CHAPTER 1: Cost Accounting:  the collection and assembly of

Information for Decision Making resources to produce a product or

deliver a service
VALUE CREATION IN
ORGANIZATIONS Marketing and Sales
 the processes of informing
Why Start with Value Creation? potential customers about the
 In CA, the goal is to assist attributes of products or services
managers in achieving the that leads to their sale
maximum value of their
organizations Distribution
 Measuring the effects of the  the process of delivering products
decisions on the value of the or services to customers
organization is one of the
fundamental services of cost Customer Service
accounting.  the support activities provided to
customers for a product or
Value Chain service
 set of activities that transforms
resources into goods and Supply Chain
services that end users purchase  set of firms and individuals that
and consume sells goods and services to the
 includes treatment or disposal of firm
any waste generated by the end
users Distribution Chain
 set of firms and individuals that
Value-added Activities buys and distributes goods and
 those activities that customers services from the firms
perceive as adding utility to the
goods or services they purchase Value chain is important because it
 comprises activities from creates the value for which the customer
research and development is willing to pay.
through the production process to
customer service How can cost information add value
 managers evaluate these to the organization?
activities to determine how they  depends whether the information
contribute to the final product’s provided improves managers’
service, quality, and cost decisions

The Value Chain Components ACCOUNTING SYSTEMS

Research and Development Accounting Systems

 the creation and development of  designed to provide information to
ideas related to new products, decision makers
services, or processes
Financial Accounting
Design  field of accounting that reports
 detailed development and financial position and income
engineering of products, services, according to accounting rules
or processes
Financial Accounting information
Purchasing  designed for decision makers
 acquisition of goods and services who are not directly involved in
needed to produce a good or the daily management of the firm.
service  users are often external to the
firm
Production
  information of firms that are International Financial Reporting
publicly traded is public and Standards (IFRS)
typically available on the  rules, standards, and conventions
company’s website that guide the preparation of
 comparable across firms financial accounting statements in
many other countries
Financial Accounting Systems
 characterized by a set of rules OUR FRAMEWORK FOR ASSESSING
that define how transactions will COST ACCOUNTING SYSTEMS
be treated
 decisions determine the
Cost Accounting performance of the organization
 field of accounting that measures,  managers use information from
records, and reports information accounting system to make
about costs decisions
 owners evaluate organizational
Cost Accounting information and managerial performance with
 designed for managers because accounting information
managers are making decisions
only for their own organization, no Line employees
need to be comparable to similar  those directly involved in
information in other production or who interact with
organizations. customers
 should be relevant for the  they produce the product or
decisions that managers are service and deal with the
operating customer
 commonly used in developing
financial accounting information Nonvalue-added activities
 primarily concerns with its use by  activities that do not add value to
managers to make decisions the good or service
 example: reworking defective
Financial Cost units
Accounting Accounting
Users of the External Internal Cost-benefit analysis
information  process of comparing benefits
Important Comparability, Decision (often measured in savings or
criteria decision relevance, increased profits) with costs
relevance timeliness associated with a proposed
Who External Managers change within an organization
establishes standard-  should be performed by
or defines setting group managers to assess whether
the system? proposed changes in an
How to Standards Relevance for organization are worthwhile
determine (rules) decision  applies equally to deciding
accounting making whether to implement a new cost
treatment accounting system

Cost Accounting, GAAP, and IFRS Cost drivers

 factors that causes or drives
Generally Accepted Accounting costs
Principles (GAAP)
 rules, standards, and conventions Differential costs
that guide the preparation of  with two or more alternatives,
financial accounting statements costs that differ among or
for firms registered in the United between alternatives
States
Differential revenues
  revenues that change in methods but it can provide more
response to a particular course of accurate cost numbers
action
Cost Accounting in Purchasing
Responsibility center
 specific unit of an organization Performance measures
assigned to a manager who is  metric that indicated how well an
held accountable for its individual, business unit, product,
operations and resources firm, and so on, is working
 departments, divisions, segments  used to evaluate the performance
or subsidiaries of key suppliers and business
 specify the reporting relations partners
within the firm
 can be based on products, Benchmarking
geography, or business functions  continuous process of measuring
a company’s own products,
Budget services, or activities against
 financial plan of the revenues and competitor’s performance
resources needed to carry out
activities and meet financial goals Cost Accounting in Production
 help managers decide whether
their goals can be achieved and if Just-in-time (JIT) methods
not, what modifications are  in production or purchasing, each
necessary unit is purchased or produced just
in time for its use
TRENDS IN COST ACCOUNTING  designed to lower the cost of
THROUGHOUT THE VALUE CHAIN maintain excess inventory

Cost Accounting in Research and Lean Accounting

Development (R&D)  cost accounting system that
provides measures at the work
Cost Accounting in Design cell or process level and
minimizes wasteful or
Design unnecessary transaction
 an important activity in product processes
development  eliminate waste from the
 can have a significant impact on accounting processes
the cost to manufacture the
product Cost Accounting in Marketing

Design for manufacturing (DFM) Customer Relationship Management

 the concept that manufacturing (CRM)
cost and complexity need to be  system that allows firms to target
considered in the design of the profitable customers by
product assessing customer revenues

Activity-based costing (ABC) Cost Accounting in Distribution

 costing method that first assigns
cost to activities and then assigns Outsourcing
them to products based on the  having or more of the firm’s
product’s consumption of activities performed by another
activities firm or individual in the supply or
 considers the activities or distribution chain
processes that will be required to
bring a product to market Cost Accounting in Customer Service
 more detailed and complicated
than conventional costing Total Quality Management (TQM)
  management method by which  ensures that procurement rules
the organization seeks to excel followed
on all dimensions, with the  recommends policies and
customer ultimately defining procedure to reduce inventory
quality losses

Cost of Quality (COQ) Cost Accountant

 system that identifies the costs of  records, measures, estimates,
producing low-quality items, and analyzes costs
including rework, returns, and lost  works with financial and
sales operational manager to provide
 identify the costs associated with relevant information for decisions
producing defective units as well  evaluates costs of products and
as the lost sales associated with processes
poor-quality products  recommends cost-effective
methods to distribute products
Enterprise Resource Planning (ERP)
 information technology that links Sarbanes-Oxley Act of 2002
the various systems of the  the CEO and CFO are
enterprise into a single responsible for signing financial
comprehensive information statements and stipulating that
system the financial statements do not
omit material information
KEY FINANCIAL PLAYERS IN THE
ORGANIZATION

Chief Financial Officer (CFO)

 manages entire finance and
accounting function
 signs off financial statements
 determines policy on debt versus
equity financing

Treasurer
 manages liquid assets
 conducts business with banks
and other financial institutions
 oversees public issues of stock
and debt
 determines where to invest cash
balances
 obtains lines of credit

Controller
 plans and design information and
incentive systems
 determines cost accounting
policies
 maintains the accounting records

Internal Auditor
 ensures compliance with laws,
regulations, and company
policies and procedures
 provides consulting and auditing
services within the firm