Introduction to Cost and Management Accounting PDF

CHAPTER 1 INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING IN A GLOBAL BUSINESS ENVIRONMENT A. Introduction to Cost Accounting 1. Accounting provides essential information and is known as the language of business. 2. Financial accounting focuses on external users and,...

CHAPTER 1 INTRODUCTION TO COST AND MANAGEMENT ACCOUNTING IN A GLOBAL BUSINESS ENVIRONMENT A. Introduction to Cost Accounting 1. Accounting provides essential information and is known as the language of business. 2. Financial accounting focuses on external users and, as such, must comply with GAAP. Financial accounting information is: a. typically historical, verifiable, quantifiable, and monetary; b. usually quite aggregated and related to the organization as a whole; and c. often a business essential because it is necessary for obtaining loans, preparing tax returns, and understanding how well or how poorly the business is performing. 3. Management accounting focuses on the information needs of an organization's internal managers’ needs that are related to their planning, controlling, and decision- making functions. a. Some management needs are satisfied by historical, monetary information based on generally accepted accounting principles. b. Other needs require forecasted, qualitative, and frequently nonfinancial information that has been developed and computed for their specific decision purposes. c. A company's business intelligence (BI) system is a formal process for gathering and analyzing information and producing intelligence to meet decision making needs. 4. Relationship of Financial and Management Accounting. Accounting information is supposed to address three different functions:  a. provide information to external parties (stockholders, creditors, and various regulatory bodies) for investment and credit decisions; b. estimate the cost of products produced and services provided by the organization; and c. provide information useful for making decisions and controlling operations. 1. Cost accounting creates an overlap between financial accounting and managerial accounting. a. Cost accounting integrates with financial accounting by providing product costing information for financial statements and with management accounting by providing some of the quantitative, cost-based information managers need to perform their tasks. (See text Exhibit 1-2) b. The boundaries between financial and managerial accounting are not clearly and definitively drawn. 6. Relationship of Management and Cost Accounting a. The Institute of Management Accountants (IMA) is an organization composed of individuals interested in the field of management accounting; coordinates the Certified Management Accountant (CMA) program. b. Management accounting is defined by the IMA as a discipline that includes almost all manipulations of financial information for use by managers in performing their organizational functions and in assuring the proper use and handling of an entity's resources. The objectives of management accounting reflect its comprehensive nature.. c. The functions of cost accounting focus primarily on the determination of the cost of making products or performing services; cost accounting is an integral part of the broader field of management accounting. d. Cost accounting is defined as "a technique or method for determining the cost of a project, process, or thing... This cost is determined by direct measurement, arbitrary assignment, or systematic and rational allocation."  e. Cost accounting creates an overlap between financial accounting and management accounting. f. The cost accounting overlap causes the financial and management accounting systems to be joined together to form a complete informational network. g. This discipline integrates with financial accounting by providing product costing information for financial statements. h. Cost accounting also integrates with management accounting by providing some of the quantitative, cost based information managers need to perform their tasks. 7. Management accountants should strive to recognize: a. what information is needed by managers; b. why the information is needed; and c. how to provide the information in the best possible form and in the timeliest manner to enhance understandability and usefulness in decision making. 8. Managers need information to make decisions about: a. acquiring and financing production capacity; b. determining which products to market; c. pricing jobs, products, or services; d. determining the best method of delivering finished goods to warehouses; e. locating the best property for production facilities; and f. financing the costs of production. 9. Data and information are clearly different. a. Data are bits of knowledge or facts that have not been summarized and categorized in a manner useful to a decision maker. b. Information represents knowledge or facts that have been carefully chosen from a body of data and arranged in a meaningful way. 10. Management accountants should provide both quantitative and qualitative information to assist managers in decision making.  a. Quantitative information allows managers to witness the numerical impact of alternative choices. b. Qualitative information furnishes facts that help eliminate some of the inherent uncertainty related to such choices. 11. Management accountants play an important role in controlling and performance evaluation. a. Controlling is the process of exerting managerial influence on operations so that they conform to previously prepared plans. b. Controlling involves setting performance standards, measuring performance, periodically comparing actual performance with standards, and taking corrective action when operations do not conform with established standards. c. A performance evaluation is the process of determining the degree of success in accomplishing a task; equates to both effectiveness and efficiency. Such evaluations are conducted to determine if operations are proceeding according to plan or if actual results differ materially from expected results. Once performance has been measured by the control process, managers must evaluate the effectiveness and efficiency of that performance. d. Effectiveness is a measure of how well an organization's goals and objectives are achieved; compares actual output results to desired results; determination of the successful accomplishment of an objective. e. Efficiency is a measure of the degree to which tasks were performed to produce the best yield at the lowest cost from the resources available; the degree to which a satisfactory relationship occurs when comparing outputs to inputs. 12. Management accountants play an important role in decision making. a. Decision making is the process of choosing among the alternative solutions available to a course of action or a problem situation. A manager’s ability to manage depends on good decision making. b. Managers are the information users while accountants are the information providers.  c. The quantity of information? desired is partially based on the expected consequences of the decision. d. The purpose of management accounting is basically two-fold: First, it must provide the basis for appropriate cost estimations that are needed for the financial statement presentations of inventory and cost of goods/services sold. Second, it must provide adequate, useful information to assist managers in performing the basic functions of planning, controlling, evaluating performance, and decision making. 13. Management accountants are not required to adhere to GAAP in providing information for managers' use internally. 14. The Financial Accounting Standards Board (FASB) establishes financial accounting standards and is a private- sector body. 15. The Cost Accounting Standards Board (CASB) is a body established by Congress in 1970 to promulgate cost accounting standards for defense contractors and federal agencies; disbanded in 1980 and reestablished in 1988; its previously issued pronouncements still carry the weight of law for those organizations that are within its jurisdiction. a. The original CASB issued twenty cost accounting standards (one of which has been withdrawn) prior to its termination. These are still in force. b. The Board's objectives are to: increase the degree of uniformity in cost accounting practices among government contractors in like circumstances; establish consistency in cost accounting practices in like circumstances by each individual contractor over periods of time; and require contractors to disclose their cost accounting practices in writing. c. CASB standards do not constitute a comprehensive set of rules and compliance is required only for companies bidding on or pricing cost-related contracts for the federal government. 16. The Certified Management Accountant (CMA) is a professional designation in the area of management accounting that recognizes the successful completion of an examination, acceptable work experience, and continuing education requirements.