Chapter 1: Introduction to Cost Accounting

Cost Accounting: Foundations and Evoutions, 8e — Chapter 1: Introduction to Cost Accounting

1. Kinney ● Raiborn
Cost Accounting:
Foundations and Evolutions, 8e
© 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a
license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Chapter 1:
Introduction to Cost
Accounting

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Learning Objectives

What are the relationships among financial, management, and cost
accounting?

What are the the sources of authoritative pronouncements for the
practice of cost accounting?

What are the sources of ethical standards for cost accountants?

What is a mission statement, and why is it important to
organizational strategy?

What must accountants understand about an organization’s
structure and business environment in order to perform effectively in
that organization?
What is a value chain, and what are the major value chain
functions?
How is a balanced scorecard used to implement an organization’s
strategy?
Why is ethical behavior so important in organizations?

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Accountants
Financial accountants provide information to
external parties

Investors

Creditors

Regulators
Managerial accountants provide information to
internal users

Managers

Cost accountants provide information to both
internal and external users

Product cost information
Accounting is the language of business.

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Relationship of Financial,
Management, and Cost Accounting

FINANCIAL
ACCOUNTING
MANAGEMENT
ACCOUNTING
COST
ACCOUNTIN
G

Product
Costs

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Types of Accounting
Financial
Meet external
information needs

Comply with GAAP
Management
Meet internal
information needs

Does not have to
comply with GAAP

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Financial versus Managerial
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

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Product Cost Information
External parties—stockholders, creditors, and
regulators
For investment and credit decisions
Complies with GAAP
Enterprise focus
Internal parties
Planning, controlling, and decision making
Evaluating performance
Includes upstream and downstream costs
Disaggregated

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Accounting Bodies
Financial

Public Company
Accounting Oversight
Board (PCAOB)

Securities and
Exchange Commission
(SEC)
Financial Accounting
Standards Board
(FASB)
Management

Institute of
Management
Accountants (IMA)

Society of Management
Accountants of Canada
Cost Accounting
Standards Board
(CASB)

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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)

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Professional Ethics
Earnings management—deliberate
accounting adjustments to “hit” profit targets
Often adjustments involve cost accounting

Product costs

Inventory valuations
Stretching legitimate accounting techniques
Outright fraud

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ethics and Legislation
Sarbanes-Oxley Act—CEOs and CFOs
personally accountable for the accuracy of
their organization’s financial reporting
False Claims Act—whistle-blower protection
and penalties for failure to blow the whistle
(disclose known financial frauds)

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Ethics and Management Accounting
Standards of Ethical Conduct for
Management Accountants

Competence

Confidentiality

Integrity

Credibility

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Organizational Strategy
1.Develop mission statement
2.Implement strategy
3.Deploy resources to create value for
customers and shareholders
4.Recognize that each organization is unique
—thus unique strategies must be developed

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Organizational Strategy
1.Develop mission statement
2.Implement strategy
Establish
appropriate
measures of
accomplishment
Develop,
implement, and
monitor
necessary
information
systems

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Five Factors in Organizational
Strategy
Core competencies
Organizational structure
Management style and organizational culture
Organizational constraints
Environmental constraints

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Core competency—critical function or
activity providing a competitive advantage

Cost leadership strategy—undercut
competitor prices
Product differentiation strategy—superior
quality products or unique services sold at
a premium
Organizational Strategies

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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?
Are your costs higher or lower than
those of main competitors? Where
are the differences most
pronounced?
What segment(s) of your business
represents 80% profits?
For each business segment above,
how large are you relative to the
largest competitors? Are you gaining
or losing relative market share?
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?
Which are your priority segments?
Where is it most important that you
gain market share?
What is your competitive
advantage?

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
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
Line manager works directly toward attaining
organizational goals
Staff employees give assistance and advice to line
managers
Treasurer and Controller

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Value Chain

Research and
Development

Product Design

Supply

Production

Marketing

Distribution

Customer Service
Communicate strategy to all members of the value chain.

A set of value-adding functions and
processes that converts inputs into
products or services

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Components of the Value Chain

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Balanced Scorecard

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Balanced Scorecard Perspectives

Learning and Growth

Use the organization’s intellectual capital to adapt to changing
customer needs or to influence new customers’ needs and
expectations through product or service innovations

Internal Business

Things to do well to meet customer needs and expectations

Customer Value

How well the organization is doing relative to important
customer criteria

Financial

Address stockholders/stakeholders concerns about
profitability and organizational growth

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Balanced Scorecard Measures
Short-term and long-term
Internal and external
Financial and nonfinancial

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Ethics in Multinationals
Foreign Corrupt Practices Act—prohibits
bribes to obtain/retain business
Organization of Economic Cooperation and
Development Convention—crime to offer,
promise, give bribes to obtain/retain internal
business deals

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Questions
What is the relationship among financial,
management, and cost accounting?
How is the balanced scorecard used to
implement an organization’s strategy?

Where can an accountant find ethical
standards for cost accounting?

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a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Potential Ethical Issues
Earnings management
Low-cost production at any cost
Whistle-blower retaliation
Fixing prices
Bribery and other corruption
Hiding managerial acts