Cost Accounting Foundations and Evolutions

Cost Accounting Foundations and Evolutions
Kinney, Prather, Raiborn
Chapter 1 Introduction to Cost Accounting
Learning Objectives (1 of 3)
Describe the relationships among financial, management, and cost accounting Identify two common organizational strategies Describe the value chain and the major value chain functions
Explain how a balance scorecard is used to implement an organizations strategy Explain why accountants must understand the organizations structure in order to perform effectively
Identify the sources of ethical standards for cost accountants List the sources of authoritative pronouncements for the practice of cost accounting
Accounting
The Language of Business
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
Two Types of Accounting

Financial
Meet external information needs Comply with GAAP
Management
Meet internal information needs Does not have to comply with GAAP
Financial Accounting
Provides information to investors, creditors, and regulators
Complies with GAAP
Financial Accounting
Uses Return on Investment (ROI) to allocate resources
Net Income/Total Assets = ROI
Traditional accounting information system is based on financial accounting requirements
Management Accounting
Provides information for making decisions and controlling operations
Accounting Differences
Financial
External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal recordkeeping
Accounting Differences
Financial
External focus Whole organization Historical Quantitative Monetary Verifiable GAAP Formal recordkeeping
Managerial
Internal focus Segments or divisions Current/projected Quantitative/qualitative Monetary and nonmonetary Timely/reasonable estimate Benefits exceed costs Formal and informal recordkeeping
Relationship of Financial, Management, and Cost Accounting Product Costs
FINANCIAL ACCOUNTING
COST MANAGEMENT ACCOUNTING ACCOUNTING
Product Cost Information

External parties - stockholders, creditors, regulators
For investment and credit decisions Complies with GAAP Enterprise-wide focus
External parties - stockholders, creditors, regulators

For investment and credit decisions Complies with GAAP Enterprise focus
Product Cost Information
Internal parties
Planning, controlling, decision making Evaluating performance Includes upstream and downstream costs Disaggregated
Exhibit 1-3
Cost Management Goals

Reduce costs Improve customer satisfaction
Organizational Strategy
1. Develop Mission Statement 2. Implement strategy 3. Measure and control the value chain and managers performance 4. Set balance scorecard goals, objectives, and targets
1. Develop Mission Statement 2. Implement strategy
Establish appropriate measures of accomplishment Develop, implement, and monitor necessary information systems
1. Develop Mission Statement
What an organization wants to accomplish How its products/services can meet customer needs Why the organization exists Used to develop an organizations strategy Modify over time
1. Develop Mission Statement 2. Implement strategy Strategy - A plan to fulfill goals and objectives by deploying resources to create value for customers and shareholders Organization strategy is supported by business unit strategies
Organizational Strategies
Cost leadership strategy - Undercut competitor prices Product differentiation strategy - Superior quality products or unique services sold at a premium Core competency critical function or activity providing a competitive advantage
Strategy Questions
Who are your five most important competitors? Is your firm more or less profitable than these firms? Compare prices for equivalent products/services. Are they higher or lower? Explain the difference. Is it customers, costs, or profit requirements?
Strategy Questions
Are your costs higher or lower than main competitors? Where are the differences most pronounced? What segment(s) of your business represents 80 percent of profits? For each business segment above, how large are you relative to the largest competitors? Are you gaining or losing relative market share?
Strategy Questions
What are your customers most important purchase criteria? How do you and your competitors rate on these purchase criteria? What are your main strengths and competencies? Are they appreciated by the market?
Strategy Questions
Which are your priority segments? Where is it most important that you gain market share? What is your competitive advantage?
1. Develop Mission Statement 2. Implement strategy
3. Measure and control the value chain and managers performance
Value Chain
Set of value-adding functions and processes that convert inputs into products/services
Research and Development Product Design Supply Production Marketing Distribution Customer Service
Communicate strategy to all members of the value chain
Exhibit 1-6
1. Develop Mission Statement 2. Implement strategy 3. Measure and control the value chain and managers performance
4. Set balance scorecard goals, objectives, and targets

Business outcomes are evaluated against performance targets
Balance Scorecard
Four perspectives Learning and Growth Internal Business Customer Value Financial Performance
Balanced Scorecard
Learning and Growth Customer Value
Internal Business
Financial
Balance Scorecard
Learning and Growth
Use the organizations intellectual capital to adapt to changing customer needs or to influence new customers needs and expectations through product or service innovations
Balance Scorecard
Learning and Growth Internal Business
Things to do well to meet customer needs and expectations
Balance Scorecard
Customer Value
How well the organization is doing relative to important customer criteria
Balance Scorecard
Customer Value
How well the organization is doing relative to important customer criteria
Financial Performance
Stockholders/stakeholders concerns about profitability and organizational growth
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
Exhibit 1-7
Organizational Structure
Distribution of authority and responsibility in an organization Authority right to use resources to accomplish a task or achieve an objective Responsibility obligation to accomplish a task or achieve an objective
Organizational Structure
Line manager works directly toward attaining organizational goals Staff employees give assistance and advice to line managers Treasurer and Controller
Insert Exhibit 1-9
Ethics and Legislation

Sarbanes-Oxley Act CEOs and CFOs personally accountable for the accuracy of their organizations financial reporting Foreign Corrupt Practices Act prohibits bribes to obtain/retain business
Ethics and Legislation

False Claims Act whistle-blower protection Organization of Economic Cooperation and Development Convention crime to offer, promise, give bribes to obtain/retain internal business deals
Ethics & Management Accountants

Standards of Ethical Conduct for Management Accountants
Competence Confidentiality Integrity Objectivity
Competence Confidentiality Integrity Objectivity
Insert Exhibit 1-10
Accounting Bodies
Financial Public Company Accounting Oversight Board (PCAOB) Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB)
Accounting Bodies
Financial Public Company Accounting Oversight Board (PCAOB) Securities and Exchange Commission (SEC) Financial Accounting Standards Board (FASB) Management IMA Society of Management Accountants of Canada Cost Accounting Standards Board (CASB)
Management Accounting Organizations

IMA
Statements on Management Accounting (not legally binding)
Society of Management Accountants of Canada

Management Accounting Guidelines (not legally binding) Cost Accounting Standards Board (CASB) Government contracting standards (legally binding)
Questions
What is the relationship among financial, management, and cost accounting? How is the balance scorecard used to implement an organizations strategy? Where can an accountant find ethical standards for cost accountants?

Cost Accounting Foundations and Evolutions

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Cost Accounting Foundations and Evolutions

Kinney, Prather, Raiborn

Chapter 1 Introduction to Cost Accounting

Two Types of Accounting

Complies with GAAP

Traditional accounting information system is based on financial accounting requirements

Relationship of Financial, Management, and Cost Accounting Product Costs

COST MANAGEMENT ACCOUNTING ACCOUNTING

Product Cost Information

External parties - stockholders, creditors, regulators

Product Cost Information

Cost Management Goals

3. Measure and control the value chain and managers performance

Communicate strategy to all members of the value chain

4. Set balance scorecard goals, objectives, and targets

Insert Exhibit 1-9

Ethics and Legislation

Ethics and Legislation

Ethics & Management Accountants

Insert Exhibit 1-10

Management Accounting Organizations

Society of Management Accountants of Canada

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