate to know what information
they need, when and in what form.
How to obtain, test and combine information and
integrate to the existing information system
Data processing and accounting system need to be
brought to gather to reduce redundancy and
increase compatibility

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 Questions?
What information do I need to do my job?
When do I need it?
In what form?
From whom should I be getting it?
What new task can I tackle now that I get all the
data?
Which old task should I abandon?
Which tasks should i do differently?
What information do I owe? To whom? When? In
what form?
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Strategic Cost Management

Developing strategy
Building resources and capabilities
Implementing strategy

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 Strategic Cost Management

Building resources and capabilities

Long-Term
Current Intangible
Productive
Assets Assets
Assets

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 Planning and Controlling
Management Decision Management Accounting System

Planning Budgets
Feedback

Accounting
Control System

Performance Performance
Evaluation Reports

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 Planning and Controlling

What is planning?

Setting Predicting Deciding how

goals results to attain goals

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Planning and Controlling

What is control?

Deciding Deciding on
and performance
taking evaluation
actions and feedback

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 Planning and Controlling

What are budgets?

They are They aid in the

quantitative coordination
expressions and
of a proposed implementation
plan of action. of the plan.
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Planning and Controlling

What are performance reports?

These are reports that

compare actual results
with budgeted amounts.

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 Performance Report Example
Boone Shop, July 2003
Budget Actual Variance
Revenues Rs. 59,000 Rs 60,000 Rs 1,000 F
Cost of goods sold 42,000 43,400 1,400 U
Wages 6,700 7,000 300 U
General 1,300 900 400 F
Fixed costs 5,000 5,000 0
Operating income 4,000 3,700 300 U
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 Performance Report Example

Actual cost of goods sold were

72% of revenues instead of the budgeted 71%.
Budget % Actual %
Revenues Rs. 59,000 100 60,000 100
Cost of goods sold 42,000 71 43,400 72
Gross margin 17,000 29 16,600 28

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 Feedback

This involves managers examining past performance

and systematically exploring alternative ways to
make better informed decisions in the future.

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 Exercise One:
Planning or Control Activities
Hero Motocorp asks its marketing team to consider ways
to get back market share from its newest competitor
Hero motocorp calculates market share after introducing its
newest products.
Hero compares cost it actually incurred with cost it
expected to incur for the productin of the new product
Hero design team proposes a new product to compete
directly with TVS
Hero estimates the cost it would incur to sell 100,000
bikes in the first quarter of next fiscal

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 ROLES OF
MANAGEMENT ACCOUNTANTS

Distinguish among the problem-

solving, scorekeeping, and
attention-directing Roles.

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 Problem Solving

This involves comparative analysis

for decision making.
This role asks: Of the several alternatives
available, which is the best?

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 Scorekeeping

This involves accumulating data and

reporting reliable results to
all levels of management.
This role asks: How is the business doing?

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 Attention Directing

This involves helping managers

properly focus their attention.
This role asks: Which opportunities and
problems should be emphasized first.
Attention directing should focus on all
opportunities to add value to an organization,
not just cost-reduction opportunities.
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 Exercise Two:
Classify in to Score Keeping, Attn Directing, Problem Solving

a)Preparing a schedule of depreciation for boat hull and deck molds—

b)Analyzing the desirability of using standard Volvo-Penta boat engines in a new
boat model—
c)Preparing the daily report of the number of hull defects found during the quality
check on the Sport Boat assembly line—.
d)Explaining the Commodore Yacht Division’s monthly performance report—
e)Interpreting differences between actual results and budgeted amounts on
performance report for the prototyping department—directing.
f)Preparing a monthly statement of boat sales, by model and customer, for the
company’s vice president of sales
g)Analyzing, for the design team, the impact on product costs for a new
dashboard odometer display
h)Preparing a cost comparison of two plywood manufacturers for use by the
purchasing manager
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 Key Themes in Management
Decision Making

Customer Focus

Value Chain Key Success Factors: Continuous

and Cost and Efficiency, Improvement
Supply Chain Time, Quality, and
Analysis Innovation Benchmarking

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 Customer Focus

The challenge facing managers is to continue

investing sufficient (but not excessive)
resources in customer satisfaction
such that profitable customers
are attracted and retained.

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 Value Chain and
Supply Chain Analysis
This theme has two related aspects:

1. Treat each of the business functions in the value

chain as an essential and valued contributor.

2. Integrate and coordinate the efforts of all business

functions in addition to developing the capabilities
of each individual business function.
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 Value Chain and
Supply Chain Analysis

Supply chain – describes the flow of goods,

services, and information from cradle to grave,
regardless of whether those activities occur in
the same organization or other organizations.

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 Key Success Factors

These are operational factors that directly affect

the economic viability of the organization.

Cost – organizations Quality – customers

are under continuous are expecting higher
pressure to reduce costs. levels of quality.

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 Key Success Factors

Time – organizations are under pressure to

complete activities faster and to meet
promised delivery dates more reliably.

Innovation – there is now heightened recognition

that a continuing flow of innovative products
or services is a prerequisite to the ongoing
success of most organizations.
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 Continuous Improvement
and Benchmarking

Continuous improvement by competitors creates

a never-ending search for higher levels of
performance within many organizations.

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 VALUE CHAIN

The term “value chain” refers to the sequence of

business functions in which usefulness is added
to the products or services of an organization.
The term “value” is used because as the usefulness
of the product or service is increased, so is its value
to the customer.

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 Value Chain

Management accountants provide

decision support for managers in the
following six business functions:

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 Value Chain

R&D Design Production

Management Accounting

Marketing Distribution Service

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 Value Chain Functions

Research and Development

It is the process that is conducted to generate
and experiment with ideas related to new
products, services, or processes.

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 Value Chain Functions

Design
It is the detailed planning and engineering
of products, services, or processes.

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 Value Chain Functions

Production
It is the acquisition, coordination, and
assembly of resources to produce
a product or deliver a service.

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 Value Chain Functions

Marketing
It is the manner by which companies
promote and sell their products
or services to customers
or prospective customers.

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Value Chain Functions

Distribution
It is the delivery of products or
services to the customer.

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 Value Chain Functions

Service
It is the after-sale support activities
provided to customers.

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 Regal Marine
See Video:
Identify Role of Mgt Accountant: Problem
solver, Score Keeping and Attention
Directing
Classify each cost item in one of the
business function

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 Exercise Three
Classify Each cost in Business Function (Value
Chain)

Cost of a toll-free telephone line used for customer inquiries about

product specifications—
Cost of sales and promotional materials
Labor costs of workers in the Cabinetry Department of the facility—
Cost of an industry research report on boat industry trendse.
Equipment and trucks purchased for transporting finished boats to
retail outlets such as the Boat Tree
Boat hull and deck mold fabrication costs
Cost of a new CAD design station
Costs of upholstery seats for Commodore yachts

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 Three ways
management accountants
support managers.

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 Key Guidelines

1. Cost-benefit approach
2. Full recognition of behavioral as well as
technical considerations
3. Using different costs for different purposes

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 Cost-Benefit Approach

A cost-benefit approach should be used in order

to spend resources if they promote decision
making that better attains organization goals
in relation to the costs of those resources.

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 Behavioral and Technical
Considerations

A management accounting system should have two

simultaneous missions for providing information:
1. To help managers make wise economic decisions
2. To help managers and other employees to aim and
strive for goals of the organization

To align Managers goal with Organizational goals

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 Different Costs for
Different Purposes
A cost (benefit or any measurement)
concept used for the external reporting
purpose need not be the appropriate concept
for the purpose of internal routine reporting
to managers.

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 Exercise Four:
Management accounting guideline
Analyze whether to produce a component needed for end product or to
outsource it
Decide whether to compensate the sales force by straight commission or by
salary
Include cost relate to admn. function to evaluate financial performance of a
division but include only controllable costs in evaluating the managers
performance.
Considering the desirability of purchasing new technology
Basing bonus calculations on financial measures such as ROI or on delivery
time to customer
Determining the loss in future business because of poor quality but including
only estimated scrap and waste as potential loss on budgeted financial
statements

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 How cost management
accounting fits into an
organization’s structure.

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 Line and Staff Relationships

Line management is directly responsible for

attaining the objectives of the organization.
Staff management exists to provide advice
and assistance to line management.

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 Line and Staff Relationships
Board of Directors

Chairman
Chief Executive Officer (CEO)

President
Chief Operating Officer (COO)

Chief Financial Officer (CFO)

Controller Audit Tax Treasury Risk Investor

Management Relations

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 Line and Staff Relationships

Controller

Examples of Functions:

* Global Financial Planning/Budgeting * Royalties

* Operations Administration * General Ledger
* Profitability Reporting * Accounts Payable and Receivable
* Inventory * Subsidiary and Liaison Accounting

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 Course Overview
Modules
Evaluation
Expectations

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