Chapter 1 Cost Accounting

Chapter 1: Introduction to Cost Management

Introduction

  • Textbook Information: Hansen/Mowen, Cornerstones of Cost Management, 4th Edition. © 2018 Cengage. All rights reserved.

  • Legal Notice: The material may not be scanned, copied, duplicated, or publicly posted.

Learning Objectives

  • Cost Management Definition: Describe what cost management is and how it contrasts financial accounting.

  • Current Factors: Identify current factors influencing cost management.

  • Role of Management Accountants: Describe how management accountants operate within an organization.

  • Ethics: Understand the importance of ethical behavior for management accountants.

  • Certification Forms: Recognize the three forms of certification available to internal accountants.

Financial Accounting versus Cost Management: A Systems Framework

  • Accounting Information System: An interrelated system comprising manual and computer components.

    • Processes: Involves collecting, recording, summarizing, analyzing, and managing data to generate information for users.

  • Major Systems: Two key accounting systems exist:

    • Financial Accounting Information System: Targeted towards external users.

    • Cost Management Accounting Information System: Targeted towards internal users.

Financial Accounting Information System

  • Outputs: Produces outputs intended for external users.

  • Inputs: Utilizes well-defined economic events as inputs.

  • Regulatory Compliance: Adheres to guidelines set by the Securities and Exchange Commission (SEC) and the Financial Accounting Standards Board (FASB).

  • Outputs Include: Financial statements used for:

    • Investment decisions.

    • Stewardship evaluation.

    • Activity monitoring.

    • Regulatory measures.

Cost Management Information System

  • Outputs: Designed for internal users.

  • Objectives: Three broad objectives:

    • Costing Services/Products: Information for costing services, products, and other management interests.

    • Planning and Control: A system focusing on planning and control.

    • Decision Making: Assists in making informed decisions.

  • Concern: Focuses on factors that drive costs, including:

    • Cycle time.

    • Quality

    • Process productivity.        

Cost Accounting Information System

  • Functionality: Assigns costs to individual products, services, and other objects specified by management.

  • External Reporting: Assists with external financial reporting by assigning costs necessary for inventory valuation and cost of sales calculation.

  • Regulatory Compliance: Conforms to SEC and FASB rules and conventions.

Operational Control Information System

  • Performance Feedback: Provides timely feedback on the performance of managers and others concerning activity management and planning control.

  • Focus: Emphasizes the identification of improvement opportunities to enhance profit by increasing customer value.

Factors Affecting Cost Management

  • Global Competition: Increased demand for precise cost information.

  • Service Industry Growth: Deregulation has spurred competition, necessitating accurate cost data for:

    • Planning.

    • Controlling.

    • Continuous improvement.

    • Decision making.

Advances in Information Technology

  1. Monitoring and Control: Use of computers for operation monitoring leads to data integration across manufacturing, marketing, and accounting.

  2. ERP Software: Offers integrated system capabilities.

  3. Tools: Personal Computers (PCs), Online Analytical Processing (OLAP), Decision-Support Systems (DSS), and the development of business analytics are key components.

Advances in IT: Continued

  • External Data Sets: Business analytics leveraging external data sets improves integration with internal databases.uy89y87hui bvn

  • Data Management: Emergence of very large data sets and electronic commerce (e-commerce) practices, e.g., Internet trading, electronic data interchange, and barcoding.

Advances in IT: Conclusion

  • Electronic Data Interchange (EDI): Facilitates document exchange between computers using telephone lines.

  • Supply Chain Management: Management of products/services from raw material procurement to retailing.

Advances in Manufacturing Environment

  • Theory of Constraints: Method for ongoing improvement in manufacturing and non-manufacturing activities.

  • Just-In-Time Manufacturing: Produces products only when necessary, emphasizing reform through inventory reduction and addressing economic challenges.

Lean Manufacturing and Computer-Integrated Manufacturing

  • Lean Manufacturing: Pursues waste elimination while respecting people.

  • Computer-Integrated Manufacturing: Automates manufacturing to:

    • Reduce inventory.

    • Enhance production capacity.

    • Improve quality/service.

    • Decrease processing times.

    • Increase output.

Customer Orientation

  • Competitive Advantage: Firms gain an edge by providing customer value.

  • Value Chain: Activities needed to design, develop, market, and deliver products/services.

  • Accounting Departments: Customer-driven departments evaluating cost report value for effective communication of key information.

New Product Development

  • Development Costs: High production costs are often concentrated in the development and design phases.

  • Cost Management Procedures:

    • Target Costing: Encourages consideration of the overall cost impact of designs over the product's life cycle.

    • Activity-Based Management: Identifies and assesses costs of activities across the development process.

Sustainable Development and Total Quality Management

  1. Sustainable Development: Meets present needs without compromising future generations' capabilities.

  2. Total Quality Management: Focuses on creating an environment for defect-free product/service production, replacing past quality acceptance standards.

Sustainable Development and Total Quality Management: Continued

  • Principles:

    • Continuous improvement.

    • Waste elimination.

  • Objectives: Ensure products/services perform according to specifications with minimal waste.

Time as a Competitive Element and Efficiency

  • Time: Critical element throughout the value chain; reducing non-value-added time enhances quality.

  • Efficiency: Vital concern, with cost as a principal efficiency measure.

Line and Staff Positions

  • Line Positions: Direct responsibility for organizational objectives.

  • Staff Positions: Supportive roles with indirect responsibility for organizational objectives.

The Controller

  • Role: Acts as the chief accounting officer, supervising all accounting departments.

  • Involvement: Participates in planning, controlling, and decision-making, catering to both internal and external accounting obligations.

The Treasurer

  • Responsibilities: Oversees finance functions, including capital raising, cash management, and investor relations.

    • Management of credit, collections, and insurance tasks.

Organizational Chart: Manufacturing Company

Exhibit 1.1 (Two Parts)

  1. Line Function:

    • President

    • Production Vice President

    • Production Supervisor

    • Machining Foreman

    • Assembly Foreman

  2. Staff Function:

    • Financial Vice President

    • Controller

    • Treasurer

    • Internal Audit

    • Cost, Financial, Systems, Tax functions.

Information for Planning, Controlling, Continuous Improvement, and Decision Making

  • Planning: Involves detailed future action formulations, setting objectives, and identifying achievement methods.

  • Controlling: Involves monitoring plan implementation, utilizing feedback, and generating performance reports for comparison between planned vs. actual data.

Continuous Improvement and Decision Making

  • Continuous Improvement: Ongoing efforts to deliver customer value, essential for competitiveness or establishing a competitive edge.

  • Decision Making: The process of choosing among alternatives based on set criteria.

Accounting and Ethical Conduct

  • Business Ethics: Understanding right from wrong in the workplace and the commitment to making ethical choices.

  • Benefits of Ethical Behavior:

    • Fosters customer and employee loyalty.

    • Avoids the costs associated with litigation.

Standards of Ethical Conduct for Management Accountants

  • Institute of Management Accountants (IMA): Establishes ethical standards including:

    • Competence: Maintaining skills and knowledge to perform duties.

    • Confidentiality: Respecting confidentiality of information.

    • Integrity: Upholding integrity in reporting.

    • Credibility: Providing reliable information.

    • Resolution of Ethical Conflict: Guidelines to address ethical dilemmas.

Certification

  • Certification Types:

    • Certificate in Management Accounting: Establishes management accounting as distinct from public accounting.

    • Certificate in Public Accounting: Demonstrates minimal professional qualification for external auditors.

    • Certificate in Internal Auditing: Acknowledges competence in internal auditing.