management accounting lesson about costs

management accounting

1. Cost Accounting
Seventeenth Edition, Global Edition
Chapter 1 (CA1)
The Manager and Management
Accounting

2. Learning Objectives
1.1Distinguish financial accounting from management accounting
1.2Understand how management accountants help firms make strategic
decisions
1.3Describe the set of business functions in the value chain and identify
the dimensions of performance that customers are expecting of
companies
1.4Explain the five-step decision-making process and its role in
management accounting
1.5Describe three guidelines management accountants follow in
supporting managers
1.6Understand how management accounting fits into an organization’s
structure
1.7Understand what professional ethics mean to management
accountants

3. Accounting Discipline Overview
•Management accountingmeasures, analyzes, and reports financial and
nonfinancial information that helps managers make decisions to fulfill
organizational goals. Management accounting need not be G A AP 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
•Cost Accountingmeasures, analyzes, and reports financial and nonfinancial
information related to the costs of acquiring or using resources in an
organization.
•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 presentations, we often use the terms interchangeably.
•Financial accountingfocuses on reporting financial information to external
parties such as investors, governmental agencies, banks, and suppliers,
based on G A AP.

4. Major Differences Between Management
and Financial Accounting
Exhibit 1.1Major Difference Between Management and Financial Accounting
Management Accounting Financial Accounting
Purpose of informationHelp managers make decisions to fulfill an
organization’s goals
Communicate an organization’s financial
position to investors, banks, regulators, and
other outside parties
Primary users Managers of the organization External users such as investors, banks,
regulators, and suppliers
Focus and emphasis Future-oriented (budget for 2020 prepared
in 2019)
Past-oriented (reports on 2019 performance
prepared in 2020)
Rules of measurement
and reporting
Internal measures and reports do not have
to follow GAAP but are based on cost-
benefit analyses
Financial statements must be prepared in
accordance with GAAP and be certified by
external, independent auditors
Time span and type of
reports
Varies from hourly information to 15 to 20
years, with financial and nonfinancial
reports on products, departments,
territories, and strategies
Annual and quarterly financial reports,
primarily on the company as a whole
Behavioral implicationsDesigned to influence the behavior of
managers and other employees
Primarily reports economic events but also
influences behavior because manager’s
compensation is often based on reported
financial results

5. Strategic Decisions and the
Management Accountant
•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.
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?

6. Value-Chain and Supply-Chain Analysis
and Key Success Factors
•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.
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
Exhibit 1.2Different Parts of the Value Chain

7. Customer Relationship Management (C R M)
•C R M is a strategy that integrates people and technology in
all business functions to deepen relationships with
customers, partners, and distributors.
•C R M initiatives the use of technology to coordinate all
customer-facing activities and design and production
activities necessary to get products to customers.

8. Supply-Chain Analysis
•Productionand Distributionare the parts of the value
chain associated with producing and delivering a product
or service.
•These two functions togetherare known as the Supply
Chain.
Exhibit 1.3Supply Chain for a Cola Bottling Company

9. 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
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

10. 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. [Control and Performance Evaluation will be
covered in future courses rather than in this]

11. Planning and Control Systems
Planningconsists 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.
Controlcomprises
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.

12. Planning and Control Systems Illustrated
Exhibit 1.5How Accounting Aids Decision-Making at Daily News

13. 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.Behavioraland 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 alternativeways to compare costs in
different decision-making situations because there are
different costs for different purposes.

14. 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
The Institute of Management Accountants (I M A) has advanced four
standards of (professional) ethical conduct for management
accountants:
•Competence
•Confidentiality
•Integrity
•Credibility

15. Sarbanes-Oxley Act (S O X)
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

16. Terms to Learn
Budget Design of products and processes
Chief financial officer Distribution
Control Finance director
Controller Financial accounting
Cost accounting Learning
Cost-benefit approach Line management
Cost management Management accounting
Customer relationship manage. (CRM) Marketing
Customer service Planning
Production
Research and development (R&D)
Staff management
Strategic cost management
Strategy
Supply chain
Sustainability
Total quality management (TQM)
Value chain

17. Cost Accounting
Seventeenth Edition, Global Edition
Chapter 2 (CA2)
An Introduction to Cost Terms and
Purposes

18. Learning Objectives
2.1Define and illustrate a cost object
2.2Distinguish between direct costs and indirect costs
2.3Explain variable costs and fixed costs
2.4Interpret unit costs cautiously
2.5Distinguish the financial accounting concepts, inventoriablecosts,
and period costs
2.6Illustrate the flow ofinventoriableand period costsin financial
accounting
2.7Explain why product costs are computed in different ways for different
purposes
2.8Describe a framework for cost accounting and cost management.

19. Basic Cost Terminology
•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
•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:
–Tracingcosts with a directrelationship to the cost object
–Allocatingaccumulated costs with an indirectrelationship to a
cost object

20. Direct and Indirect Costs
•Direct costs can be conveniently and economically traced
(tracked) to a cost object.
–Examples? Material (e.g. tires for car) and labor(e.g.
assembly-line worker wages).
•Indirect costs cannot be conveniently or economically
traced (tracked) to a cost object.
–Examples? Electricity, rent, property taxes and plant
administration expenses.
•Instead of being traced, these costs are allocated to a cost
object in a rational and systematic manner.

21. 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!

22. Cost Object Examples at Car Manufacturer
Exhibit 2.1Examples of Cost Objects at Tesla
Cost Object Illustration
Product A BMW X6 vehicle
Service Telephone hotline providing
information and assistance to BMW
stores and galleries
Project R&D project on an electric BMW taxi
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

23. Cost Assignment to a Cost Object
(Car Manufacturer Example)
Exhibit 2.2Cost Assignment to a Cost Object

24. Cost Behavior Patterns: Variable
Costs and Fixed Costs
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.
Exhibit 2.3Graphs of Variable and Fixed Costs

25. 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 costsfor many decisions.

26. Cost Behavior Summarized and
Related Other Cost Concepts
COSTS TOTAL DOLLARS COST PER UNIT
VARIABLE COSTS Change in proportion with
output
(more output = more cost)
Unchanged in relation to
output
FIXED COSTS Unchanged in relation to
output (within the relevant
range)
Change inversely with output
(more output = lower cost per
unit)
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.

27. Illustration of Fixed Cost Within
Relevant Range
Exhibit 2.4 Thomas Transport Company

28. Multiple (Dimensions of)
Classifications of Costs
Exhibit 2.5 Examplesof Costs in Combinationsof the Direct/Indirect and
Variable/Fixed Cost Classificationsfor a Car Manufacturer

29. The Three Different Sectors of Economy (i.e.
The Three Prototypes That Will Haunt Us in
the Examples for the Rest of the Course)
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.
Think of 2. and 3. as simplifications/subsets of 1. in terms of (basic) cost
accounting, thus most examples will be based on manufacturing
companies with the implication that handling merchandising/service
companies is straight-forward.

30. Types of Inventoryin 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 W I P
Finished goods—goods completed but not yet sold
Merchandising-sector companies hold only one type of
inventory: Merchandise Inventory (or Finished Goods
Inventory), and service-sector companies hold no
inventories.

31. Commonly Used Classifications of
Manufacturing Costs
Also known as inventoriablecosts:
Direct materials—acquisition costs of all material that will
become part of the cost object
Direct labor—compensation of all manufacturing laborthat
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

32. InventoriableCosts Versus Period
Costs
•Inventoriablecosts 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 (i.e. on the
income statement) as cost of goods sold only when the
product is sold. For manufacturing companies, all
manufacturing costs are inventoriablecosts.
•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.

33. Cost Flows
The Cost of Goods Manufactured and the Cost of Goods
Soldsection of the income statement are accounting
representationsof the actual flow of costs through a
production system.
More specifically: Inventoriablecosts go through the
balance sheet accountsof
direct materials inventory,
work-in-process inventory, and
finished goods inventory
beforeentering the cost of good sold in the income
statement.

34. Cost Flows Illustrated
Exhibit 2.7 Flow of Revenue and Costs for a Manufacturing-Sector Company,
Cellular Products (in thousands)

35. Multiple-Step Income Statement
Exhibit 2.8 Income Statement and Schedule of Cost of Goods Manufactured of a
Manufacturing-Sector Company, Cellular Products

36. Flow of Revenues and Costs for a
Merchandising Company
Exhibit 2.10 Flow of Revenues and Costs for a Merchandising Company
(Retailer or Wholesaler)

37. Other Cost
Considerations/Classifications
•Prime cost is a term referring to all direct manufacturing costs
(materials and labor).
•Conversion cost is a term referring to direct laborand indirect
manufacturing costs.
•Overtime premium laborcosts 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.
Because management can define and classify costs in multiple ways,
judgment is required when measuring cost.
Managers, accountants, suppliers, and others should agree on the
classifications and meaning of the cost terms introduced in this chapter
and throughout the book.

38. Different Product Costs for Different
Purposes
Exhibit 2.11 Different Product Costs for Different Purposes

39. 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.Analyzingthe relevant information for making decisions

40. Terms to Learn
Actual cost Direct costs of a cost object
Average cost Direct manufacturing labor costs
Budgeted cost Direct material costs
Conversion costs Direct materials inventory
Cost Factory overhead costs
Cost accumulationFinished goods inventory
Cost allocation Fixed costs
Cost assignment Idle time
Cost driver Indirect costs of a cost object
Cost object Indirect manufacturing costs
Cost of goods
manufactured
Inventoriable costs
Cost tracing Manufacturing overhead costs
Merchandising-sector companies
Operating income
Overtime premium
Period costs
Prime costs
Product cost
Relevant range
Revenues
Service-sector companies
Unit cost
Variable cost
Work-in-process inventory
Work-in-process