Cost Accounting: A Managerial Emphasis PDF

Cost Accounting: A Managerial Emphasis Chapter 1 The Manager and Management Accounting Learning Objectives (1 of 2) 1.1 Distinguish financial accounting from management accounting 1.2 Understand how management accountants help firms make strategic decisions 1.3 Describe the set of busin...

Cost Accounting: A Managerial Emphasis Chapter 1 The Manager and Management Accounting Learning Objectives (1 of 2) 1.1 Distinguish financial accounting from management accounting 1.2 Understand how management accountants help firms make strategic decisions 1.3 Describe the set of business functions in the value chain and identify the dimensions of performance that customers are expecting of companies 1.4 Explain the five-step decision-making process and its role in management accounting Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Learning Objectives (2 of 2) 1.5 Describe three guidelines management accountants follow in supporting managers 1.6 Understand how management accounting fits into an organization’s structure 1.7 Understand what professional ethics mean to management accountants Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Accounting Discipline Overview (1 of 3) Management accounting measures, analyzes, and reports financial and nonfinancial information that helps managers make decisions to fulfill organizational goals. Management accounting need not be GAAP compliant. Managers use management accounting information to: – Develop, communicate, and implement strategies – Coordinate product design, production, and marketing decisions and evaluate a company’s performance Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Accounting Discipline Overview (2 of 3) Financial accounting focuses on reporting financial information to external parties such as investors, governmental agencies, banks, and suppliers, based on GAAP. Cost Accounting measures, analyzes, and reports financial and nonfinancial information related to the costs of acquiring or using resources in an organization. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Accounting Discipline Overview (3 of 3) Today, most accounting professionals take the perspective that cost information is part of the information collected to make management decisions; therefore, the distinction between the two is not clear-cut, and in your book and these PowerPoint presentations, we often use the terms interchangeably. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Major Differences Between Management and Financial Accounting (1 of 2) Exhibit 1.1 Major Difference Between Management and Financial Accounting Blank Management Accounting Financial Accounting Purpose of Help managers make Communicate an organization’s information decisions to fulfill an financial position to investors, organization’s goals banks, regulators, and other outside parties Primary users Managers of the organization External users such as investors, banks, regulators, and suppliers Focus and Future-oriented (budget for Past-oriented (reports on 2019 emphasis 2020 prepared in 2019) performance prepared in 2020) Rules of Internal measures and reports Financial statements must be measurement and do not have to follow GAAP prepared in accordance with GAAP reporting but are based on cost-benefit and be certified by external, analyses independent auditors Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Major Differences Between Management and Financial Accounting (2 of 2) Exhibit 1.1 [Continued] Blank Management Accounting Financial Accounting Time span and Varies from hourly information Annual and quarterly financial type of reports to 15 to 20 years, with financial reports, primarily on the company and nonfinancial reports on as a whole products, departments, territories, and strategies Behavioral Designed to influence the Primarily reports economic events implications behavior of managers and but also influences behavior other employees because manager’s compensation is often based on reported financial results Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Strategic Decisions and the Management Accountant (1 of 2) Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace. There are two broad strategies: cost leadership and product differentiation. Strategic cost management describes cost management that specifically focuses on strategic issues. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Strategic Decisions and the Management Accountant (2 of 2) Management accounting information helps managers formulate strategy by answering questions such as the following: Who are our most important customers, and what critical capability do we have to be competitive and deliver value to our customers? 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 product in terms of features, price, cost, and quality? Will adequate cash be available to fund the strategy, or will additional funds need to be raised? Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Value-Chain and Supply-Chain Analysis and Key Success Factors (1 of 2) 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. The entire customer experience determines the value a customer derives from a product. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Value-Chain and Supply-Chain Analysis and Key Success Factors (2 of 2) The value chain is the sequence of business functions by which a product is made progressively more useful to customers. The value chain consists of the following: – Research and Development – Design of Products and Processes – Production – Marketing (including Sales) – Distribution – Customer Service Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Value Chain Illustrated Exhibit 1.2 Different Parts of the Value Chain Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Customer Relationship Management (C RM) CRM is a strategy that integrates people and technology in all business functions to deepen relationships with customers, partners, and distributors. CRM initiatives the use of technology to coordinate all customer-facing activities and design and production activities necessary to get products to customers. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Supply-Chain Analysis Production and Distribution are the parts of the value chain associated with producing and delivering a product or service. These two functions together are known as the Supply Chain. The supply chain describes the flow of goods, services, and information from the initial sources of materials, services, and information to their delivery, regardless of whether the activities occur in one organization or in multiple organizations. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Supply Chain Illustrated Exhibit 1.3 Supply Chain for a Cola Bottling Company Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Key Success Factors Customers want companies to use the value chain and supply chain to deliver ever-improving levels of performance when it comes to several (or even all) of the following: – Cost and Efficiency – Quality – Time – Innovation – Sustainability Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Key Success Factors—Sustainability The interest in sustainability appears to be intensifying among companies for several reasons: Many investors care about sustainability. Companies are finding that sustainability goals attract and inspire employees. Customers prefer the products of companies with good sustainability records and boycott companies with poor sustainability records. Society and activist nongovernmental organizations monitor the sustainability performance of firms and take legal action against those that violate environmental laws. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Decision-Making, Planning, and Control: The Five-Step Decision- Making Process 1. Identify the problem/uncertainties. 2. Obtain information. 3. Make predictions about the future. 4. Make decisions by choosing among alternatives. 5. Implement the decision, evaluate performance, and learn. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Planning and Control Systems (1 of 2) Planning consists of 1. selecting an organization’s goals and strategies, 2. predicting results under various alternative ways of achieving those goals, 3. deciding how to attain the desired goals, and 4. communicating the goals and how to achieve them to the entire organization. Management accountants serve as business partners in these planning activities because they understand the key success factors and what creates value. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Planning and Control Systems (2 of 2) Control comprises 1. taking actions that implement the planning decisions, 2. evaluating past performance, and 3. providing feedback and learning to help future decision making. The most important planning tool when implementing strategy is a budget. A budget is the quantitative expression of a proposed plan of action by management and is an aid to coordinating what needs to be done to execute that plan. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Planning and Control Systems Illustrated Exhibit 1.5 How Accounting Aids Decision-Making at Daily News Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Management Accounting Guidelines Three guidelines help management accountants provide the most value to the strategic and operational decision- making of their companies: 1. The cost-benefit approach compares the benefits of an action/purchase to the costs. Generally, of course, the benefits should exceed the costs. 2. Behavioral and technical considerations recognize, among other things, that management is primarily a human activity that should focus on encouraging individuals to do their jobs better. 3. Managers use alternative ways to compare costs in different decision-making situations because there are different costs for different purposes. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Line and Staff Relationships Organizations distinguish between line management and staff management. Line management is directly responsible for achieving the goals of the organization. Staff management provides advice, support, and assistance to line management. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Organizational Structure and the Management Accountant Exhibit 1.6 Organizational Structure and the Management Accountant Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Management Accounting Beyond the Numbers The successful management accountant possesses several skills and characteristics that reach well beyond basic analytical abilities. For example, management accountants must do the following: 1. Work well in cross-functional teams and as a business partner 2. Promote fact-based analysis and make tough-minded, critical judgments without being adversarial 3. Lead and motivate people to change and be innovative 4. Communicate clearly, openly, and candidly 5. Have high integrity Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Professional Ethics The Institute of Management Accountants (IMA) has advanced four standards of ethical conduct for management accountants: Competence Confidentiality Integrity Credibility Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Sarbanes-Oxley Act (SOX) The Sarbanes-Oxley legislation was passed in 2002 in response to a series of corporate scandals. The act focuses on improving the following: Internal controls Corporate governance Monitoring of managers Disclosure practices of public companies Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Accounting: A Managerial Emphasis Chapter 2 An Introduction to Cost Terms and Purposes Learning Objectives (1 of 2) 2.1 Define and illustrate a cost object 2.2 Distinguish between direct costs and indirect costs 2.3 Explain variable costs and fixed costs 2.4 Interpret unit costs cautiously 2.5 Distinguish the financial accounting concepts, inventoriable costs, and period costs Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Learning Objectives (2 of 2) 2.6 Illustrate the flow of inventoriable and period costs in financial accounting 2.7 Explain why product costs are computed in different ways for different purposes 2.8 Describe a framework for cost accounting and cost management. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Basic Cost Terminology (1 of 2) Cost—a sacrificed or forgone resource to achieve a specific objective Actual cost—a cost that has occurred Budgeted cost—a predicted cost Cost object—anything for which a cost measurement is desired Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Object Examples at Tesla Exhibit 2.1 Examples of Cost Objects at Tesla Cost Object Illustration Product A Tesla Model 3 vehicle Service Telephone hotline providing information and assistance to Tesla stores and galleries Project R&D project on an electric Tesla truck Customer The Dubai Road and Transport Authority (RTA), which is building a large fleet of electric taxis in the city Activity Setting up machines for production or maintaining production equipment Department Worker health and safety department Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Basic Cost Terminology (2 of 2) Cost Accumulation—the collection of cost data in an organized way by means of an accounting system Cost Assignment—a general term that encompasses the gathering of accumulated costs to a cost object in two ways: – Tracing costs with a direct relationship to the cost object – Allocating accumulated costs with an indirect relationship to a cost object Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Direct and Indirect Costs Direct costs can be conveniently and economically traced (tracked) to a cost object. Indirect costs cannot be conveniently or economically traced (tracked) to a cost object. Instead of being traced, these costs are allocated to a cost object in a rational and systematic manner. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Assignment to a Cost Object (Tesla Example) Exhibit 2.2 Cost Assignment to a Cost Object Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Allocation Challenges Direct Costs Material (steel or tires for a car, as an example) Labor (assembly-line worker wages) Indirect Costs Electricity Rent Property taxes Plant administration expenses Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Factors Affecting Direct/Indirect Cost Classifications The materiality of the cost in question The available information-gathering technology Design of operations Note: a specific cost may be both a direct cost of one cost object and an indirect cost of another cost object. The direct/indirect classification depends on the cost object that one is trying to determine the cost of. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Behavior Patterns: Variable Costs and Fixed Costs (1 of 2) Variable costs change, in total, in proportion to changes in the related level of activity or volume of output produced. Fixed costs remain unchanged, in total, for a given time period, despite changes in the related level of activity or volume of output produced. Costs are fixed or variable for a specific activity and/or for a given time period. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Behavior Patterns: Variable Costs and Fixed Costs (2 of 2) Variable costs are constant on a per-unit basis. That is, if a product takes 5 pounds of material each, it stays the same per unit regardless if one, ten, or a thousand units are produced. Fixed costs per unit change inversely with the level of production. As more units are produced, the same fixed cost is spread over more and more units, reducing the cost per unit. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Behavior Summarized Costs Total Dollars Cost Per Unit Variable Costs Change in proportion Unchanged in relation to with output output (more output = more cost) Fixed Costs Unchanged in relation to Change inversely with output (within the output relevant range) (more output = lower cost per unit) Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Graphs of Variable and Fixed Costs Exhibit 2.3 Graphs of Variable and Fixed Costs Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Other Cost Concepts Mixed costs have both fixed and variable elements. Cost driver—a variable, such as the level of activity or volume, that causally affects costs over a given time span Relevant range—the band or range of normal activity level (or volume) in which there is a specific relationship between the level of activity (or volume) and the cost in question Fixed costs are considered fixed only within the relevant range. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Illustration of Fixed Cost Within Relevant Range Exhibit 2.4 Thomas Transport Company Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Multiple Classifications of Costs Costs may be classified as – Direct/Indirect and – Variable/Fixed. These multiple classifications give rise to important cost combinations: – Direct and variable – Direct and fixed – Indirect and variable – Indirect and fixed Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Examples of the Multiple Classifications of Costs Exhibit 2.5 Examples of Costs in Combinations of the Direct/Indirect and Variable/Fixed Cost Classifications for a Car Manufacturer Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Use Unit Costs Cautiously Although unit costs are regularly used in financial reports and for making product mix and pricing decisions, managers should think in terms of total costs rather than unit costs for many decisions. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved The Three Different Sectors of Economy 1. Manufacturing-sector companies purchase materials and components and convert them into various finished goods. 2. Merchandising-sector companies purchase and then sell tangible products without changing their basic form. 3. Service-sector companies provide services (intangible products) like legal advice or audits. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Types of Inventory in Manufacturing Direct materials—resources in-stock and available for use Work-in-process (or progress)—goods partially worked on but not yet completed, often abbreviated as WIP Finished goods—goods completed but not yet sold Note: Merchandising-sector companies hold only one type of inventory: Merchandise Inventory Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Commonly Used Classifications of Manufacturing Costs Also known as inventoriable costs: Direct materials—acquisition costs of all material that will become part of the cost object Direct labor—compensation of all manufacturing labor that can be traced to the cost object Indirect manufacturing—all manufacturing costs that are related to the cost object but cannot be traced to that cost object in an economically feasible way Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Inventoriable Costs Versus Period Costs Inventoriable costs are all costs of a product that are considered assets in a company’s balance sheet when the costs are incurred and that are expensed as cost of goods sold only when the product is sold. For manufacturing companies, all manufacturing costs are inventoriable costs. Period costs are all costs in the income statement other than cost of goods sold. They are treated as expenses of the accounting period in which they are incurred. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Flows The Cost of Goods Manufactured and the Cost of Goods Sold section of the income statement are accounting representations of the actual flow of costs through a production system. Note: Inventoriable costs go through the balance sheet accounts of direct materials, work-in-process, and finished goods inventory before entering the cost of good sold in the income statement. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Cost Flows Illustrated Exhibit 2.7 Flow of Revenue and Costs for a Manufacturing-Sector Company, Cellular Products (in thousands) Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Multiple-Step Income Statement (1 of 2) Exhibit 2.8 Income Statement and Schedule of Cost of Goods Manufactured of a Manufacturing-Sector Company, Cellular Products Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Multiple-Step Income Statement (2 of 2) Exhibit 2.8 Income Statement and Schedule of Cost of Goods Manufactured of a Manufacturing-Sector Company, Cellular Products Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Flow of Revenues and Costs for a Merchandising Company Exhibit 2.10 Flow of Revenues and Costs for a Merchandising Company (Retailer or Wholesaler) Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Other Cost Considerations Prime cost is a term referring to all direct manufacturing costs (materials and labor). Conversion cost is a term referring to direct labor and indirect manufacturing costs. Overtime premium labor costs are considered part of indirect overhead costs. Idle time refers to the wages paid for unproductive time caused by lack of orders, machine or computer breakdown, work delays, poor scheduling, and the like. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Measuring Costs Requires Judgment Because management can define and classify costs in multiple ways, judgment is required. Managers, accountants, suppliers, and others should agree on the classifications and meaning of the cost terms. Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Different Product Costs for Different Purposes (1 of 2) Pricing and product-mix decisions—decision about pricing and maximizing profits Contracting with government agencies—very specific definitions of allowable costs for “cost plus profit” contracts Preparing external-use financial statements—GAAP-driven product costs only Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved Different Product Costs for Different Purposes (2 of 2) Exhibit 2.11 Different Product Costs for Different Purposes Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved A Framework for Cost Accounting and Cost Management The following three features of cost accounting and cost management can be used for a wide range of applications (for helping managers make decisions): 1. Calculating the cost of products, services, and other cost objects 2. Obtaining information for planning and control and performance evaluation 3. Analyzing the relevant information for making decisions Copyright © 2021, 2018, 2016 Pearson Education, Inc. All Rights Reserved